How do taxes work in retirement? (US and Canada)

In both countries, most retirement income is taxed as regular income — withdrawals from a 401(k), IRA, or RRSP, a pension, and part of your Social Security, CPP, or OAS. Some accounts (a Roth IRA in the US, a TFSA in Canada) are the exception: money comes out tax-free.

United States: Social Security can be partly taxable

The IRS compares your “combined income” (your other income, plus half your Social Security) against a base amount. Above $25,000 single ($32,000 married filing jointly), up to 50% of your benefit becomes taxable. Above $34,000 single ($44,000 married filing jointly), up to 85% becomes taxable. These thresholds haven’t been adjusted for inflation since the 1990s, so more retirees cross them every year.

United States: your savings accounts are taxed differently

Traditional 401(k) / IRA: every withdrawal is taxed as ordinary income, the same as a paycheck.
Roth 401(k) / Roth IRA: withdrawals are tax-free, since you paid tax on the money going in.
Required minimum distributions (RMDs):you’re required to start withdrawing from traditional accounts at age 73 (rising to 75 for people born in 1960 or later), whether you need the money yet or not.

Canada: CPP and OAS are taxable, with a twist on OAS

CPP is taxable income, full stop. OAS is also taxable — but on top of that, it has a “recovery tax” (the clawback): once your net income passes $93,454 (2025), OAS is reduced by 15 cents for every dollar over that line. This is a benefit reduction, not an income tax, but it functions like an extra tax on income near and above that threshold.

Canada: RRSP vs. TFSA

RRSP (and the RRIF it converts to): withdrawals are taxed as income, same as a traditional 401(k)/IRA in the US.
TFSA: withdrawals are completely tax-free and don’t count toward the OAS clawback — which makes a TFSA especially useful for keeping income below that threshold.

A worked example (US)

Someone with $28,000 from a traditional 401(k) and $20,000 in Social Security (filing single):

Combined income: $28,000 + half of $20,000 = $38,000 — above the $34,000 line
Up to 85% of their Social Security becomes taxable, on top of the full $28,000 from the 401(k)
Shifting some of that $28,000 to come from a Roth account instead would lower combined income and the tax on Social Security too

Why order matters, not just totals

Which account you draw from first — taxable, tax-deferred, or tax-free — changes how much tax you owe overall, even with the same total spending. When Can I Retire counts taxes, benefit thresholds, and clawbacks in today’s dollars as part of your plan, not as an afterthought.

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Last checked: October 2026

When Can I Retire is education, not financial advice.