Retirement can change the way you think about taxes.
While you were working, your main tax question may have been, “How can I reduce this year's tax bill?” In retirement, the bigger question is often:
How can I manage taxes over the next 10, 20, or 30 years—not just this year?
Retirees often have several sources of income, such as retirement accounts, Social Security, pensions, investment accounts, and eventually required withdrawals from retirement accounts. The timing of those income sources can make a meaningful difference in your tax picture.
Here are several tax-efficient moves worth considering.
1. Don't wait until retirement to think about taxes
The years just before and after retirement can create important planning opportunities.
For example, you might have a temporary period when:
- You have stopped working but haven't started Social Security.
- Your income is lower than it was during your working years.
- You haven't started required minimum distributions (RMDs).
- You have more flexibility over how much income to recognize.
That temporary change in income can open planning opportunities that may not be available later.
The key is to look ahead rather than waiting until a tax event becomes unavoidable.
2. Consider whether a Roth conversion makes sense
A Roth conversion generally moves money from a traditional retirement account into a Roth IRA. The amount converted is generally included in taxable income for the year of the conversion.
Why would someone voluntarily pay tax now?
One reason is that you may be able to pay tax on some retirement savings at a relatively favorable rate today rather than potentially paying tax on larger withdrawals later.
For example, imagine someone who:
- Is 62 and recently retired
- Has $1.5 million in traditional retirement accounts
- Has relatively little taxable income this year
- Expects Social Security and other income later
- May eventually have substantial RMDs
Rather than automatically converting as much as possible, the better question may be:
How much, if any, should we convert this year based on the client's projected tax situation?
That can involve comparing several scenarios rather than choosing one number immediately.
And a Roth conversion is not automatically beneficial. The tax cost today, projected future income, Medicare premiums or ACA costs, and the client's broader circumstances all matter.
The goal isn't simply to convert as much as possible. It's to determine whether converting a portion now fits the client's longer-term plan.
3. Think about RMDs—and what happens after you or your spouse dies
Traditional retirement accounts generally aren't meant to remain untouched forever. Most owners must begin taking required minimum distributions (RMDs) at age 73 under current federal rules.
RMDs are generally taxable as ordinary income.
For someone with a large traditional retirement account, those required withdrawals can become a significant part of taxable income later in retirement.
That's one reason the years after you retire but before RMDs begin can deserve attention.
You may have a period when:
- Your paycheck has stopped
- You haven't started Social Security yet
- Your income is relatively low
- RMDs haven't begun
That lower-income window may provide an opportunity to evaluate whether gradual Roth conversions or other income-planning strategies make sense.
But RMD planning isn't only about the original account owner's lifetime.
What happens when a spouse inherits the account?
The tax picture can change significantly after the death of a spouse.
A surviving spouse may have less household income, but may also face a different tax situation as a single filer, a smaller standard deduction and narrower tax brackets that can cause the same level of income to reach higher marginal tax rates sooner. At the same time, the surviving spouse may inherit the deceased spouse's retirement account and eventually have to take distributions from it.
Planning for the “survivor years” can be just as important as planning for the joint-return years.
What about children who inherit the retirement account?
Inherited retirement accounts can also create tax considerations for the next generation.
For many non-spouse beneficiaries, current rules generally require inherited retirement accounts to be distributed within a limited period, often 10 years, although the specific rules depend on the beneficiary and circumstances.
If the beneficiary is already a high-income taxpayer, distributions from an inherited traditional IRA may be added to income that is already being taxed at relatively high rates.
For example, a parent may have accumulated a substantial traditional IRA while in retirement. If the account is later inherited by an adult child who is already earning a high salary, withdrawals from that inherited IRA could add taxable income on top of the child's existing earnings.
This is one reason retirement-account planning can have an estate-planning dimension, not just an income-tax dimension.
You might ask:
“What could my taxable income look like once RMDs begin?”
But also:
“What could happen to this account after the first spouse dies—and eventually when my children inherit it?”
The goal isn't to eliminate RMDs. It's to understand how retirement-account balances may affect taxes during your lifetime, after the first spouse's death, and potentially for your beneficiaries.
4. Coordinate Social Security with your other income
Social Security doesn't exist in a vacuum.
The taxability of your benefits can depend on your other income, so the timing of Social Security can interact with retirement-account withdrawals, pensions, investment income, and other decisions.
For example, starting Social Security while also taking large retirement-account distributions may produce a different tax result than coordinating those income sources differently.
This doesn't mean there is one universally “best” age to claim Social Security.
The question is not simply when to claim. It's how Social Security fits with the rest of your income sources.
5. Don't forget about Medicare premiums—or ACA costs
Retirement tax planning isn't only about your federal income-tax bracket.
Your income can also affect the cost of your health coverage, depending on your age and circumstances.
If you're on Medicare, higher income can increase your Medicare premiums through IRMAA, the income-related monthly adjustment amount.
If you retire before age 65 and get health insurance through the ACA Marketplace, your income can also affect the amount of premium tax credit you may receive.
This becomes particularly important when considering a Roth conversion or another significant increase in income.
For example:
- A 62-year-old retiree may be receiving an ACA premium tax credit.
- A Roth conversion increases taxable income.
- The additional income could reduce the person's ACA premium tax credit, increasing their health insurance cost.
Similarly, after age 65, a large Roth conversion could potentially increase Medicare premiums through IRMAA.
That doesn't automatically mean a Roth conversion is a bad idea. It means the additional health-insurance cost should be considered alongside the tax cost before deciding how much to convert.
If you're retired before 65, check the ACA impact. If you're on Medicare, check the IRMAA impact.
The practical takeaway is simple: don't look at the tax bracket alone. Look at the total cost of the decision.
6. If you give to charity, consider how you fund your donations
For retirees who regularly give to charity, the source of the donation can matter.
A qualified charitable distribution (QCD) allows an eligible IRA owner who is at least age 70½ to have money sent directly from an IRA to a qualified charity. A qualifying QCD can generally be excluded from income and can satisfy all or part of an RMD.
For someone who already plans to give to charity, this can be worth discussing as part of their overall tax plans.
The details matter, including the type of account, the recipient organization, and how the distribution is made.