Often, retirement dreams involve taking long vacations, spending more time with family, and pursuing hobbies. What don’t the dreams take into account — what don’t they see? Taxes.
Especially when retirees begin drawing Social Security, pensions, and retirement funds, taxes can become a significant expense. The good news is that you don’t have to accept a high tax bill in retirement passively. If you plan smartly and understand how retirement income is taxed, you can legally reduce your tax burden and keep more of your hard-earned income.
So, let’s look at how to reduce your retirement taxes — without breaking any rules.
1. Demystifying Your Retirement Income and How It’s Taxed
You must first understand how the Internal Revenue Service (IRS) views your various retirement income streams before you can effectively reduce your tax burden. After all, to plan tax-efficiently, you must understand the rules of each money “bucket.”
- Social Security benefits. Often, this is the first point of confusion. However, be aware that 85% of your Social Security benefits may be taxable. According to the IRS, the percentage depends on your combined income, which includes adjusted gross income (AGI) + nontaxable interest + half your Social Security benefit. In other words, the more you earn, the more your Social Security benefits are taxed. Furthermore, Social Security is taxed differently by states, with many states exempting it.
- Traditional IRAs and 401(k)s. Since these are generally funded with pre-tax dollars, contributions often result in a reduction of taxable income. During this time, the money grew tax-deferred. Just like a paycheck, retirement distributions are taxed as ordinary income.
- Roth IRAs and Roth 401(k)s. This is the opposite of a traditional IRA or 401(k). Since you contribute after-tax dollars, you don’t get a tax deduction up front. Qualified retirement withdrawals are, however, completely tax-free. Since they don’t qualify for taxation, they’re a game-changer for tax planning.
- Annuities. Tax treatment of annuities varies depending on whether they are qualified or non-qualified funds. Qualified annuities are taxed on withdrawals, while nonqualified annuities are taxed on earnings.
- Pensions. As with distributions from traditional IRAs and 401(k)s, pension income is generally taxed as ordinary income, unless you contributed after-tax dollars.
- Investment income (taxable brokerage accounts). The income from bonds, dividends from stocks, and capital gains from investments is included in this category. Dividends and interest are generally taxed as ordinary income. If your overall income level is high enough, you may qualify for lower tax rates (0%, 15%, or 20%) on qualified dividends and long-term capital gains.
To minimize taxes in retirement, you must strategically manage which “buckets” you withdraw from and when.
2. Delaying Social Security: A Strategic Double Play
Although Social Security benefits can be collected as early as age 62, delaying this decision can improve tax efficiency and increase lifetime income.
Delaying your monthly payout beyond your full retirement age (FRA) increases your benefit by 8% for every year you delay. If you claim at FRA when you are 70, your monthly benefit can be substantially higher.
As well as increasing your monthly check, delaying Social Security can also reduce your tax bill. The money you have in your Roth savings account or taxable brokerage accounts may be able to support you while your Social Security benefits grow. If you keep your “combined income” low in your early retirement years, you can avoid or substantially reduce the federal taxation of your Social Security benefits. With more income and a lower tax bill, it’s a powerful one-two punch.
3. Embrace the Power of Roth Accounts: Your Tax-Free Anchor
Among retirees’ tax-planning weapons, Roth IRAs and Roth 401(k)s are among the most potent. Due to their tax-free withdrawals, these accounts offer unparalleled flexibility and control. Unlike Social Security benefits, Roth withdrawals won’t increase your adjusted gross income (AGI), which means you won’t pay more in taxes or be subject to higher Medicare premium surcharges (more later).
Incorporate Roth savings into your retirement plan now, if you haven’t already.
- Roth Conversions. A Roth IRA is established when funds are transferred from a traditional IRA or 401(k). Initially, you will be required to pay taxes on the converted amount; however, it will be tax-free for all future qualified withdrawals. To shift your tax liabilities to years when your income is likely to be lower, this is a strategic move.
- Utilizing a Roth 401(k). You can contribute after-tax dollars directly from your paycheck if your employer offers a Roth 401(k). As with Roth IRAs, these contributions are tax-free, and qualified withdrawals are also tax-free.
4. Strategic Roth Conversions: The Tax Bracket Balancing Act
As we mentioned above, Roth conversions are a cornerstone of proactive retirement tax planning. By paying taxes now, at a lower rate, we can avoid paying them later, at a higher rate.
However, it’s all about timing and sizing when it comes to Roth conversions;
- Convert during low-income years. The best time for Roth conversions is when your taxable income is temporarily lower. You may do this during a “gap year” between leaving your job and starting Social Security payments or taking Required Minimum Distributions (RMDs).
- Fill in your tax brackets. Convert amounts that will “fill up” your current low tax bracket (such as the 12% or 22% federal income tax bracket of 2025, or any lower state tax bracket) instead of converting a considerable sum. As a result, you can pay relatively low taxes on the conversion.
- Proactive RMD management. Having a Roth conversion reduces your traditional IRA or 401(k) balance, which is one of the major benefits. The reason for this is that once you reach age 73 (as of 2025), you must take Required Minimum Distributions (RMDs) from these pre-tax accounts. By proactively moving funds to a Roth, you can lower your future Required Minimum Distributions (RMDs) and reduce your taxable income as you retire.
Planning this strategy requires attention to detail and often involves multi-year projections, so it’s a good idea to consult a financial planner or tax planner.
5. Managing Required Minimum Distributions (RMDs): The Inevitable Tax Trigger
As of 2025, the SECURE Act 2.0 mandates that you begin taking RMDs from your traditional IRAs, 401(k)s, and similar tax-deferred accounts once you reach age 73. If not managed properly, these distributions can quickly inflate your taxable income, pushing you into higher tax brackets and triggering income-based surcharges. If you don’t take RMDs, you may be penalized 25% — or 10% if you do it promptly.
In addition to Roth conversions, Qualified Charitable Distributions (QCDs) are another effective tool for managing Required Minimum Distribution (RMD) taxes. You can direct up to $105,000 (for 2024, adjusted for inflation) directly from your IRA to a qualified charity if you are 70 ½ or older. This QCD counts toward your RMD requirement, but it’s not included in your taxable income. In addition to fulfilling your charitable intentions, you’ll also be meeting your RMD obligations.
6. The Art of Tax-Efficient Withdrawal Sequencing: Blending Your Buckets
In many cases, retirees instinctively follow a simple withdrawal order. Invest first in taxable brokerage accounts, then in traditional tax-deferred accounts, and finally in tax-free Roth accounts. However, the optimal withdrawal strategy will often depend on your financial situation, income needs, and tax landscape.
To strategically manage your taxable income and remain in lower tax brackets, consider using a “blended withdrawal strategy.” For instance;
- Avoiding Medicare IRMAA cliffs. By strategically combining taxable and Roth withdrawals, you can prevent Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) surcharges — we’ll discuss in more detail below.
- Filling up low tax brackets. You may supplement your income with tax-free Roth withdrawals by withdrawing a smaller amount from your traditional (taxable) accounts to “fill up” your lowest tax bracket. As a result, you can pay taxes on some income at the lowest possible rate while gaining access to additional funds tax-free.
- Strategic capital gains realization. To maintain desired income levels, combine withdrawals from tax-deferred accounts with strategic sales of appreciated assets in taxable accounts (see point 7).
When modeled out with a qualified financial planner or tax professional, retirement savings can be significant.
7. Leveraging Capital Gains Tax Brackets: A Hidden Gem
Depending on your total taxable income, long-term capital gains on assets held in taxable brokerage accounts for more than one year are taxed at a remarkably favorable rate: 0%, 15%, or 20%.
Having this flexibility in retirement is a unique advantage, especially if other sources of income (Social Security, pensions, RMDs) are low. Depending on your earnings, including capital gains, you may qualify for 0% long-term capital gains tax. For married couples filing jointly in 2025, this 0% bracket extends up to approximately $96,700 in taxable income. The 20% rate threshold went from $588,750 to $600,050.
In other words, if your income is above that threshold, you can sell appreciated assets tax-free. You can use a strategy called “tax gain harvesting” to reset the cost basis of your investments (if you repurchase them immediately) or free up cash for expenses without triggering capital gains taxes. Alternatively, you might hold off selling appreciated assets when your income is higher to avoid hitting a higher capital gains rate.
8. Watch Out for Medicare Surcharges (IRMAA): The Income Cliff
Medicare Part B premiums (medical insurance) and Medicare Part D prescription drug plan premiums are subject to the Medicare income-related monthly adjustment amount (IRMAA). Medicare beneficiaries who have a modified adjusted gross income of more than $106,000 (individual return) or $212,000 (joint return) are covered by this provision.
So, whenever you earn more than certain thresholds with your Modified Adjusted Gross Income (MAGI), you will be charged Income-Related Monthly Adjustment Amounts (IRMAAs). As such, adding these surcharges to your Medicare premium can add hundreds of dollars per month.
As an example, in 2025, if your MAGI as a married couple filing jointly exceeds roughly $206,000, your premiums can significantly increase. In most cases, your IRMAA is calculated using the income you reported two years prior (e.g., 2023 MAGI is used to calculate 2025 premiums).
A large RMD, a Roth conversion, the sale of a highly appreciated home, or even a large capital gain from an investment sale can unexpectedly push you over the IRMAA threshold. The best way to avoid unnecessary premium surcharges is to plan your income over a multi-year period to stay below these premium cliffs.
9. Utilize Tax-Loss Harvesting in Taxable Accounts: Offsetting Gains
The concept of “tax-loss harvesting” can be helpful if you invest within a regular brokerage account. In this case, you intentionally sell investments when their value has declined (at a loss) to offset capital gains you’ve realized on profitable investments you’ve sold. Even if your capital losses exceed your capital gains, you can use up to $3,000 of those net losses each year to reduce your ordinary income. If any losses remain, they can be carried forward and offset future gains or income.
It is essential to be aware of the “wash-sale rule,” which prohibits you from claiming a loss if you acquire the same or substantially identical security within 30 days of the sale. For a valid tax-loss harvesting strategy, be mindful of this rule.
10. Stay Informed and Adjust Your Plan Annually: The Evolving Landscape
Your personal financial situation, tax laws, and income thresholds are subject to constant change. Tax strategies that are optimal this year might not be the same next year. So, a proactive, annual review of your financial plan is necessary:
- Annual income review. Take a close look at all sources of income and reassess your projected income.
- Tax bracket reassessment. Find out where you stand in the current tax brackets, as well as possible state income tax implications.
- RMD and capital gains exposure. You should calculate your upcoming Required Minimum Distributions (RMDs) and any potential capital gains.
- Life event coordination: Plan your withdrawals and income generation strategies around any significant life events (e.g., major healthcare expenses, downsizing a home, receiving an inheritance).
- Professional guidance. Regularly meet with a tax advisor or financial planner who specializes in retirement income planning. In times of change, they can provide tailored advice and assist in navigating them.
Final Thoughts
Rather than being a time of financial stress during retirement, retirement should be a time of freedom and independence. Even well-funded retirees can be forced to pay more than they should if they don’t have a robust tax strategy.
The goal isn’t to avoid taxes altogether — that will get you in trouble. Instead, you should pay as little tax as possible while maintaining your benefits.
The key to managing your retirement tax picture is to utilize Roth accounts, time withdrawals strategically, manage Required Minimum Distributions (RMDs), and stay below key tax thresholds.
FAQs
Is it really worth doing Roth conversions if I have to pay taxes on the money now?
For many, yes.
When you convert your Roth IRA to a Roth IRA, you pay taxes at a known rate today, often during a low-income year (e.g., before you start receiving Social Security or take required minimum distributions). As RMDs begin, this avoids potentially higher tax rates in the future. Roth withdrawals are tax-free forever, so they don’t count toward Social Security or Medicare taxes. Essentially, it’s a long-term play to shift tax liabilities in the future.
How do state taxes affect my retirement income?
Tax laws vary significantly from state to state. At the same time, some states do not tax income from retirement accounts, others tax pensions, 401(k)s, and even Social Security. You should research the tax laws of any state in which you might consider retiring before retiring. A move to a more tax-friendly state may be a powerful tax-saving strategy, but be sure to consider other factors, such as proximity to family, cost of living, and climate.
When does Medicare look at my income to determine IRMAA surcharges?
Typically, Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) is determined by your Modified Adjusted Gross Income (MAGI) from two years ago. For your Medicare premiums in 2025, the Social Security Administration will look at your tax return for 2023. Due to the two-year look-back period, multi-year tax planning is crucial. It is possible to pay higher Medicare premiums two years after a high-income year (such as after a Roth conversion or after selling an appreciated asset).
Can I handle my retirement tax planning myself, or do I definitely need an expert?
It depends on the complexity of your situation and your level of comfort. Using online tools can be helpful if you have a relatively simple financial situation (e.g., Social Security and a 401(k)).
However, if you have multiple income streams, substantial assets, complex investments, or anticipate major life changes, it is highly recommended that you consult with a fee-only fiduciary financial advisor. In many cases, their fees are more than offset by the taxes they save you.
What if I’m already retired and didn’t do much tax planning beforehand? Is it too late?
It’s never too late to optimize your tax situation! Even though pre-retirement planning provides the most flexibility, you can still significantly reduce your tax burden by using strategies such as Roth conversions during low-income retirement years, utilizing Qualified Charitable Distributions (QCDs) from your IRA, managing your withdrawal sequence carefully, and harvesting your tax losses. Also, an annual review of your income, expenses, and taxes remains essential as you age.
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