Retirement Tax Planning

Retirement Tax Planning

Benjamin Franklin remarked, "Nothing is certain except death and taxes." Even today, this sentiment holds relevance. It underscores the importance of tax planning, ensuring our families receive the legacies we envision without undue tax burdens. Just as many acquire life insurance to cover final expenses or pre-plan end-of-life arrangements, it's wise to invest judiciously to optimize tax benefits in retirement. Proper financial planning can prevent unexpected tax implications during your retirement years.

How Different Retirement Accounts Are Taxed

Various taxation rules apply to retirement savings. You invest money without initial taxation for tax-deferred accounts like Traditional IRAs and many 401(k) plans. Instead, you pay taxes on the account's withdrawals, often assuming you'll have a lower income in retirement and thus a smaller tax bill.

On the other hand, Roth IRAs use post-tax dollars, so you don't pay taxes on the earnings when you withdraw.

You invest after-tax for taxable accounts, such as traditional brokerage and bank accounts. There's no age requirement for withdrawals, and you won't face penalties for accessing your money. However, you must pay taxes on any capital gains in the year you withdraw them.

Health savings accounts (HSAs) accept pre-tax contributions. These funds remain tax-free if you use them for medical, dental, or vision expenses. After turning 65, you can use these funds for non-medical purposes, but they'll be taxed as income upon withdrawal.

The Impact of Taxes on Social Security

Generally, your Social Security income is only taxed if your taxable income exceeds 25,000 per year. The general rule is that you will pay income tax on up to 50 percent of your Social Security benefits if your combined income is between $25,000 and $34,000 for the year. If your income exceeds $34,000 for the year, up to 85 percent of your Social Security benefits may be taxed.

What is your combined income? It is the sum of your adjusted gross income, nontaxable interest, and ½ of your Social Security benefits.

Required Minimum Distributions and Tax Implications

You want to be careful during retirement planning to ensure you're not pushed into a higher tax bracket than necessary due to minimum distribution requirements. These requirements may seem benign at worst – even good in some instances – but they can completely derail your tax planning if you don't account for them in the planning stages.

Tax-Efficient Withdrawal Strategies

The best plan for maximizing the efficiency of your withdrawal strategies for taxation purposes is to diversify so that you receive a steady stream of taxable and tax-deferred income throughout the year. Don't forget the potential value of brokerage accounts for allowing you to avoid unnecessary taxes, hold investments until the following year to enjoy more favorable taxation, and invest in tax-advantaged bonds that may provide smaller returns but often offer the benefit of no federal taxes.

Tax Credit and Deductions for Retirees

Don't forget to take advantage of tax credits and deductions available for retirees and people with disabilities. These tax credits and deductions can make a world of difference in the amount you must pay in taxes each year and may even place you in a lower tax bracket. If you have the funds available, investing in professional tax preparation services by people who specialize in helping retirees maximize their tax savings each year is worthwhile.

State Taxes and Retirement

One thing many people do not consider when retiring, or until they've filed taxes a few times during retirement, is location. You can choose locations before retirement that offer the best tax benefits based on income while offering the type of lifestyle you desire. For instance, some states have no income tax. In contrast, others offer retirees more favorable tax credits and treatment than other states. In other words, consider where you are planning to retire as you plan for taxes in your retirement.

Estate Planning and Tax Considerations

Going back to death and taxes, we've now come full circle. Planning your estate to reduce the tax burden on your beneficiaries is something everyone is interested in doing. The best way to do this is to work with a professional estate planner to ensure your family will not incur surprise double taxation (inheritance and estate taxes, which can be crippling).


One solid recommendation for managing taxes during retirement is to pay quarterly. That allows you to stay on top of your tax situation and avoid unpleasant bills that seem impossible to pay at the last minute. That is especially true if you do not plan to automate tax withholdings on all your taxable income for the year.