Whether retirement is fast approaching or has already arrived, you’re probably looking for ways to maximize your income flow for the future. Reducing taxes in retirement is an essential element of maximizing retirement income and protecting the wealth you’ve worked so hard to build.
Your retirement assets are the key to the security, comfort and lifestyle you count on for your later years. You not only need to protect the assets themselves—you want to reduce the bite that taxes can take out of every aspect of your portfolio.
This is especially important if you’re a high-income earner or high-net-worth individual. Earning and saving significant wealth is wonderful—as long as you don’t end up giving large sums of your hard-earned cash to Uncle Sam in retirement. If you don’t take advantage of the tax strategies we’ll introduce here, your higher tax bracket can result in tax bills that consume a painful portion of your earnings.
The good news is that there are proven methods for reducing taxes in retirement—legally and ethically—if you know what you’re doing. This guide will help you understand key strategies for minimizing taxes on your income and portfolio throughout your retirement years.
Proven Strategies for Reducing Taxes in Retirement
Successfully reducing taxes in retirement requires understanding how different retirement accounts work and implementing strategic timing for withdrawals, conversions, and benefit claims. Let’s explore the most effective approaches to keep more money in your pocket.
Understanding Tax Brackets and Their Impact
Before exploring specific strategies for reducing taxes in retirement, it’s vital to understand how your tax bracket affects your tax responsibility. The US tax system is progressive, taxing those with higher incomes more than those with lower incomes. Currently, there are seven tax brackets, each specifying a marginal tax rate—the tax you pay on the next dollar of taxable income.
Tax brackets are crucial because they determine how much of your money goes to Uncle Sam. If you can reduce your net taxable income enough, you can lower your tax bracket, reducing your marginal taxation rate. This is why reducing taxes in retirement often focuses on managing your total taxable income across multiple sources.
Managing Required Minimum Distributions (RMDs)
Once you turn 73, traditional IRAs and 401(k)s require you to start taking Required Minimum Distributions. These distributions are counted as ordinary income for tax purposes, and large RMDs can significantly impact your efforts toward reducing taxes in retirement by pushing you into higher tax brackets.
For example, if your RMD is $100,000 per year and your other income is $44,000, you could jump from the 12% tax bracket to the 24% bracket. Every extra dollar in income would then be taxed at the 24% marginal rate.
RMDs are calculated using IRS life expectancy tables, and you must take your first distribution by April 1 of the year following your 73rd birthday, with subsequent distributions required by December 31 each year.
Leveraging the Gap Years Strategy
The gap years span from retirement to age 73, when RMDs begin. During these years, your income may be lower, creating opportunities for reducing taxes in retirement through strategic planning. This period allows for two powerful strategies: postponing Social Security benefits and converting traditional IRA assets to a Roth IRA.
During the gap years, you can take advantage of lower tax brackets to make partial Roth conversions. You’ll pay taxes on the converted amount at your current (lower) rate, but once that money has been in the Roth IRA for the required time, it can be withdrawn tax-free in retirement.
Converting $100,000 per year over ten years at a 22% tax rate is far more effective for reducing taxes in retirement than waiting until RMDs force you into a 32% bracket later.
Optimizing Social Security Timing
Social Security timing plays a crucial role in reducing taxes in retirement. You can claim benefits from age 62 to 70, but the timing significantly affects both your benefit amount and your tax situation.
Waiting until age 70 to claim Social Security provides several advantages for reducing taxes in retirement:
- You’ll earn more annual income by waiting—a guaranteed 8% increase per year between full retirement age and 70
- Taking early benefits raises your income during the gap years, reducing the effectiveness of Roth conversion strategies
- Higher lifetime benefits mean less reliance on taxable retirement account withdrawals
The Social Security Administration provides detailed information about how delayed retirement credits work and their impact on your monthly benefits.
Avoiding the Social Security Tax Torpedo
Social Security benefits can create a “tax torpedo” that undermines your efforts at reducing taxes in retirement. When your combined income (adjusted gross income plus nontaxable interest plus half of Social Security benefits) exceeds certain thresholds, up to 85% of your Social Security benefits become taxable.
For married couples filing jointly in 2024, this taxation begins when combined income exceeds $32,000, with maximum taxation kicking in at $44,000. Strategic income management during retirement can help you avoid or minimize this tax impact.
Understanding IRMAA and Medicare Costs
High-income earners must be aware of Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) when reducing taxes in retirement. IRMAA is a surcharge that increases your Medicare Part B and Part D premiums based on your modified adjusted gross income from two years prior.
In 2024, IRMAA affects individuals with income over $103,000 ($206,000 for joint filers). At the highest bracket, your monthly Part B premium could increase from the standard amount to over $500, plus additional Part D surcharges. This represents thousands in additional annual costs that proper planning can help avoid.
Utilizing Qualified Charitable Distributions
Beginning at age 70½, owners of traditional IRAs can make Qualified Charitable Distributions (QCDs) directly from their IRAs to eligible charities, up to $100,000 per year. QCDs are an excellent tool for reducing taxes in retirement because they satisfy RMD requirements without increasing your taxable income.
QCDs provide several advantages for reducing taxes in retirement:
- They directly reduce your taxable income dollar-for-dollar
- They help avoid bracket creep and increased IRMAA
- They reduce future RMD amounts by lowering your IRA balance
- They provide tax benefits even if you don’t itemize deductions
For example, if you donate $50,000 through QCDs, it reduces your taxable income by $50,000—not just a deduction, but income that never appears on your tax return.
Strategic Roth Conversions
Partial Roth conversions during the gap years represent one of the most powerful strategies for reducing taxes in retirement. By converting portions of your traditional IRA to a Roth IRA while in lower tax brackets, you can:
- Pay taxes at lower current rates rather than potentially higher future rates
- Reduce future RMD amounts
- Create a pool of tax-free income for later retirement years
- Spread tax payments across multiple years to avoid bracket creep
The key is timing these conversions when your income is lowest, typically during the gap years between retirement and when Social Security and RMDs begin.
Additional Strategies for Reducing Taxes in Retirement
Several other tactics can support your overall approach to reducing taxes in retirement:
Harvest Capital Gains at 0% Rates: If you’re in the lowest tax brackets during gap years, you may qualify for 0% long-term capital gains rates. Selling profitable investments during these years can provide tax-free income while reducing future tax obligations.
Tax-Loss Harvesting: Offset capital gains with investment losses to reduce your overall tax burden. This strategy works particularly well during market downturns. While managing taxes on your investments is crucial, it’s equally important to protect your portfolio against sequence of return risk that could impact your retirement savings.
Asset Location Optimization: Keep tax-inefficient investments (like bonds) in tax-deferred accounts and tax-efficient investments (like growth stocks) in taxable accounts.
Manage Investment Income: Be aware of the 3.8% Medicare surcharge on net investment income for higher earners, and consider strategies to reduce this exposure.
Employer Pension Considerations
If you have an employer pension, coordinate its timing with your other strategies for reducing taxes in retirement. When possible, postpone pension income until age 70, but some pensions require earlier payouts. The ideal approach involves making partial Roth conversions before taking pension income to avoid having multiple income sources simultaneously pushing you into higher tax brackets.
Planning for Inherited IRAs
Recent changes to IRA inheritance rules require attention for reducing taxes in retirement. Non-spouse beneficiaries must now empty inherited IRAs within 10 years, but can time distributions strategically during that period. Plan withdrawal strategies carefully to avoid large tax bills when the 10-year deadline arrives.
Working with Professionals
Successfully reducing taxes in retirement requires coordinated planning across multiple strategies, tax laws, and timing considerations. The complexity increases significantly for high-income earners and high-net-worth individuals who face additional challenges like IRMAA, higher tax brackets, and more complex investment portfolios.
Early planning provides the most flexibility for reducing taxes in retirement, giving you time to implement strategies gradually and adjust for changing circumstances. The sooner you begin planning, the more options you’ll have available.
At Calamita Wealth Management, we specialize in helping affluent individuals develop comprehensive strategies for reducing taxes in retirement. As fee-only, fiduciary advisors, we provide unbiased guidance focused solely on your best interests. Our expertise in retirement tax planning helps ensure you keep more of your hard-earned wealth while navigating the complexities of retirement income management.
If you’d like to explore how these strategies might apply to your specific situation, we invite you to schedule a consultation to discuss your goals for reducing taxes in retirement and creating a secure, tax-efficient retirement plan. You can also connect with our founder Todd Calamita on LinkedIn to learn more about his approach to comprehensive financial planning.
