Five Tax Strategies to Help Your Money Last in Retirement

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The intricacies of tax planning are a critical component of your overall retirement strategy. Minimizing taxes in retirement isn’t just about reducing today’s tax bill — it’s about ensuring that your hard-earned money lasts longer and that you can draw from your assets efficiently.

By applying a logical, data-driven approach, you can create a retirement tax strategy that maximizes your income and minimizes unnecessary tax burdens.

Tax planning: Why it’s essential in retirement

The tax landscape changes as you transition from earning a salary to drawing income from different sources, such as Social Security, pensions, retirement accounts and investments. Without a solid plan, taxes can eat away at your retirement income, leaving less for your lifestyle and goals.

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Here are the key elements of tax planning as you approach retirement:

Managing tax brackets. As your income sources shift, it’s critical to understand how to stay within favorable tax brackets. Drawing too much from tax-deferred accounts, such as a 401(k) or traditional IRA, can push you into a higher tax bracket, leading to a larger tax bill. Strategic withdrawals can help you optimize your tax liability.
Timing of withdrawals. Deciding when to tap into different accounts is a central component of tax minimization. For example, delaying withdrawals from tax-deferred accounts until later years could make sense if you expect your income to decrease in retirement, reducing your tax liability. Alternatively, you may want to start drawing on those accounts earlier to manage your taxable income.
State taxes. State income tax laws vary widely. If you plan to move in retirement, consider the tax implications of your new location. Some states have no income tax, while others may tax retirement income at higher rates. Accounting for state taxes in your retirement plan could save thousands over time.

Tax minimization strategies for retirement

Several strategies can help minimize taxes in retirement. These techniques ensure that you’re not only reducing your tax burden today but also extending the longevity of your savings for years to come.

1. Roth conversions

One of the most effective tax-minimization strategies is converting a portion of your tax-deferred accounts, such as a traditional IRA or 401(k), into a Roth IRA. Unlike traditional retirement accounts, withdrawals from Roth IRAs in retirement are tax-free. The key is to strategically convert these funds during low-income years — such as right after retirement but before required minimum distributions (RMDs) begin at age 73.

Why it works. Roth conversions allow you to pay taxes upfront while in a lower tax bracket. The funds then grow tax-free and can be withdrawn tax-free in retirement.
Strategic timing. The years between retirement and age 73 (when RMDs kick in) often present a golden “tax window” where your income may be lower, making it an ideal time to convert funds without pushing yourself into a higher tax bracket.

2. Harvesting capital gains

As you approach retirement, managing investments in taxable accounts becomes crucial for tax minimization. One technique is tax-loss harvesting, which involves selling investments that have lost value to offset gains from other investments. Additionally, strategically selling appreciated assets during years when your taxable income is lower can help minimize the capital gains taxes you pay.

Long-term gains. For individuals in lower tax brackets, long-term capital gains may be taxed at 0%. This is especially beneficial during retirement, when your income is likely lower than in your peak earning years.
Capital losses. If you have investments that have declined in value, selling them to realize a loss can offset gains elsewhere in your portfolio. This reduces your overall tax liability.

3. Tax diversification

Tax diversification means having different types of accounts — tax-deferred (e.g., traditional 401(k) and IRA), taxable (e.g., brokerage) and tax-free (e.g., Roth IRA) — to draw from in retirement. By having a mix of accounts, you can strategically choose which to withdraw from each year based on your income needs and the tax implications of each type of account.

Tax-deferred accounts. Traditional IRAs and 401(k)s provide a tax deduction when contributing, but withdrawals are taxed as ordinary income in retirement. These accounts are great for reducing taxable income while working, but without a strategy, you could face higher taxes when withdrawing in retirement.
Taxable accounts. These are brokerage accounts that offer flexibility. Only the capital gains are taxed, and you can manage when to realize gains. This flexibility allows you to control your taxable income in a given year.
Roth accounts. Roth IRAs and 401(k)s are powerful tools because they offer tax-free withdrawals in retirement. Contributing to Roth accounts during your working years (especially if you expect to be in a higher tax bracket in the future) can provide significant tax savings down the line.

4. Required minimum distributions (RMDs)

At age 73, the IRS mandates that you start withdrawing a certain amount from your tax-deferred accounts, known as RMDs. These withdrawals are taxed as ordinary income. Failing to plan for RMDs can lead to a sudden spike in taxable income, pushing you into higher tax brackets.

Mitigate RMDs. To avoid being hit with a large tax bill, you can start taking strategic withdrawals before age 73, and you could perform Roth conversions. Both strategies would reduce the balance in your tax-deferred accounts before RMDs hit.
Qualified charitable distributions (QCDs). If charitable giving is part of your retirement plan, consider using RMDs to make charitable donations. QCDs allow you to donate up to $100,000 per year directly from your IRA to a qualified charity, satisfying your RMD requirement while avoiding taxes on the distribution.

5. Health savings accounts (HSAs)

For those who have access to a health savings account (HSA) through a high-deductible health plan, this tool can play a key role in retirement planning. HSAs offer a triple tax advantage: Contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are also tax-free.

Saving for medical expenses. Medical expenses can be a significant cost in retirement. By building up an HSA balance during your working years, you can cover health care expenses in retirement without incurring taxes.
Post-65 withdrawals. After age 65, HSA funds can be used for any purpose, though non-health care withdrawals are taxed as ordinary income (similar to an IRA).

The key to successful tax planning is understanding the variables and optimizing outcomes. By taking advantage of strategies like Roth conversions, tax diversification and tax-efficient withdrawal sequences, you can minimize your tax burden and make your savings last longer.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As Founder of Elevated Retirement Group, Inc., Scott Dougan has built a comprehensive retirement planning company focused on helping clients grow and preserve their wealth. Under Scott’s leadership, a team of experienced financial advisers, Certified Financial Planners (CFP®) and CPAs use tax-efficient strategies, professional investment management, income planning and proactive health care planning to help clients feel confident in their financial future — and the legacy they leave behind. Scott has also written a book titled “Exceptional Retirement: Tools and Strategies for Retiring on Your Terms” (click here to request a free copy). You can find Scott on YouTube by clicking here, where he creates educational videos for those near retirement. If you would like to talk to Scott’s team, you can schedule a call by clicking here.