How California Taxes Social Security and Retirement Income

If you're thinking about retiring in California, one big question probably comes to mind: How much of my retirement income will go to taxes? It’s something many retirees wonder, especially when it comes to Social Security. Does the state take a cut? What about federal taxes? And how do other income sources factor in?

Here’s the good news: California doesn’t tax your Social Security benefits. But before you breathe a full sigh of relief, there’s more to the story. Federal taxes still apply and if you have income from a 401k, IRA, pension or investments, that can add up quickly.

Knowing how California’s tax rules differ from federal taxes is key to making smart decisions with your money in retirement. In this article, we’ll break it all down – from how your Social Security is taxed (or not), to the types of retirement income California does tax and the strategies that can help you keep more of what you’ve saved.

DOES CALIFORNIA TAX SOCIAL SECURITY BENEFITS?

Let’s start with the most common question: Does California tax Social Security?

The answer is simple – No. California does not tax:

• Social Security retirement benefits
• Social Security disability insurance
• Survivor benefits
• Supplemental Security Income

This makes California one of a shrinking number of states that exempt all Social Security income from state taxes. More than 10 states – including Colorado, New Mexico and Vermont – still tax some or all Social Security income. So, if much of your retirement income comes from Social Security, California can be a favorable home base.

A RETIREE-FRIENDLY STATE – BUT NOT TAX-FREE

While California is generous when it comes to Social Security, the state makes up for it in other ways. It’s still one of the most heavily taxed states in the country, with:

• High state income tax rates (up to 13.3%)
  • California also imposes a 1.2 percent payroll tax on wage income, bringing the all-in top rate to 14.5%
• A state capital gains tax that’s treated as regular income
• A state sales tax base rate of 7.25% (with local rates often higher)
• Property tax rates that, while lower than some states at 0.71%, apply to high-value real estate

Retirees who live primarily on Social Security income may find relief, but those with other retirement income – like 401(k)s or pensions – will still face significant California state tax exposure.

OTHER TAXABLE RETIREMENT INCOME IN CALIFORNIA

As you can see, California retirees are not off the hook when it comes to taxes. In fact, most other sources of retirement income are fully taxable at the state level, and California’s progressive income tax rates can lead to sizable bills for high-income retirees.

Here’s what is taxed as regular income in California:

• Withdrawals from traditional IRAs and 401k plans
• Employer-sponsored pensions
• Annuity income (excluding the return of principal)
• Capital gains, dividends and interest income
• Rental income or part-time consulting work

For retirees who’ve spent decades saving in tax-deferred accounts like a 401k or traditional IRA, those required distributions in retirement can significantly increase state taxable income. And unlike some other states, California does not offer a deduction or exemption for retirement income, which means every dollar you withdraw may be subject to its full income tax rate.

Depending on your total income, California’s state income tax rates range from 1% to 13.3% (14.5% on wage income), the highest marginal rate in the country. That top bracket applies to very high earners, but even middle-income retirees can land in higher tax brackets when RMDs, pensions and investment income stack up.

That’s why it’s critical to include state tax planning in your broader retirement income strategy. Tools like Roth conversions, careful withdrawal timing and tax diversification across accounts can help keep your state income tax bill manageable in retirement.

SNOWBIRDS AND STATE RESIDENCY RULES

If you live in California only part of the year – say, spending your winters in Arizona or Nevada – you’ll want to be especially cautious when it comes to state residency rules.

California has a reputation for aggressively pursuing individuals it considers residents for tax purposes. Even if you split your time between multiple states, you may still be considered a California resident if you:

• Spend a significant number of days in the state each year
• Maintain your primary home in California
• Have strong financial ties, such as a California driver’s license, voter registration or bank accounts
• Rely on California-based healthcare providers or professionals

And being classified as a resident doesn’t just mean you owe tax on the income you earn in the state; it can mean California taxes your entire income, regardless of where it was earned.

If you're a snowbird, it's important to formally establish residency in another state if you plan to avoid California taxes. That may involve moving your primary address, updating your legal documents and carefully tracking your time spent in each location.

HOW THE FEDERAL GOVERNMENT TAXES SOCIAL SECURITY INCOME

Even though California doesn’t tax Social Security, the federal government does – depending on your total income.

Up to 85% of your Social Security income can be included as taxable income on your federal tax return.⁴ Whether or not your benefits are taxed depends on a formula the Social Security Administration and IRS use to determine your provisional income.

WHAT IS PROVISIONAL INCOME?
Provisional income includes:

• Your adjusted gross income
• Any tax-exempt interest (like municipal bond interest)
• 50% of your Social Security benefits

Once your provisional income crosses a certain threshold, part of your benefits becomes taxable.

IRS THRESHOLDS FOR SOCIAL SECURITY TAXATION

Filing Status   

Single filer

• Provisional income between $25,000 and $34,000: Up to 50% of Social Security benefits may be taxable
• Provisional income over $34,000: Up to 85% of Social Security benefits may be taxable

Married filing jointly

• Provisional income between $32,000 and $44,000: Up to 50% of Social Security benefits may be taxable
• Provisional income over $44,000: Up to 85% of Social Security benefits may be taxable

Most retirees have at least some portion of their Social Security benefits taxed because they also draw from:

• 401k plans
• Traditional IRAs
• Dividends and capital gains
• Part-time work

STRATEGIES TO HELP MINIMIZE FEDERAL TAXES ON SOCIAL SECURITY

Tax-smart retirement financial planning can go a long way toward reducing the amount you owe on Social Security benefits. While you can’t control how the IRS calculates provisional income, you can control when and how you take income from different sources, and that can make a big difference. With the right strategies, you may be able to lower your taxable income, avoid unnecessary tax brackets and preserve more of your retirement savings.

Here are a few effective strategies:

Delay Social Security

If you don’t need your benefits right away, delaying Social Security can boost your monthly payout and postpone the tax impact. It also gives you time to draw from other accounts in a more tax-efficient way.

Use Roth accounts

Withdrawals from Roth IRAs and Roth 401ks don’t count toward provisional income. Using Roth funds to cover retirement expenses can help keep your taxable income lower when you're collecting Social Security.

Leverage QCDs

Once you turn 70½, you can donate up to $100,000 annually from a traditional IRA directly to charity through a Qualified Charitable Distribution. These gifts count toward your RMDs but don’t add to your taxable income — helping reduce taxes on your benefits and possibly your Medicare premiums.

Withdraw strategically

Tapping taxable accounts or Roth IRAs first and deferring withdrawals from traditional IRAs and 401ks can help you stay in a lower tax bracket over time. Coordinating your withdrawals carefully can reduce the taxes you owe both now and later.

Understand how RMDs impact taxes

Starting at age 73 (or 75, depending on your birth year), you must begin taking Required Minimum Distributions from most tax-deferred retirement accounts. These RMDs are counted as taxable income and can increase the portion of your Social Security that's taxed. They may also bump you into higher Medicare premium tiers.

That’s why many retirees explore Roth conversions in their 60s – before RMDs begin. Converting part of a traditional IRA or 401k to a Roth IRA means paying taxes now, but it reduces future RMDs and gives you a tax-free income source in retirement.

Roth conversions aren’t right for everyone, but they can offer long-term tax savings when timed correctly. A financial advisor can help you weigh the pros and cons and decide whether this strategy fits your retirement plan.

WORK WITH A FINANCIAL ADVISOR TO COORDINATE STRATEGIES

Tax planning in retirement isn’t just about reducing taxes this year – it’s about managing your tax exposure over decades. By coordinating income from Social Security, retirement accounts, investments and other sources, you can create a plan that helps you stay in control of your taxable income each year.

An experienced financial advisor can help you:

• Model the long-term tax impact of different withdrawal strategies
• Identify the best time to take Social Security based on your broader income picture
• Explore whether Roth conversions or QCDs are right for your situation
• Prepare for future RMDs without tax surprises
• Integrate tax planning with your broader retirement, estate and legacy goals

GET HELP NAVIGATING CALIFORNIA TAXES IN RETIREMENT

Retirement should be a time to enjoy the life you've worked so hard to build, not a time to worry about tax rules, withdrawal schedules or costly surprises. But as you navigate the state’s unique tax structure and consider Social Security, retirement accounts, Medicare premiums and investment income all in the mix, it’s easy to make a move that ends up increasing your tax bill in California.

That’s where Edelman Financial Engines can help. Our experienced advisors can work with you to design a retirement income strategy that’s built around your lifestyle and goals — while helping you minimize taxes wherever possible. Whether it’s coordinating withdrawals, timing Social Security, exploring Roth conversions or planning for RMDs, a financial advisor can help you stay one step ahead and keep more of what you’ve saved.