10 Types of Retirement Income That are Not Taxable

You can't always avoid taxes, but on these income sources, you won't pay as much as you expect.
Updated April 3, 2023
happy senior couple using laptop

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

If you’re saving for retirement, boosting your bank account to meet your goals is a priority. But it’s important to plan for taxes as well.

If you’re using a traditional taxable brokerage account, your investments could face significant taxation.

On the other hand, some types of retirement income are not taxable. Focusing on these could mean sending less of what you’re earning to the government.

Health savings account distributions

Valeri Luzina/Adobe stethoscope, calculator and dollars on a paper with electrocardiogram

A health savings account (HSA) comes with tax advantages. The contributions you make to your account are tax-deductible, and the funds grow in your HAS tax-free.

When it comes time to use those funds for qualified expenses, there are no taxes applied to your withdrawals as long as you use the funds for medical expenses.

Social Security payments

JohnKwan/Adobe social security cards

Social Security payments are typically not taxable. However, you may have to pay taxes on your payments depending on how much you receive.

If you have a combined income of $25,000 to $34,000, you may have to pay taxes on half of your income. If you earn more than that, you could pay tax on up to 85% of your earnings.

Joint filers earning between $32,000 and $44,000 may pay taxes on half of their earnings, while those bringing in more than this amount could pay taxes on up to 85%.

Roth withdrawals

Tada Images/Adobe 100 dollar bills with smartphone having IRAs retirement profile

As you’re selecting the best type of retirement account for your future, there may not be a better option for reducing your tax burden than a Roth.

You can structure an IRA or a 401(k) as a Roth account so you have some options. With this retirement strategy, you’ll invest money after you’ve paid taxes on it. The money then grows in your Roth account until you reach at least 59 1/2 years of age.

At that point, any withdrawals you make are tax-free. In short, you’re paying taxes on these funds upfront and letting them grow tax-free to build your retirement portfolio.

Reverse mortgage payments

pla2na/Adobe tiny model house on dollar bills with keys besides a blue background

With a reverse mortgage, you’re borrowing money using the home as security. What’s more, payments you receive from your reverse mortgage are not taxable.

You don’t make monthly payments on a reverse mortgage. Rather, the repayment of the borrowed funds comes due when you no longer live in that home. If the loan isn’t repaid, the lender can sell the home to recoup the investment.

A reverse mortgage isn’t for everyone. They have high fees and should be carefully considered, even with the benefit of not having taxes levied on payments.

Life insurance benefits

Rawpixel.com/Adobe couple browsing life insurance policies on tablet

Life insurance is typically meant to pay out a lump sum of money to your named beneficiary after your death. However, during your lifetime, you may receive proceeds from a life insurance policy.

If you’re listed as the beneficiary on a life insurance policy and receive the payout, you don’t have to pay taxes on those funds. That could mean thousands of non-taxable dollars added to your retirement funds.

Veteran's benefits

mehaniq41/Adobe silver color chain and one hundred dollar bills on american flag

Any benefits paid to you through the U.S. Department of Veterans Affairs are not taxable. This could include any disability compensation you receive as well as pension payments for disabilities.

There are no taxes applied to insurance proceeds you receive or dividends that are paid to you or your beneficiaries. Any interest that builds on deposits you’ve left with the organization that leads to dividend payments is also not taxed.

Public assistance benefits

Rido/Adobe happy young lady hugging old woman

Seniors who qualify for public assistance benefits don’t have to worry about paying taxes on those funds. This includes any type of support you receive through mortgage assistance programs, crime victim payments, Medicare benefits, or state reemployment assistance.

If you qualify for and receive support in the form of food benefits through the Nutrition Program for the Elderly, those are not taxable benefits either. Most types of welfare benefits are also not taxed.

Though designed to meet the needs of lower-income individuals, you should take advantage of these programs if you qualify.

Do you dream of retiring early? Take this quiz to see if it's possible.

Profits from selling your home

Andy Dean/Adobe white color house with a for sale sign

Are you planning to sell your home, perhaps to downsize? If you meet the ownership and use tests established by the IRS, you may not have to pay capital gains tax on the sale of your home.

You’ll need to have owned your home for at least five years, and it must be your primary residence for at least two of those years. If you sell it, you won’t have to pay taxes on up to $250,000 of your gains if you’re an individual or $500,000 if you’re married and filing jointly.


Andrii Yalanskyi/Adobe man arranging wooden blocks in a sequence to spell out the word bond

Municipal bonds may not be something you’ve thought about purchasing, but they can provide a nice little chunk of tax-free earnings depending on how many you purchase.

Most people have to pay taxes on federal and state bonds when the income is received, but that doesn’t apply to municipal bonds issued by states or other government organizations.

Be sure to double-check your state and local laws regarding these taxes even though bond income isn’t taxed at the federal level.


Monkey Business/Adobe senior couple in office discussing papers with young female advisor

You may not be able to count on the proceeds from an inheritance for your retirement income — unless you already know what’s coming your way. 

While you won’t have to pay taxes on any inheritance you receive, estates over a certain size may be subject to estate taxes. However, these taxes are paid by the estate itself and not you.

For 2022, the federal estate tax exemption is $12.06 million. For 2023, it is $12.92 million. Any amount over the exemption is subject to tax.

Bottom line

pikselstock/Adobe happy senior couple using laptop

These are solid ways to add some income to your retirement and avoid money stress by not having to pay extra taxes.

However, if you use an inheritance or other sources of non-taxed income to make money during your retirement — such as putting them into investments — those new dividends could be taxed.

Smart Asset Benefits

  • Get matched with fiduciary financial advisors
  • Advisors are vetted and certified fiduciaries
  • Take the mystery out of retirement planning
  • Their matching tool is free

Paid Non-Client Promotion

Author Details

Sandy Baker Sandy Baker is a has over 17 years of experience in the financial sector. Her experience includes website content, blogs, and social media. She’s worked with companies such as Realtor.com, Bankrate, TransUnion, Equifax, and Consumer Affairs.

Want to learn how to make an extra $200?

Get proven ways to earn extra cash from your phone, computer, & more with Extra.

You will receive emails from FinanceBuzz.com. Unsubscribe at any time. Privacy Policy

  • Vetted side hustles
  • Exclusive offers to save money daily
  • Expert tips to help manage and escape debt