One of the most overlooked aspects of retirement planning is the effect that federal income taxes or state income taxes have on someone trying to live on a fixed income. They can take a big bite out of your retirement savings if you’re not prepared.
The good news for your nest egg is that not all retirement income is taxable. By understanding which sources of income are tax-free in 2026, you can create a smarter retirement strategy and keep more of your hard-earned money. Here are six types of retirement income that won’t get taxed, and how to make the most of them.
The easiest way to avoid taxes on your retirement money is to use a Roth account. Both IRA and 401(k) plans can be structured as Roth accounts, which don’t offer a tax deduction on contributions but allow tax-free withdrawals after age 59 ½.
Essentially, with a Roth account, you’re paying your taxes upfront at the time that you contribute, rather than owing them on your distributions. While you can’t contribute to a Roth if your income exceeds certain levels, you can convert your traditional plan to a Roth at any time. However, you’ll have to pay income taxes on the amount of the conversion, just as if you withdrew the money.
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For this reason, it typically makes more sense to start a Roth earlier in your career rather than facing a huge tax bill during your peak earning years. For example, a $1 million portfolio in a 401(k) plan or traditional IRA might be worth $800,000 or less after taxes. Similarly, if your investments are in a regular, taxable brokerage account, the income that money generates may also be taxable.
It’s not usually a good idea to rely on an inheritance as a retirement plan. For starters, receiving an inheritance is never a sure thing, and additionally, the amount bequeathed is rarely enough to fund a long retirement.
However, many Americans do receive an inheritance at some point in their lives, and it can often be a good supplement to existing retirement savings. Financially speaking, the best part of an inheritance is that it is tax-free, so long as you don’t live in Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, which still impose inheritance taxes.
Though some states do impose an estate tax, that money will come out of the inheritance and not your personal funds.
Municipal bonds are issued by states, cities and various localities, generally to fund projects like schools, roads and other items that are for the common good. Municipal bonds are granted tax relief at the federal level, meaning investors don’t have to pay federal taxes on the interest earned from any municipal bond.
If you buy a bond issued in your own state, you’re typically granted a tax exemption from state taxes, as well. This makes municipal bonds particularly valuable in high-tax states like California. They can also be a good source of retirement income, as they are generally safe investments in addition to being tax-exempt.
A health savings account (HSA) combines some of the best features of both traditional and Roth IRAs into a single package. Contributions to an HSA earn a tax deduction, and earnings within the account grow tax-free.
When used for qualifying healthcare expenses, which is a fairly broad category, withdrawals are tax-exempt as well. Otherwise, you’ll face a steep 20% penalty on your withdrawals. However, the kicker in terms of retirement planning is that once you reach age 65, you can withdraw your HSA money for any reason at all without having to pay a penalty.
When used for non-healthcare purposes, you’ll still face ordinary income tax, but you can avoid the penalty. The best use of an HSA will always be for healthcare expenses, though, as you can withdraw your funds tax-free at any time.
In many cases, Social Security payments are not taxable, but this is not always the case. If you’re simply living off your Social Security retirement benefits, then it’s true that they are tax-free.
However, if you earn over a certain amount, some or even most of your payments become taxable. Individuals with a combined income of $25,000 to $34,000 may have to pay tax on up to 50% of their benefits; those with incomes of over $34,000 may face taxes on up to 85% of their Social Security income. For joint filers, up to 50% of Social Security income is taxable for incomes between $32,000 and $44,000, with those earning more paying tax on up to 85% of benefits.
The Social Security Administration defines “combined income” as adjusted gross income plus nontaxable interest plus one-half of Social Security benefits. Here are some other notable key takeaways about taxes on your Social Security in 2026:
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Social Security: 6.2% on wages up to $184,500
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Medicare: 1.45% on all wages
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Additional Medicare Tax: An extra 0.9% on earnings over $200,000 (single) or $250,000 (married filing jointly).
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Self-Employed: 12.4% (6.2% + 6.2%) for Social Security on earnings up to $184,500, plus the 2.9% Medicare tax on all earnings.
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New Senior Deduction: A new federal deduction of up to $6,000 for individuals, adjusted for inflation and filing status, could lower taxable income for eligible seniors age 65 and older for tax year 2025
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State Taxes: Some states still tax benefits; rules vary, but a new federal deduction might affect state tax liability.
Just like an inheritance, waiting for a life insurance payout isn’t an ideal strategy for funding a retirement plan. However, it’s entirely possible that at some point in your senior years, you will receive some type of life insurance payout.
Often, these distributions are in the hundreds-of-thousands-of-dollars range, so they can significantly impact your retirement savings. And just as with inheritances, life insurance proceeds are tax-free to the recipient, at least when taken in a lump sum rather than installments.
Caitlyn Moorhead and Jordan Rosenfeld contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 6 Types of Retirement Income That Won’t Get Taxed