When we meet with individuals and families thinking about retirement, one of the first questions they ask is, “Have I saved enough?” It’s an important question, but it’s only one part of the retirement puzzle. As retirement gets closer, another important question is, “How do I plan for taxes once I stop working?” This is where tax planning in retirement becomes an important part of the overall picture.
If you’ve saved across different account types, (pre-tax, tax-free, and taxable brokerage accounts) you have flexibility. The key is to use that flexibility with intention. Strategies like filling lower tax brackets, Roth conversions, coordinating withdrawals across account types, and using charitable tools strategically, could make a meaningful difference over time.
In Retirement, Focus on Lifetime Taxes, Not Just This Year
Many people assume that the goal is to pay as little tax as possible every year. In reality, retirement tax planning should be about coordinating your goals and minimizing taxes over your lifetime. This may mean intentionally paying more tax early in retirement to pay less in future years or provide a more tax advantageous situation for your heirs.
Those early years in retirement could provide valuable planning opportunities. Once Required Minimum Distributions (RMDs) begin in your 70s, flexibility narrows. Those required withdrawals could push income higher, whether you need it or not. Being proactive earlier could help smooth out your tax picture over time.
Coordinating Retirement Income Sources
Retirement income could come from multiple sources, and each one impacts your tax picture differently. This could include taxable brokerage accounts, traditional IRAs or 401(k)s, Roth accounts, Social Security and, possibly, pensions. Understanding how these pieces work together gives you more control over your cash flow and tax brackets.
Pulling from a traditional IRA increases taxable income dollar for dollar. Drawing from a Roth account is typically tax free and doesn’t increase taxable income. Realizing gains in a brokerage account may be taxed at different rates than ordinary income.
The goal isn’t complexity but rather coordination. When these sources are used together, thoughtfully, you could gain more control over your tax brackets and long-term financial plan.
Roth Conversions and Bracket Management
Roth conversions are one of the most discussed retirement strategies. By moving money from a pre‑tax IRA into a Roth IRA, you pay tax today in exchange for future tax‑free growth. Additionally, Roth IRAs are not subject to RMDs. Conversions tend to work best during lower‑income years and are often most effective when done gradually over time. The key is carefully managing tax brackets to avoid unintended tax consequences. The tax-free nature of a Roth IRA makes it a great asset for both personal use and your heirs. Roth conversions could involve complex tax considerations. Please consult your tax professional for your specific situation.
Hidden Taxes in Retirement
Everyone is familiar with federal and state taxes, but those aren’t the only ones to consider in retirement. In retirement, “hidden taxes” could impact your plan in ways that aren’t always obvious:
- Social Security taxation: Up to 85% of benefits may be taxable depending on your income. As other income increases, more of your benefit may be subject to tax.
- Medicare IRMAA surcharges: Part B and Part D premiums are income-based. If your income exceeds certain thresholds, your premiums increase through IRMAA (Income-Related Monthly Adjustment Amount). One important item to note is that Medicare uses your income from two years prior to determine premiums. Decisions you make today could impact future healthcare costs.
Understanding these lesser‑known taxes is important, because they could meaningfully impact cash flow and long‑term retirement costs.
Tax-Efficient Charitable Giving
For those who give charitably, certain strategies could help reduce taxes while fulfilling your charitable goals:
- Gifting appreciated assets from a taxable brokerage account is a great way to avoid capital gains tax, satisfy charitable intent, and possibly provide a charitable deduction. You could give assets directly to a charitable organization or through a Donor Advised Fund (DAF).
- Qualified Charitable Distributions (QCDs) are available once you reach age 70½. QCDs allow you to give directly from an IRA. They reduce taxable income, count toward satisfying RMDs, and may help manage Social Security taxation and Medicare premiums.
These tools allow you to meet charitable goals in a way that may also lower your tax burden and increase the impact of your giving.
Approaching Retirement Taxes with Clarity and Purpose
Proactive planning could give you greater awareness and control over how and when you draw income in retirement. Understanding how different income sources, tax rules, and timing considerations work together could help you make more informed decisions as your financial picture evolves.
If you’re looking for guidance as you navigate these considerations, Foster Group is here to help as a trusted advisor. We can help you evaluate your options and coordinate with your tax professional as part of your broader retirement planning. What does it mean to be truly cared for? It means we understand your passions and use proven methods to help you reach your goals.
