Tax-Smart Retirement Income Planning Strategies

Retirement is a goal we set with dreams of traveling abroad, playing golf, relaxing on the beach, pursuing a passion project, spending more time with family and friends, or ticking off items on our personal bucket list. As retirement comes into view, the most common question is. “Will you be financially secure when you take the plunge into that stage of life?”.

Retirement income planning is not only about the size of your nest egg but also how you withdraw from it. Structuring distributions wisely helps reduce your tax bill and preserve more of your hard-earned wealth. Here are some strategies to consider for planning your retirement income.

1. Diversify Your “Tax Buckets”

Many people enter retirement with their savings in tax-deferred retirement accounts like 401(k)s and traditional IRAs.¹ While powerful for growth, withdrawals are fully taxable as ordinary income. A better approach is to spread savings across three types of accounts:

• Tax-deferred, like IRAs
• Tax-free, such as Roth IRAs or Roth 401ks
• Taxable brokerage accounts, so you can keep your taxable income consistent and still cover expenses in years with significantly increased spending needs

This diversification allows for flexibility keeping your tax bill lower.

2. Manage Required Minimum Distributions (RMDs)

RMDs from tax-deferred accounts become mandatory at age 73 (rising to age 75 in 2033).² These can push you into higher tax brackets, trigger Medicare premium surcharges, and cause more of your Social Security benefits to be taxable. Planning using Roth conversions, staggered withdrawals, or charitable gifts can help soften the impact.

3. Use Roth Conversions Strategically

A Roth conversion means moving money from a Traditional IRA or 401(k) into a Roth IRA account and paying income tax on the conversion now in exchange for tax-free withdrawals later. The benefits are twofold: Roth IRAs are not subject to RMDs, and qualified withdrawals are entirely tax-free. Conversions are especially attractive in years when your taxable income is temporarily lower, typically early retirement years before Social Security or RMDs begin.

4. Sequence Withdrawals Thoughtfully

The order in which you draw funds matters. Consider your level of taxable income now, and in future years, to determine if drawing modest amounts from tax-deferred accounts early is prudent. The goal is to spread tax liability more evenly throughout retirement.

5. Time Social Security Benefits Carefully

Up to 85% of Social Security benefits may be taxable, depending on your other income.³ Delaying benefits until age 70 not only increases the monthly payout but also creates a window to take withdrawals or perform Roth conversions before Social Security begins. Coordinating these decisions can reduce your lifetime tax exposure.

6. Consider Qualified Charitable Distributions (QCDs)

If charitable giving is part of your plan, once you reach age 70½, you can make donations directly from your IRA to a qualified charity.⁴ These QCDs count toward your RMD but are excluded from taxable income, typically making them the most tax-efficient way to give.

7. Factor in State Taxes

State tax rules vary significantly. Some states exempt retirement income, others tax it fully, and a few impose no income tax at all. Being mindful of your state’s treatment or relocating can improve tax efficiency.

Tax-smart retirement income planning is an ongoing process that requires balancing cash flow needs, tax considerations, and long-term goals. Working with a financial advisor and/or tax professional ensures your plan is tailored, flexible, and built to last your lifetime which will make your retirement years more enjoyable and less stressful.

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¹ U.S. Census Bureau, 2021 Survey of Income and Program Participation.
² SECURE 2.0 Act of 2022. Division T of the Consolidated Appropriations Act, 2023, Pub L. 117-328, 136 Stat. 4459 (2022).
³ https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable
⁴ https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals