There’s a reason the expression “nothing is certain except death and taxes” has become cliché — because it’s true. It’s also true that when it comes to retirement, it’s not just about how much you save; it’s also how much you get to keep. While you can’t escape taxes, lifetime tax planning can help you better manage how much of your hard-earned money ends up in the government’s pocket.
Many assume that they’ll automatically be in a lower bracket once they retire. Unfortunately, that’s not always the case. Without an effective retirement tax strategy, retirees can end up with a higher burden than necessary, potentially reducing the longevity of their savings. As with any financial plan, the sooner you start tax-efficient retirement planning, the more impact it can have. Knowing some key factors of the process can help you develop an approach that works for your specific lifestyle and future vision.
Common But Potentially Costly Mistakes Retirees Make
Beyond assuming they’ll stay in a lower bracket, retirees often make several other common but potentially costly mistakes, such as:
Having No Plan
One of the biggest missteps when saving for life after the workforce is not planning for taxes at all. Many retirees find their wealth concentrated in tax-deferred accounts like a 401(k) or Thrift Savings Plan (TSP), with no strategy for managing withdrawals and minimizing taxes. This can lead to unexpectedly high Required Minimum Distributions (RMDs), pushing them into a higher bracket and increasing their overall burden. Additionally, without proper planning, retirees may face unnecessary Medicare premium surcharges, known as Income-Related Monthly Adjustment Amounts (IRMAA), due to higher taxable income. IRMAA can significantly increase Medicare Part B and Part D premiums for higher-income beneficiaries, making it a critical consideration in retirement tax planning.
Not Considering Marginal Taxation Rates
Others fail to understand how marginal tax rates work, assuming that earning more pushes all their income into a higher bracket — when, in reality, only the income above each threshold gets taxed at the higher rate.
Non-Strategic Roth Conversions
Another potential miscalculation when planning to retire is non-strategic or knee-jerk Roth conversions. While strategic Roth conversions can be a powerful tool, converting too much at the wrong time can push you into a higher bracket, negating the potential benefits.
Understanding Your Tax Position
A strong retirement tax strategy starts with understanding both your current and future brackets. Don’t assume that your rate will automatically drop in retirement. As already mentioned, your combined income sources after leaving the workforce could keep you in the same bracket — or even bump you into a higher one.
When planning for a tax-efficient retirement, it’s crucial to consider all future income sources:
- Pensions
- Social Security
- Required Minimum Distributions (RMDs)
- Investments and rental income
- Potential inheritances of retirement accounts
Additionally, for Virginia retirees, it’s important to note that Virginia does not tax Social Security benefits but does have a state income tax. This could play a key role in deciding where to spend your golden years.
Strategic Opportunities To Consider
There’s no one-size-fits-all solution to reducing taxes after you retire. Every approach should be tailored to your specific needs, goals, and lifestyle. The most effective way to develop a personalized plan is by working closely with an experienced financial advisor and tax professional. Putting together the right team can help you navigate the complexities of the process and create a strategy that aligns with your unique financial situation.
With that in mind, here are several key tactics that are often part of a well-executed retirement tax strategy:
Strategic Roth Conversions
While avoiding knee-jerk Roth conversions is important, strategically creating a tax-free bucket of retirement income can be a game-changer. Roth conversions, when done correctly, can help retirees manage their current brackets and potentially help sidestep large RMDs that push them into higher brackets later in life.
Curious if a Roth conversion makes sense for your situation? Schedule your free Roth conversion review with Good Life Financial Advisors of NOVA today.
Tax Bracket Management
The goal is to maximize lower brackets in early retirement years to reduce taxes later. This might involve drawing from taxable accounts first while delaying Social Security or making strategic Roth conversions in lower-income years. A skilled financial advisor can help devise a strategy that makes sense for you.
Asset Location Optimization
You’ve likely already noticed that not all accounts are taxed the same. Asset location optimization means placing tax-inefficient assets in tax-deferred accounts while keeping growth-focused assets in Roth accounts where they can grow tax-free. This approach requires a deep understanding of tax efficiency and long-term strategy, making it critical to discuss with a professional.
Qualified Charitable Distributions
Qualified charitable distributions (QCDs) can be a powerful tool in retirement. At age 70½, retirees can make QCDs directly from an IRA to a qualified charity, reducing taxable income. In 2025, the QCD limit has been increased to $108,000.
Donor-Advised Funds
Another strategy for charitably inclined retirees is contributing to a Donor-Advised Fund (DAF). Done properly, a DAF allows for an upfront deduction while spreading charitable contributions over multiple years.
Gifting Appreciated Securities
Instead of donating cash, gifting appreciated securities can provide a double benefit — allowing donors to avoid capital gains taxes while receiving a charitable deduction.
Pro-tip- gifting appreciated securities to a DAF can supercharge the tax efficiency of your charitable giving.
Implementation Framework: Making Your Plan Work
A successful lifetime tax planning approach is not a one-time decision — it’s an ongoing process. Here are some tips on what to include in a cohesive framework:
Year-by-Year Planning Approach
While it’s vital to have a multi-year strategy, planning should be reviewed annually to ensure that every decision still aligns with long-term goals. Making the wrong move can be costly, so flexibility is key.
Coordination with Retirement Benefits
Retirement income doesn’t exist in a vacuum. Planning should account for:
- Defined benefit plans (e.g., FERS pensions)
- Social Security strategies
- RMD timing and withdrawals
- Medicare Premium Considerations (IRMAA)
- Capital gains on real estate transactions
Monitoring and Adjustment Strategies
The best plans are adaptable. Both tax laws and personal circumstances can (and do) change, making it essential to take a snapshot of where you are now and adjust as needed.
Case Studies: The Impact of Poor vs. Strategic Planning
Federal Employee Strategy: The RMD Shock
Jeff and Michelle, are married and both retired from the Federal government under FERS. They, each have a $35,000 annual pension, $36,000 in Social Security, and $1 million each in their TSP. At age 73, they must begin taking RMDs. Without a retirement tax strategy, they may find themselves paying far more in taxes on their savings than expected.
Private Sector Example: The Overloaded 401(k)
Sheila, a marketing executive, maxed out her 401(k) for 30 years, believing it was the best retirement move. After retirement, she realizes her entire portfolio is tax-deferred, leaving her with a large tax burden when she wants to take withdrawals to supplement her income. If she had implemented strategic Roth conversions earlier, she might have been able to significantly reduce taxation liability for increased cash flow.
Mixed Retirement Income Situation
Edward is a retiree with a mix of taxable, tax-deferred, and Roth accounts who effectively manages withdrawals to minimize taxes. He withdraws from taxable accounts first while doing strategic Roth conversions in lower-income years, keeping his rate lower and extending the longevity of his retirement savings.
What to Look for in an Advisor
If your financial advisor isn’t discussing taxes, you might want to reconsider the relationship. While financial advisors are not tax professionals, they should be actively engaged in the planning and coordinating with your tax professional.
When it comes to developing a plan around taxes, an experienced advisor can help:
- Optimize withdrawals and shifting brackets
- Strategically manage Roth conversions
- Incorporate asset location optimization
- Plan for RMDs and Medicare premium thresholds
- Work alongside tax professionals for a holistic approach
Take the Next Step in Your Retirement Tax Strategy with Good Life Financial Advisors of NOVA
Effective lifetime tax planning can help you keep more of your hard-earned savings, making a proactive approach essential. Good Life Financial Advisors of NOVA can help. Schedule a call with our team today to learn more about how we approach building personalized and tax-efficient retirements for our clients.
We’ll have a short conversation to see if we’re a good fit for each other.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification mark CERTIFIED FINANCIAL PLANNERTM in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
