Robert is 66, single, and just retired. On Tuesday, he withdraws $30,000 from his Traditional 401(k). On Wednesday, he sells $10,000 of stock in his Fidelity brokerage account. On Thursday, his Social Security check deposits.
Three sources of income. Three completely different tax treatments. The 401(k) withdrawal is taxed at his ordinary rate. The brokerage sale might be taxed at 0%. And somewhere between 0% and 85% of his Social Security is taxable, depending on how the other two affect his "combined income."
Understanding this is the difference between an effective tax rate of 8% and 18%. Same retirement. Same spending. Just knowing which dollars to pull from which account, and in what order.
The short version: Traditional IRA/401(k) withdrawals are taxed as ordinary income (10–37%). Roth withdrawals are tax-free if qualified. Brokerage account sales are taxed at capital gains rates (0%, 15%, or 20%). Social Security is 0–85% taxable depending on your other income. Pensions are usually fully taxable. The interactions between these sources determine your real tax bill.
The Tax Treatment by Account Type
Traditional IRA and 401(k): Fully Taxed as Ordinary Income
Every dollar you withdraw from a Traditional IRA or Traditional 401(k) is taxed at your ordinary income rate. If you're in the 22% bracket, you pay 22 cents per dollar withdrawn.
This applies to contributions you deducted and to all investment growth. You got the tax break going in; now you pay going out. There's no special capital gains treatment. Even if your IRA held stocks that tripled, the gains are ordinary income, not long-term capital gains [1].
2026 tax brackets for single filers (selected):
| Taxable Income | Rate |
|---|
| Up to $12,400 | 10% |
| $12,401–$50,350 | 12% |
| $50,351–$106,050 | 22% |
| $106,051–$207,350 | 24% |
Source: Tax Foundation projections [2]
The exception: If you made nondeductible (after-tax) contributions to a Traditional IRA, a portion of each withdrawal is a tax-free return of basis. But the Pro-Rata Rule means you can't just withdraw the after-tax portion. The IRS treats all your Traditional IRAs as one pool and taxes withdrawals proportionally based on the ratio of after-tax to pre-tax money across all your IRAs [3].
Roth IRA and Roth 401(k): Tax-Free (If Qualified)
Qualified Roth withdrawals are completely tax-free. You paid taxes on contributions going in. No tax coming out. No tax on the growth. This is the most favorable tax treatment of any retirement account.
To qualify, two conditions must be met:
- You're 59½ or older
- The Roth account has been open for at least five years
If you withdraw earnings before meeting both conditions, you'll pay ordinary income tax plus a 10% penalty on the earnings. Contributions (not earnings) can always be withdrawn from a Roth IRA tax-free at any time, since you already paid tax on them.
As of 2024, Roth 401(k)s are no longer subject to required minimum distributions during the account owner's lifetime [4]. This makes them even more powerful: your money can grow tax-free indefinitely.
Taxable Brokerage Accounts: Capital Gains Rates
When you sell investments in a taxable brokerage account (Vanguard, Schwab, Fidelity), you pay capital gains tax on the profit (sale price minus purchase price).
Long-term capital gains (held more than one year) get preferential rates:
| 2026 Taxable Income (Single) | Capital Gains Rate |
|---|
| Up to $49,450 | 0% |
| $49,451–$492,300 | 15% |
| Over $492,300 | 20% |
Source: Bankrate [5]
That 0% bracket is one of the most valuable and underused tools in retirement tax planning. A single retiree with $49,000 or less in taxable income pays nothing on long-term capital gains. A married couple filing jointly can have up to roughly $98,900 and still pay 0% [6].
Short-term capital gains (held one year or less) are taxed as ordinary income. No preferential rate.
Dividends follow similar rules. Qualified dividends get the favorable capital gains rates. Nonqualified dividends (from REITs, some international stocks) are taxed as ordinary income.
Pensions: Usually Fully Taxable
If you contributed to a pension with pre-tax dollars (most common), the entire distribution is taxable as ordinary income. It works exactly like a Traditional IRA withdrawal.
If you contributed some after-tax dollars, a portion of each payment is a tax-free return of your basis. Your pension administrator should provide Form 1099-R showing the taxable amount.
Social Security: 0%, 50%, or 85% Taxable
Social Security taxation is based on a formula the IRS calls "combined income" (sometimes called "provisional income"):
Combined Income = AGI + Nontaxable Interest + 50% of Social Security Benefits
| Combined Income (Single) | Taxable Portion of SS |
|---|
| Below $25,000 | 0% |
| $25,000–$34,000 | Up to 50% |
| Above $34,000 | Up to 85% |
For married couples filing jointly, the thresholds are $32,000 and $44,000.
These thresholds haven't been adjusted for inflation since 1993. Let that sink in. In 1993 dollars, these were meant to affect only high-income retirees. Today, anyone with a modest pension or IRA withdrawal crosses them. It's a stealth tax increase that Congress has never bothered to fix.
Putting It All Together: Robert's Tax Return
Let's see how Robert's three income sources interact in 2026.
Income:
- Social Security: $24,000
- Traditional 401(k) withdrawal: $30,000
- Brokerage sale (long-term gain): $10,000
Step 1: Social Security taxation
Combined income = $30,000 (401k) + $10,000 (brokerage gain) + $12,000 (50% of SS) = $52,000
Since $52,000 exceeds $34,000, up to 85% of Social Security is taxable.
The actual formula works in two tiers. First tier: 50% of the amount between $25,000 and $34,000 = $4,500. Second tier: 85% of the amount above $34,000 = 85% × ($52,000 − $34,000) = $15,300. Total: $4,500 + $15,300 = $19,800. But the taxable amount can't exceed 85% of total benefits: 85% × $24,000 = $20,400. Since $19,800 < $20,400, the taxable amount is $19,800.
Step 2: Calculate AGI
$30,000 + $10,000 + $19,800 = $59,800
Step 3: Apply deductions
Standard deduction for a single filer 65+ in 2026 (including additional senior amount): approximately $18,050
Step 4: Taxable income
$59,800 − $18,050 = $41,750
Step 5: Calculate tax
The $10,000 capital gain "stacks" on top of ordinary income. Robert's total taxable income is $41,750. The ordinary income portion (excluding the $10,000 gain) is $31,750. Since total taxable income ($41,750) is below the $49,450 threshold for 0% capital gains, the capital gains rate is 0%.
Ordinary income tax on $31,750:
- 10% on $12,400 = $1,240
- 12% on $19,350 = $2,322
- Total federal tax: $3,562
Robert received $64,000 in total cash flow ($24,000 SS + $30,000 401k + $10,000 brokerage). His effective federal tax rate: 5.6%.
If Robert had pulled the entire $64,000 from his 401(k) instead, more of his Social Security would have been taxable, he'd lose the 0% capital gains benefit, and his tax bill would roughly double. The account you pull from isn't a minor detail. It's the whole game.
The NUA Exception: A Hidden 401(k) Benefit
If your 401(k) holds employer stock, there's a special provision called Net Unrealized Appreciation (NUA). Instead of rolling the stock into an IRA (where it would all be taxed as ordinary income upon withdrawal), you can distribute the stock directly to a brokerage account [7].
You pay ordinary income tax only on the stock's original cost basis. The appreciation (the NUA) gets taxed at long-term capital gains rates when you eventually sell. For someone with company stock that has multiplied in value, this can save tens of thousands of dollars.
It's a niche strategy with strict rules (the distribution must be a "lump sum" from the plan), but for retirees with large concentrations of employer stock, it's worth discussing with a tax professional.
Your Next Move
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Map your income sources. List every retirement income stream and its tax treatment. Knowing which dollars are ordinary income, capital gains, or tax-free is the foundation.
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Check whether you're in the 0% capital gains bracket. If your taxable income is below $49,450 (single) or roughly $98,900 (married), harvest gains in your brokerage account for free. This is the tax-gain harvesting strategy that most retirees overlook.
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Calculate your Social Security combined income. Every additional dollar of 401(k) withdrawal can make another 85 cents of Social Security taxable. Roth withdrawals don't count toward combined income. This is a powerful reason to use Roth accounts strategically.
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Run the numbers for your specific situation. Use our compound interest calculator to model different withdrawal combinations. Even small changes in which account you pull from can shift your effective rate by several percentage points.
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Don't forget state taxes. Seven states have no income tax at all. Others exempt Social Security or pension income. Your state's rules can swing the optimal strategy dramatically.
References
- Internal Revenue Service. (2025). Topic No. 410: Pensions and Annuities. IRS.gov. https://www.irs.gov/taxtopics/tc410
- Tax Foundation. (2025). 2026 Tax Brackets (Projected). TaxFoundation.org.
- SmartAsset. (2026). A Guide to the Pro-Rata Rule and Roth IRAs. SmartAsset.com.
- Internal Revenue Service. (2024). Retirement Topics: Required Minimum Distributions (RMDs). IRS.gov.
- Bankrate. (2025). Long-term Capital Gains Tax Rates 2025-2026. Bankrate.com.
- Kiplinger. (2025). Capital Gains Tax Rates for 2026. Kiplinger.com.
- Forbes. (2025). A Hidden 401(k) Rule That Could Cut Your Taxes Big-Time (NUA). Forbes.com.
