Retirement Tax Planning

Plan for taxes over your whole retirement, not just this year. 

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Taxes can be one of the largest expenses in retirement. Unlike market returns or inflation, though, taxes are something you can often influence. Small decisions made early, such as when to draw from each account, when to claim Social Security, and when to convert IRA money to a Roth, can change how much tax you pay over 20 or 30 years.

 

I help pre-retirees and retirees understand their tax picture and build a plan that fits their goals. This page explains the main ideas and links to my articles on each topic.

 

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Why Taxes Matter More Than Many People Expect

 

Many people assume their taxes will drop in retirement. Sometimes they do, but not always. Required Minimum Distributions (RMDs), Social Security benefits, investment income, and Medicare premiums can all push taxable income higher than expected.

 

The goal is not to avoid taxes altogether. It is to pay them in the years when they cost the least.

 

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Common Tax Risks in Retirement

 

These are the issues that most often catch retirees by surprise:

• Required Minimum Distributions (RMDs). Once they begin, you must withdraw from traditional IRAs and 401(k)s whether you need the money or not. Large balances can lead to large, taxable withdrawals.

• Taxes on Social Security. Other income can cause more of your benefit to become taxable.

• Medicare IRMAA surcharges. Higher income can raise your Medicare premiums two years later.

• The Widow's Tax Trap. When one spouse passes away, income often falls, but the surviving spouse files as a single taxpayer and can face higher tax rates.

• Net Investment Income Tax and inherited IRA rules. These can add to the tax bill for you or your heirs.
   

Read more:

• Hidden Retirement Tax Risks: IRMAA, RMDs & Social Security

• Widow's Tax Trap: How Taxes Can Rise in Retirement

• What Is IRMAA? How Medicare Surcharges Affect Retirement

 

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Ways to Manage Taxes in Retirement

 

There is no single best strategy. The right mix depends on your accounts, income, age, and goals. These are the main tools I work with.

 

Roth Conversions

A Roth conversion moves money from a traditional IRA to a Roth IRA. You pay tax on the amount converted, but future growth and withdrawals are generally tax-free. Converting can make sense in years when your income is low, but converting too much, or at the wrong time, can raise your tax bill. Many people do best converting a moderate amount each year between when they retire and when they begin Social Security.

 

• When Should You Do a Roth Conversion: 5 Guiding Principles

• When a Roth Conversion Is a Mistake: Tax-Smart Alternatives

• Roth vs. Traditional: Which Makes More Sense for You?

 

Withdrawal Planning

The old rule of spending taxable accounts first and Roth accounts last does not always work well. A plan that uses blended withdrawals from several account types can help keep your taxable income steadier from year to year.

• Retirement Withdrawal Strategies to Make Your Money Last

 

Asset Location

Asset location is about which account holds which investment. Placing investments in the account where they are taxed least can improve your after-tax returns without changing your overall investment mix.

• Tax-Efficient Asset Location

 

Charitable Giving

If you give to charity, how you give can matter. A Qualified Charitable Distribution (QCD) lets people age 70½ and older give directly from an IRA. The gift can count toward your RMD without adding to your taxable income. Donor-advised funds and gifts of appreciated investments can also help.

• QCDs: The Tax-Smart Way to Give

 

Capital Gains and Losses

In some years, you can sell investments at a loss to offset gains. In years when your income is low, you may also be able to sell investments at a gain and pay little or no federal capital gains tax.

 

Other Situations

Some people have additional options, such as those who own rental property, hold employer stock in a 401(k), or plan to move to a different state (especially lower cost, lower tax states).  Still others plan to retire overseas in a low-cost country. These are more specific to the individual.

 

For an overview of all of these strategies, and when each one tends to fit:

• 12 Retirement Tax Planning Strategies to Reduce Your Tax Bill

• Retiring Overseas:  How to Live Comfortably Abroad

 

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Timing Matters

 

Many people have a stretch of years after they stop working, but before Social Security and RMDs begin, when their taxable income is lower than usual. This can be a good time to convert part of an IRA to a Roth or to make other planned moves.

 

That is one reason tax planning and Social Security planning go together. When you claim Social Security affects how long this window stays open.

• Social Security Claiming Strategies: When to Claim

 

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How I Can Help

 

Tax decisions affect one another, so it helps to look at them together. As part of my financial coaching, I can help you:

• Review your accounts and estimate your likely taxes in the coming years

• Look at whether Roth conversions make sense, and how much

• Plan which accounts to draw from, and in what order

• Consider charitable giving strategies if giving is important to you

• Understand how income choices could affect Medicare premiums and Social Security taxes

• Prepare questions and ideas to review with your CPA or tax preparer

 

I work with clients in Ohio and across the United States, by video call.

 

Ready to talk it over?

 

If you would like to see how taxes could affect your retirement, I invite you to schedule a free, introductory, no-obligation Discovery Session. We will talk about your situation and goals, and you can decide whether working together makes sense.

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Schedule a Free Discovery Session

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Related Links:

• 12 Retirement Tax Planning Strategies to Reduce Your Tax Bill

• Hidden Tax Risks in Retirement: IRMAA, RMDs & Social Security

• Tax-Efficient Asset Location

• When a Roth Conversion Is a Mistake: Tax-Smart Alternatives

• Widow's Tax Trap: How Taxes Can Rise in Retirement

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This page is for general education and is not tax, legal, or investment advice. Tax rules change and depend on your circumstances. Please consult a qualified tax professional before making tax decisions.

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Frequently Asked Questions

 

Why do taxes matter so much in retirement?

Taxes can be one of the largest expenses in retirement. Required Minimum Distributions, Social Security benefits, investment income, and Medicare premiums can all push taxable income higher than many people expect. The goal is not to avoid taxes altogether. It is to plan ahead so you pay them in the years when they cost the least. See The Hidden Retirement Tax Risks.

 

What is a Roth conversion, and is it right for everyone?

A Roth conversion moves money from a traditional IRA to a Roth IRA. You pay tax on the amount you convert, but future growth and withdrawals are generally tax-free. It can make sense in years when your income is low, such as the years between retiring and starting Social Security. Converting too much, or at the wrong time, can raise your tax bill, so it is not the right choice for everyone. See When Should You Do a Roth Conversion: 5 Guiding Principles.

 

What are Required Minimum Distributions (RMDs)?

Once you reach a certain age, you must withdraw a minimum amount each year from traditional IRAs and 401(k)s, whether you need the money or not. The starting age is 73 for people born from 1951 through 1959, and 75 for people born in 1960 or later. These withdrawals are generally taxable, and large account balances can lead to large withdrawals, which is why many people plan for them well before they begin. See 12 Retirement Tax Planning Strategies to Reduce Your Tax Bill.

 

What is the Widow's Tax Trap?

When one spouse passes away, household income often falls somewhat but not typically by 50%.  The surviving spouse must begin to file as a single taxpayer. Because single tax brackets are much narrower than married-filing-joint tax brackets, the surviving spouse can end up in a higher bracket than the couple was in.

Planning ahead can help reduce this risk. See Widow's Tax Trap: How Taxes Can Rise in Retirement.

 

What is IRMAA?

IRMAA is an extra charge added to Medicare Part B and Part D premiums for people with higher incomes. It is based on your income from two years earlier, so a large one-time increase in income, such as a big Roth conversion or a large withdrawal, can raise your Medicare costs later. See What Is IRMAA? How Medicare Surcharges Affect Retirement.

 

What is a Qualified Charitable Distribution (QCD)?

A QCD lets people age 70½ and older give money directly from an IRA to a qualified charity. The gift can count toward your Required Minimum Distribution without being added to your taxable income. It can be a useful option for people who already give to charity. See QCDs: The Tax-Smart Way to Give.

 

Is my Social Security benefit taxable?

It can be. Depending on your other income, up to 85 percent of your benefits may be included in your federal taxable income. This does not mean an 85 percent tax rate. Qualified Roth IRA withdrawals do not count in the income formula, which is one reason Roth planning and Social Security planning go together. Some states also tax benefits, and most do not. See my page on Social Security Planning.

 

Do you prepare tax returns or give tax advice?

No. I am not a CPA or tax preparer. I can help you understand your options, see how different choices may affect your taxes, and prepare questions to review with your CPA or tax preparer. For specific tax, legal, or investment advice, please consult a qualified professional.

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