Retirement and Tax Planning

Tax planning in retirement is not simply a search for the smallest tax bill in a given year. The more useful objective is to preserve as much after-tax wealth and spending flexibility as possible over the years before and after work ends. A strategy that saves tax today but forces large taxable withdrawals later can be less attractive than it first appears, while paying some tax deliberately in a lower-income year can improve the long-term result.

The tax side of retirement also changes because the source of income changes. Wages may disappear, but Social Security, pensions, retirement-account withdrawals, interest, dividends and capital gains can each affect taxable income differently. Retirees often have more control over the timing of some of those items than workers do, which creates planning opportunities but also makes isolated rules of thumb less reliable.

Traditional retirement accounts give savers a way to defer paying tax on money that they are saving for retirement, but tax deferral is not the same as tax elimination. Roth accounts reverse the timing by using after-tax contributions in exchange for tax-free qualified withdrawals. Taxable brokerage accounts do neither, yet they offer their own advantages because only the taxable income and realized gains are generally taxed, not a return of investment basis. A sound plan uses those differences rather than assuming one account type is always superior.

The discussion below focuses on U.S. federal tax planning. State income taxes, pension exclusions, Social Security treatment and estate rules vary, so a retiree moving between states or drawing income from several jurisdictions should add state-specific planning to the federal framework.

Tax planning is about lifetime after-tax wealth

The old version of this article correctly emphasized that tax should not be treated as an end in itself. That point is worth keeping, but it needs a more precise framework. The relevant comparison is not simply whether a transaction produces tax now or later. It is how the choice affects after-tax cash flow, investment flexibility, future tax brackets, Medicare premiums, Social Security taxation, required distributions and the assets eventually left to heirs.

Consider a worker deciding between an additional pretax retirement contribution and a Roth contribution. The pretax contribution can reduce current taxable income, leaving more money invested today, but future withdrawals are generally taxable as ordinary income. A Roth contribution receives no current deduction, yet a qualified withdrawal is tax-free. If the marginal tax rate on the contributed dollars is lower at withdrawal than at contribution, pretax saving receives an extra advantage. If the later rate is higher, Roth treatment becomes more valuable. If the rates are similar, the comparison is closer, and flexibility, required minimum distribution rules and estate goals can matter more.

The comparison also depends on what happens to the tax savings created by a deductible or pretax contribution. If the current tax reduction is spent rather than saved, part of the economic advantage of pretax saving is lost. If it is invested, the saver has a larger amount working for retirement. That distinction is one reason retirement-tax comparisons should be made on an after-tax basis rather than by looking only at account balances.

Current tax brackets are progressive, so only the income that falls into a higher bracket is taxed at that higher marginal rate. Retirees therefore do not need to avoid crossing every bracket line at all costs. The better question is whether taking additional income in one year creates an acceptable marginal cost in exchange for a future benefit, such as reducing a large traditional IRA balance before required distributions begin or creating more Roth assets for later years.

For 2026, federal brackets and the standard deduction have again been adjusted, and taxpayers age 65 or older may also qualify for an enhanced $6,000 deduction per eligible person through 2028, subject to an income phaseout. The standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly in 2026. These amounts matter when estimating how much ordinary income can be recognized before the next marginal rate applies, but they are inputs to the plan rather than targets by themselves.^[1]

Build tax flexibility before retirement

Tax planning becomes easier when retirement wealth is not concentrated in a single tax category. A household with only large pretax accounts has limited control once withdrawals and required minimum distributions begin because most distributions increase ordinary taxable income. A household with only Roth assets has excellent tax flexibility in retirement but may have given up valuable deductions during high-earning years. Taxable assets can create a third source of spending money, often with a different tax profile from either traditional or Roth accounts.

That is the practical case for tax diversification. It does not require splitting every contribution evenly across account types. A worker in a high marginal bracket who expects a much lower rate after retiring may reasonably favor pretax contributions. Someone in a temporarily low bracket, or a younger worker who expects materially higher earnings later, may put more weight on Roth contributions. Couples can also have different account types between spouses, which can increase flexibility once one spouse retires, dies or begins taking distributions.

Employer plans are usually the first place to review because an employer match can be more important than the tax distinction between pretax and Roth contributions. The tax treatment of the employee contribution still matters, but giving up an available match merely to optimize current taxes is usually a poor trade. After capturing a useful match, the next contribution decision can take account of current marginal rate, expected retirement income, Roth eligibility, investment options, fees and access to other tax-advantaged accounts.

IRAs can add further flexibility, although the deductibility of a traditional IRA contribution and eligibility for a direct Roth IRA contribution depend on income and workplace-plan coverage. The limits and phaseouts change periodically, so they should be checked for the tax year in which the contribution is made. The broader planning point is more durable: use deductible contributions when the current deduction is genuinely valuable, use Roth treatment when paying tax now is attractive relative to paying it later, and avoid assuming that either choice is automatically best because of age alone.

Taxable accounts also deserve a place in the discussion. They do not receive the same retirement-specific tax shelter, but they can provide liquidity before age-based retirement rules apply, allow investors to realize gains selectively, and preserve access to basis that is not itself taxed again when the asset is sold. For people retiring before Social Security or before required minimum distributions, taxable savings may help fund spending without forcing a large amount of ordinary income onto the tax return.

Account type and investment choice should be considered together. Interest from taxable bonds or other income-producing assets can create recurring taxable income, while broad equity holdings often defer a larger portion of tax until gains are realized. Placing tax-inefficient assets in a tax-deferred account can make sense when the investment allocation remains appropriate, but tax efficiency should not dictate an unsuitable portfolio. The primary investment decision is still the amount of risk, liquidity and diversification the household needs.

The same principle applies to investment strategies more broadly. Higher expected returns do not automatically make a tax-deferred account better, and a lower expected return does not make a Roth account better. The account determines how returns are taxed; the investment determines the risk and return profile. Keeping those two decisions separate prevents tax arguments from being used to justify taking more investment risk than the retirement plan can support.

Use the years around retirement deliberately

One of the most valuable planning periods often begins when earned income falls and ends when other taxable income becomes harder to control. A person who retires at 62, delays Social Security and is not yet taking required minimum distributions may have several years in which ordinary taxable income is unusually low. Those years can be used to realize income intentionally rather than merely accepting whatever the accounts produce.

Roth conversions are a common example. Converting money from a traditional IRA to a Roth IRA generally causes the untaxed portion of the conversion to be included in income for that year. The conversion itself does not create a deduction, and the tax bill can be substantial, so converting an entire large IRA at once is rarely the default answer. Partial conversions can instead be sized around the household’s marginal bracket, deductions, cash available to pay the tax, Medicare consequences and the amount of pretax money likely to remain when required distributions begin.

A conversion is not automatically beneficial just because the current tax rate looks low. Paying tax years earlier has an opportunity cost, particularly if the tax must be paid from money that would otherwise remain invested. The comparison becomes stronger when tax is paid from outside cash, future tax rates are expected to be similar or higher, the pretax balance is likely to create large required distributions, or the household values having a pool of tax-free assets later. It becomes weaker when the current rate is high, retirement income is likely to fall sharply, or the conversion pushes income into other costly thresholds.

Retirement timing itself can therefore be a tax variable. Working several months into a calendar year may leave less room for conversions or realized gains because wages already fill part of the tax brackets. Retiring near the end of a year can make the following calendar year more attractive for planning. Couples also need to consider the possibility that one spouse continues working after the other retires, because the working spouse’s income can keep the household in a higher bracket even though one career has ended.

The same low-income window can be used for taxable investments. Long-term capital gains receive different federal tax treatment from ordinary income, and some gains may fall into a 0% federal capital-gains band depending on taxable income. Realizing gains in a low-income year can therefore reset basis at little or no federal capital-gains tax in some circumstances. The calculation needs to include the rest of the return, because realizing gains can affect Social Security taxation, Medicare premiums and deductions even when the stated capital-gains rate appears favorable.

Tax-loss harvesting can also be useful when a taxable investment has fallen below cost, but the portfolio decision comes first. A harvested loss can offset realized capital gains and, within tax-law limits, some ordinary income, with unused losses generally carried forward. The wash-sale rule restricts the immediate repurchase of substantially identical securities around the loss sale, so a tax-motivated trade should preserve the intended investment exposure without simply recreating the position in a way that disallows the loss.

Annual planning should include estimated payments and withholding as well. Retirees may receive income from several sources that do not automatically withhold enough federal tax. Pension payments, IRA distributions and Social Security can generally accommodate withholding elections, while taxable investment income may require estimated payments. Good planning is not only about reducing tax; it also avoids underpayment penalties and a large unexpected balance due.

Coordinate RMDs, Social Security and Medicare

Required minimum distributions reduce the ability to postpone taxable retirement income indefinitely. Under current law, the applicable RMD age is 73 for people born from 1951 through 1959 and 75 for people born in 1960 or later. The first distribution can generally be delayed until April 1 of the year after the applicable age is reached, but delaying that first distribution can place both the first and second RMD in the same calendar year. Roth IRAs and designated Roth accounts in 401(k) and 403(b) plans are not subject to lifetime RMDs for the original owner under current rules.^[2]

RMDs are one reason tax planning should begin before the first mandatory withdrawal. A retiree with a large traditional account may find that waiting until the RMD age leaves little room to manage ordinary income. Earlier voluntary withdrawals or Roth conversions can reduce the future pretax balance, but the goal is not to eliminate the account at any cost. The correct pace depends on the marginal rate paid now versus the likely rate later, the investment return that remains tax-deferred, expected spending and the household’s other income.

The first-year deadline deserves particular attention. Taking the first RMD in the year the retiree reaches the applicable age spreads the first two required distributions across separate tax years. Waiting until the following April can make sense if the current year is unusually high-income, but the resulting second RMD still has to be taken by December 31 of that same following year. Two RMDs in one year can increase taxable income enough to change the treatment of other items, so the deferral should be modeled rather than assumed to be beneficial.

Social Security adds another interaction. Federal tax law does not simply tax a fixed percentage of every benefit. The formula uses “combined income,” which includes adjusted gross income, tax-exempt interest and one-half of Social Security benefits. For an individual filer, combined income above $25,000 can make benefits taxable, while the corresponding threshold for a joint return is $32,000; at higher income levels, up to 85% of benefits can be included in taxable income. That does not mean Social Security is taxed at an 85% rate, a distinction that is often misunderstood.^[3]

Because additional IRA withdrawals or Roth conversions raise adjusted gross income, they can cause a larger portion of Social Security to become taxable. The effective marginal tax cost of an extra dollar of retirement-account income can therefore be higher than the nominal bracket suggests in the part of the income range where Social Security is being phased into taxable income. A conversion that appears to fit comfortably inside a stated bracket should be tested against the Social Security formula when benefits have already started.

Medicare creates a different threshold effect. Higher modified adjusted gross income can trigger income-related monthly adjustment amounts, or IRMAA, for Part B and Part D. Medicare generally looks to tax information from two years earlier, so a large conversion or capital gain can raise premiums after the tax year in which the income was recognized. The effect should be treated as another marginal cost of recognizing income, not as a reason never to cross an IRMAA threshold. A conversion that produces a larger long-term tax benefit can still be worthwhile after the premium increase is included.

There is also a timing issue when work ends. Social Security allows certain life-changing events, including loss or reduction of work, to support a request to use more recent income information for IRMAA purposes. A retiree whose prior return reflects a salary that no longer exists should not assume that the old income level must determine Medicare premiums without review. The appeal rules are administrative rather than tax rules, but they belong in the retirement-tax calendar because they affect the cost of decisions made around retirement.

All of these interactions make withdrawal sequencing more nuanced than the familiar instruction to spend taxable money first, then tax-deferred money, then Roth money. That order can be sensible for some households, but a blended approach often creates more control. A retiree might use taxable cash for part of spending, take enough traditional IRA money to use a chosen bracket, and leave Roth assets available for a later large expense or a year when other income is high.

Manage taxable investments without letting tax dominate the portfolio

The previous article devoted substantial attention to whether investors should hold positions merely to avoid realizing capital gains. The useful part of that discussion is the warning against allowing tax to override a sound portfolio decision. An appreciated security can carry a tax cost if sold, but keeping an oversized or unsuitable position solely to defer the gain can create more investment risk than the tax saving justifies.

That trade-off becomes especially visible during bear markets, although the answer is not to predict market bottoms or turn long-term retirement planning into short-term market timing. A diversified investor may need to rebalance, raise cash for near-term spending or reduce a concentrated position even when the transaction has tax consequences. Taxes should be estimated and managed as part of the trade, not used as a blanket reason to avoid it.

Frequent trading can also increase realized gains and reduce the value of tax deferral in a taxable account, but activity level by itself does not determine whether a trade is economically justified. A lower-turnover strategy is often more tax-efficient when two strategies have similar expected results, yet selling remains appropriate when the investment thesis changes, risk becomes excessive or the portfolio needs rebalancing. The tax cost belongs in the decision alongside transaction costs, risk and expected return.

Asset location can help reduce recurring tax drag without changing the target portfolio. For example, interest-producing assets may be more tax-efficient inside a retirement account, while broad equity holdings with low turnover can be relatively efficient in a taxable account. There are important exceptions, including the ordinary-income treatment of withdrawals from traditional accounts and the value of keeping high-growth assets in Roth space. Asset location should therefore be optimized across the household rather than by assigning a rigid rule to each security.

Capital losses require similar discipline. Selling solely to create a tax loss while abandoning an investment that still fits the plan can distort the portfolio. A better approach is to identify losses that can be harvested while maintaining appropriate market exposure and observing the wash-sale rules. The result is a tax benefit that supports the investment plan rather than replacing it.

Charitable, state and family considerations

Charitable giving can be coordinated with retirement distributions. An IRA owner who is at least age 70½ may be able to make a qualified charitable distribution directly from the IRA to an eligible charity. A qualifying QCD can count toward the year’s RMD while being excluded from taxable income, subject to the annual limit and other rules. For 2026, the indexed QCD exclusion limit is $111,000 per eligible individual, although most donors will use far less than the maximum.

A QCD can be more valuable than taking an IRA distribution and then writing a separate charitable check because the qualifying IRA amount is kept out of adjusted gross income. That can matter for items tied to AGI, including the taxation of Social Security and Medicare IRMAA. The donor cannot also claim the excluded QCD as a charitable contribution deduction, so the comparison should be made against the household’s actual deduction situation rather than assuming a double benefit.

State taxation can materially change the result as well. Some states do not tax individual income, some exclude all or part of Social Security, and others provide pension or retirement-income exclusions. A move in retirement can therefore change the tax cost of a withdrawal or conversion even when federal law is unchanged. Residency rules, the timing of the move and taxation of income sourced to the old state can all matter, particularly for people with business interests, rental property or deferred compensation.

Family circumstances deserve attention because a plan built for a couple may change sharply after the first spouse dies. The surviving spouse often moves from a joint return to a single return, which can compress the tax brackets available to the household even if income does not fall proportionately. Large pretax balances can then become more expensive to distribute. That possibility can strengthen the case for some Roth conversion during joint-filing years, although the conversion still has to be attractive on its own numbers.

Estate planning can point in the opposite direction for some taxable assets. Investment basis rules, inherited retirement-account rules, charitable intentions and the tax situation of beneficiaries can all affect which assets are best spent, converted, donated or left to heirs. These decisions are sufficiently dependent on current law and personal circumstances that larger estates, trusts, inherited accounts and multi-state families should treat tax planning as coordinated work between retirement, estate and legal advisers rather than as a stand-alone withdrawal formula.

Make tax planning an annual retirement process

A retirement tax plan should be revisited each year because several of its inputs change at different speeds. Tax brackets and deductions are updated, account balances move with markets, RMDs change with prior year-end values, Social Security benefits adjust, Medicare thresholds move, and personal spending rarely follows the original projection exactly. A plan created at age 60 can still provide direction at 70, but the dollar amounts used to implement it will need regular revision.

The most useful annual review starts with expected spending and known income. Add Social Security, pensions, wages, interest, dividends, planned asset sales and any required distributions, then estimate the taxable portion rather than treating every cash inflow as fully taxable. From there, identify how much room remains in the relevant ordinary-income and capital-gains ranges and whether using some of that room for a Roth conversion, IRA withdrawal or realized gain improves the longer-term plan.

Next, look beyond the tax return itself. Estimate Medicare effects, state taxes, charitable giving, large purchases and the cash source that will pay any tax generated by a conversion or gain. A strategy that appears efficient on Form 1040 can be less attractive when it produces a Medicare premium increase or requires selling investments at an inconvenient time to pay the tax. The reverse is also true: a modest tax cost today can be worthwhile if it reduces future forced income and creates more flexibility.

Review the portfolio at the same time. Tax planning should support, not obstruct, sensible risk management. If rebalancing or reducing a concentrated position creates a gain, compare the tax cost with the investment risk being removed. If a loss is available, decide whether it can be harvested without compromising the allocation. Retirement tax decisions are strongest when they are integrated with retirement savings and portfolio management rather than handled after the investment decisions have already been made.

Finally, distinguish permanent decisions from timing decisions. A Roth conversion is generally irreversible once completed, while the amount of a planned taxable withdrawal can often be adjusted before year-end. Social Security claiming decisions, charitable transfers and large asset sales also have different degrees of flexibility. Where the tax effect is material, projections should be run before the transaction rather than reconstructed at filing time.

The goal is not to pay the least possible taxes every year. It is to use the tax rules deliberately so that retirement spending, investment risk and future income remain manageable after tax. The best plan will often include years in which paying more tax is intentional because doing so improves the household’s position later, alongside years in which deductions, lower-income withdrawals or charitable strategies legitimately reduce the bill. That is a more useful definition of retirement tax savings than simply postponing every taxable event for as long as possible.