Recently, the wavelength range around 1060 nm has become attractive for retinal imaging with optical coherence tomography (OCT), promising deep penetration into the retina and the choroid. The adjacent water absorption bands limit the useful bandwidth of broadband light sources, but until now, the actual limitation has not been quantified in detail. We have numerically investigated the impact of water absorption on the axial resolution and signal amplitude for a wide range of light source bandwidths and center wavelengths. Furthermore, we have calculated the sensitivity penalty for maintaining the optimal resolution by spectral shaping. As our results show, with currently available semiconductor-based light sources with up to 100–120 nm bandwidth centered close to 1060 nm, the resolution degradation caused by the water absorption spectrum is smaller than 10%, and it can be compensated by spectral shaping with negligible sensitivity penalty. With increasing bandwidth, the resolution degradation and signal attenuation become stronger, and the optimal operating point shifts towards shorter wavelengths. These relationships are important to take into account for the development of new broadband light sources for OCT.