Retirement Tax Planning: Keep More of What You've Saved
Pay less in taxes over the course of your retirement
Why It Gets Complicated
- Larger IRA withdrawals may increase taxable income
- Higher income may cause more Social Security to become taxable
- Income increases may also affect Medicare premiums
What Is Retirement Tax Planning?
Retirement tax planning is the process of looking at how taxes may affect your income, savings, investments, and retirement accounts over time.
Common Areas Retirement Tax Planning Covers
Retirement tax planning is not usually about one single strategy. It often involves looking at how different financial decisions work together over time.
Retirement Account Withdrawals
The order withdrawals are taken from retirement accounts may affect taxes over time. Withdrawing money from traditional IRAs, Roth IRAs, and brokerage accounts may all create different tax consequences.
Roth Conversions
Some retirees explore Roth conversions during lower-income years before Required Minimum Distributions begin. Future qualified withdrawals from a Roth IRA may become tax-free.
Social Security Timing
The age someone starts Social Security may affect overall retirement income and taxes. For some retirees, waiting longer may increase monthly income while creating different tax planning opportunities.
Required Minimum Distributions
Many retirees are surprised by how large RMDs can become later in retirement. RMDs may increase taxable income and sometimes affect Medicare premiums or Social Security taxation.
Investment Taxes
Investments held outside retirement accounts may create taxes through dividends, interest, or capital gains. The timing of investment sales may also affect taxes from year to year.
Why Timing Matters
For some retirees, the years between retirement and Required Minimum Distributions may create temporary lower-income years that provide additional planning opportunities.
Who Benefits Most From Retirement Tax Planning?
Retirement tax planning may be especially helpful for people who have large IRA or 401(k) balances, want to reduce taxes in retirement, are getting close to Required Minimum Distributions, want to better understand Roth conversions, or are concerned about future tax rates.
Example Social Security Scenarios
Example 1
A retiree may stop working at age 62 and delay Social Security until age 70. During those earlier retirement years, taxable income may temporarily fall into a lower tax bracket. Some retirees use those years to explore partial Roth conversions before Social Security and Required Minimum Distributions begin later in retirement.
Example 2
Another retiree may have a large traditional IRA balance that continues growing for many years. Later in retirement, Required Minimum Distributions may create larger taxable withdrawals than expected. That additional income may increase taxes, increase Medicare premiums, and cause more Social Security income to become taxable.