5 Types Of Retirement Income And How They're Taxed

Bonds And Mutual Funds

The majority of bonds are subject to taxes, aside from some individual securities such and municipal bonds, because almost all bonds generate income for the retiree. Municipal bonds are typically also exempt from state and local tax, although exceptions to these rules do apply in certain states. Like a pension, most bond income distributions are subject to regular income tax rates. However, because mutual funds are typically made up of many bonds, the tax rate that must be paid is the cumulative average tax rate of the individual bonds within. For example, if half of the bonds in the fund were tax-free and the other half were fully taxable, half of the retirement income you receive from this particular mutual fund would be subject to taxes. Because every mutual fund is unique in its bond makeup, there is no hard and fast rule for taxation.