Unfortunately, taxes don’t disappear when you retire. Most retirees continue to generate income, and much of it may be taxable. The good news is that with thoughtful planning, you can manage taxes in retirement and keep more of your money available for the things that matter most.
Here are four practical strategies to help you navigate taxes in retirement with confidence.
1. Take Inventory of Your Accounts
Your retirement income often comes from multiple sources, and the types of accounts you hold play a major role in how much tax you’ll owe. Taking inventory of your accounts can help you plan withdrawals strategically and manage your taxable income from year to year.
- Tax‑deferred accounts
These accounts are funded with pretax dollars, meaning withdrawals are generally taxed as ordinary income. Common examples include traditional and rollover IRAs, as well as workplace retirement plans like 401(k)s and 403(b)s. - Tax‑free accounts
Some accounts allow qualified withdrawals without triggering taxes. Roth IRAs, Roth 401(k)s, and health savings accounts (HSAs) may provide tax‑free income if IRS requirements are met. These accounts can be especially valuable when you want to avoid increasing your taxable income in retirement. - Taxable accounts
Individual, joint, and trust accounts typically don’t offer special tax advantages. Interest, dividends, and capital gains may be taxable, and selling assets for a profit can increase your tax bill. Even so, these accounts can play an important role in providing flexibility during retirement.
2. Understand How Social Security and Pension Income Are Taxed
If Social Security benefits are your only source of income, they may not be taxable. However, if you receive additional income—such as wages, investment earnings, pension payments, or withdrawals from pretax retirement accounts—a portion of your Social Security benefits may be subject to federal income tax. Managing your total “combined income” can help reduce the amount of your benefits that are taxed.
Pension income is often taxable as well, but retirees typically face fewer payroll deductions than during their working years. For example, you’re no longer paying into Social Security, and you may have flexibility in choosing how much federal income tax is withheld from your pension payments.
3. Plan Ahead for Required Minimum Distributions
Once you reach age 73, the IRS generally requires you to begin taking withdrawals from certain retirement accounts, such as traditional IRAs and most employer‑sponsored retirement plans. These required minimum distributions (RMDs) are taxable—even if you don’t need the income. Some inherited retirement accounts are also subject to RMD rules.
RMDs are designed to prevent retirement savings from remaining tax‑deferred indefinitely. As part of your retirement income plan, it’s important to estimate how much you’ll be required to withdraw and how those distributions may affect your overall tax situation.
During RMD years, some retirees choose to supplement their income with withdrawals from tax‑free accounts to help keep taxable income lower.
4. Balance Withdrawals Strategically
A thoughtful withdrawal strategy can help you manage taxes over time. In years when your income is relatively low, it may make sense to take withdrawals from pretax accounts up to a higher tax bracket. In higher‑income years—such as when you sell assets or receive a large distribution—you might rely more on tax‑free accounts.
Some retirees also explore converting pretax assets to Roth accounts. A Roth conversion involves paying taxes now—ideally at a lower rate—in exchange for the potential benefit of tax‑free withdrawals later. While this strategy isn’t right for everyone, it can be a useful tool when coordinated carefully.
Enjoy a More Tax‑Smart Retirement
Taxes are a reality in retirement, but they don’t have to derail your plans. By understanding your income sources and using them strategically, you can better manage what you owe and make the most of your retirement savings.
Because tax rules and personal circumstances vary, it’s wise to consult a qualified tax professional before making changes to your strategy.
Want more? Check out our blog, How to Recognize Tax Scams During Filing Season.
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