Keeping more of what you've earned

Every dollar you pay in taxes is a dollar you won’t get to spend on the things you want to do in retirement. That’s why minimizing taxes—legally and strategically—has to be part of your retirement plan. While you can’t avoid taxes entirely, you can take steps to make sure you don’t pay more than necessary.

Three goals for taxes in retirement

When it comes to taxes, retirees should focus on three simple goals:

1. Follow the law. Pay what you owe, but not a penny more.

2. Minimize your tax bill. Use every legal strategy available.

3. Don’t sacrifice your lifestyle. Avoid twisting your retirement around tax avoidance schemes that compromise how you want to live.

 

Why retirement taxes are different

Retirement doesn’t just change your lifestyle—it changes how you’re taxed.

• From saving to spending. Contributions to 401(k)s and traditional IRAs likely reduced your taxable income during your working years. But when you withdraw that money in retirement, it’s mostly taxed as ordinary income.

• Fewer deductions. Many retirees lose tax breaks they once relied on, like child credits, mortgage interest deductions, or tax-free employer health benefits.

• New taxes. Social Security benefits may be up to 85% taxable for many retirees, and higher income can trigger steep Medicare surcharges through something called IRMAA (Income-Related Monthly Adjustment Amount).

In short: the rules shift dramatically. Understanding those changes early makes for better planning—and fewer surprises.

Required Minimum Distributions (RMDs)

One of the biggest tax challenges in retirement is required minimum distributions (RMDs). Starting at age 73, you must begin withdrawing a percentage of your tax-deferred accounts each year, whether you need the money or not. Those withdrawals increase your taxable income and can even bump you into a higher tax bracket.

The penalties for missing an RMD are steep—as much as 25% of the amount you should have withdrawn, on top of the taxes you owe. That’s why projecting your RMDs in advance and planning withdrawals carefully is essential.

Smart tax strategies for retirees

There are several strategies that can help you reduce your tax burden in retirement:

• Diversify your account types. Ideally, you’ll enter retirement with a mix of taxable, tax-deferred, and tax-free (Roth IRA) accounts. This gives you flexibility to pull from the right bucket at the right time.

• Roth conversions. Converting portions of a traditional IRA into a Roth IRA—especially in lower-income years—can reduce future RMDs and provide tax-free withdrawals later. Many advisors recommend a “fill the bracket” approach: convert just enough each year to avoid moving into a higher tax bracket.

• Charitable giving with QCDs. If you’re charitably inclined, you can make qualified charitable distributions directly from your IRA starting at age 70½. These gifts satisfy your RMD and avoid income taxes altogether.

• Tax-efficient investments. Municipal bonds may provide tax-free income. Qualified dividends and long-term capital gains are often taxed at lower rates than ordinary income. And tax-loss harvesting can offset gains when markets are volatile.

• Health savings accounts (HSAs). If you have an HSA, withdrawals for qualified medical expenses are tax-free—a powerful way to cover health care costs.

Staying on top of tax payments

When you worked, your employer withheld taxes from each paycheck. In retirement, it’s up to you. While you can withhold taxes from Social Security or IRA distributions, income from taxable accounts often requires making quarterly estimated tax payments. Staying proactive helps you avoid underpayment penalties and surprises on April 15.

The value of professional advice

Taxes in retirement are complex, and small mistakes can be costly. That’s why the transition into retirement is the perfect time to seek professional guidance. A tax advisor, working in tandem with your financial advisor, can help you avoid pitfalls and uncover opportunities that may save you thousands.

Looking ahead

In our final step, we’ll turn to something even bigger than money: creating your legacy. We’ll explore how to pass along not just your wealth, but also your values and wisdom, to the people and causes that matter to you most.

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Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax or legal issues, these matters should be discussed with the appropriate professional. Any opinions are those of the author, are subject to change without notice and are not necessarily those of Raymond James.

This material is being provided for information purposes only and does not purport to be a complete description of the securities, markets, or developments referred to in this material and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Investing involves risk and investors may incur a profit or a loss regardless of strategy selected, including asset allocation and diversification