Retirement and Taxes: Four Smart Steps to Stay Ahead

Retirement is often seen as a time to relax, explore the world, and enjoy the rewards of a long career. But alongside the freedom of retirement comes a new set of financial challenges — especially when it comes to taxes. With the right planning, you can manage your tax exposure and keep more of your savings. Here are four important steps to take as you approach retirement, along with the key tax considerations for each.

1. Envision Your Retirement Lifestyle

Start by picturing what your life after work will look like. Are you planning to move to another state? Thinking of downsizing your home? Will you work part-time or start a new venture?

Tax Angle on Relocating: Relocating to a state with lower income or property taxes could help your retirement dollars go further. However, if you sell your home and your profit exceeds $250,000 ($500,000 for married couples filing jointly), the excess may be taxable. Part-time earnings might also impact your Social Security benefits or bump you into a higher tax bracket—especially if you're under full retirement age.

2. Take Stock of Your Income Sources

For many retirees, Social Security forms the foundation of income. Deciding when to start claiming benefits is critical. Taking benefits before your full retirement age reduces your monthly amount, while waiting (up to age 70) increases your benefit.

Tax Angle on Social Security Income: Up to 85% of your Social Security benefits could be taxable depending on your total income. Coordinating your retirement distributions and investment income can help keep your tax bill in check.

If you have a pension, explore your options—whether it’s a lump sum or monthly payments.

Tax Angle on Pensions: Pension income is generally taxed as ordinary income, so it’s important to factor it into your overall income plan.

You may also have taxable investment accounts to draw from.

Tax Angle on Investment Accounts: Capital gains and qualified dividends often get more favorable tax treatment than regular income. By timing withdrawals from these accounts strategically, you can manage your tax bracket and preserve your nest egg.

3. Build a Tax-Efficient Withdrawal Strategy

Once you hit age 73, you’re required to start taking withdrawals — known as Required Minimum Distributions (RMDs) — from most traditional retirement accounts like IRAs and 401(k)s. Skipping them can result in steep penalties.

Tax Angle on RMDs: RMDs are taxed as ordinary income. If you don’t need the funds, consider a Qualified Charitable Distribution (QCD), which allows you to donate directly from your IRA to a charity, satisfying your RMD without increasing your taxable income.

Roth IRAs and Roth 401(k)s, on the other hand, offer tax-free withdrawals if you meet certain conditions.

Tax Angle on Roth IRAs and Roth 401(k)s: Withdrawals from Roth accounts don’t count toward taxable income and aren’t subject to RMDs during your lifetime. This makes them a flexible tool for tax management in retirement.

4. Prepare for Health Care Costs

Medical expenses often increase with age, and they can take a major bite out of your retirement savings if you’re not prepared. Medicare premiums, prescriptions, and long-term care are all important to plan for.

Tax Angle on HSAs: Health Savings Accounts (HSAs) are a triple tax-advantaged way to cover medical costs—contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are tax-free. If you’re still working and have a high-deductible plan, maxing out HSA contributions before retirement can pay off later. Also, some out-of-pocket medical expenses may be tax-deductible if they exceed a certain percentage of your adjusted gross income (AGI).

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Retirement can last 20, 30, or even more years—and tax laws are constantly evolving. That’s why it’s important to revisit your strategy regularly. A thoughtful mix of income sources, smart withdrawal planning, and awareness of changing tax rules can help you preserve your savings and enjoy a financially healthy retirement.

Need help with the details? We can model different retirement income scenarios and help you build a tax-efficient plan tailored to your goals.