Ahhh retirement. That season of life where you get to do whatever you want. Like play limitless golf, go on cruises with all your friends, and dance the night away until your 8 pm bedtime. Or, at least that’s what all the commercials want you to think!
However, the truth is, many Americans are NOT properly prepared for retirement.
They don’t have enough money set aside for retirement, don’t know how much to have set aside, or the money that they are nesting away isn’t working for them like it should be. And while we are not investing experts, we do know a thing or two (actually, 5!) about tax planning for retirement.
So before you go daydreaming about how much your backswing will improve when you can spend 8 hours a day on your favorite course, read through this article and be sure that you’re tax planning for retirement correctly.
Trust us when we say that knowing you are financially prepared for retirement makes those retirement day dreams all the sweeter.
(Please note that this article is for informational purposes only and is not to replace the advice of a qualified tax expert, investment advisor, or financial planner who can look at your specific situation and total income.)
How you handle your tax planning now will dramatically impact the finances that you have available to live out your retirement years. The impact of taxes on your future withdrawals, investment income, and even Social Security benefits can create a significant gap between what you save and what you actually get to use.
Understanding the Different Types of Retirement Accounts (And Their Tax Impact)
There are many different types of retirement accounts—and each one has different tax implications both now and in the future.
Some accounts give you a tax break today, while others let your money grow tax-free until you withdraw it. Knowing the difference could help you maximize your savings and minimize your tax burden down the road. Choosing the right mix of tax-deferred accounts, Roth accounts, and taxable accounts creates tax diversification that lets you manage your marginal tax rates in retirement.
Simple IRA (Savings Incentive Match Plan for Employees)
This plan allows employees to contribute through salary deferrals, up to $16,500 in 2025. For those aged 50 and over, an additional $3,500 catch-up contribution is allowed. Employers must either match employee contributions up to 3% or contribute 2% for all eligible employees, regardless of whether they contribute. These contributions reduce your taxable income now and grow tax-deferred until retirement. Consult your plan administrator for limits and deadlines during each tax year.
SEP IRA (Simplified Employee Pension)
With a SEP IRA, employers can contribute up to 25% of an employee’s compensation or $70,000 in 2025, whichever is less. It’s a great option for self-employed individuals or small businesses with fluctuating cash flow. Contributions are tax-deductible and grow tax-deferred. However, employees can’t contribute directly, and catch-up contributions aren’t allowed. Withdrawals in retirement are subject to ordinary income tax rates, so it’s important to understand your expected income level.
Traditional IRA
Contributions may be tax-deductible depending on your income level and participation in an employer plan. Earnings grow tax-deferred, and withdrawals are taxed as ordinary income in retirement. This can help reduce your current tax bill but may increase your taxable income in later years. Traditional retirement accounts like IRAs also play a role in determining your eligibility for certain tax credits and deductions.
Roth IRA
With a Roth IRA, you contribute after-tax dollars now in exchange for tax-free growth and withdrawals later. If you expect to be in a higher tax bracket during retirement, a Roth IRA can provide long-term tax savings. There are no required minimum distributions, making it ideal for those who want flexibility. A Roth conversion may also help reduce your tax liability in subsequent years if timed correctly.
401(k)
This is a common employer-sponsored plan where employees can contribute pre-tax income to a retirement account. Many employers match a portion of contributions. Traditional 401(k)s reduce taxable income now but increase it later when withdrawals are taxed. Roth 401(k)s work in reverse—taxed now, tax-free later. Don’t forget to consider how this affects your Social Security income taxation and total gross income in retirement.
403(b)
Available to employees of nonprofits, public schools, and government agencies. Contributions are usually made with pre-tax dollars and grow tax-deferred. Like 401(k)s, they can offer both traditional and Roth options, with similar tax treatment. If you anticipate receiving pension plans or qualified dividends, a 403(b) may fit into your broader investment strategy.
Each of these account types offers different advantages based on your current and future income, tax bracket, and retirement timeline. Your goal should be tax diversification—having a mix of accounts to draw from later so you can manage your taxable income strategically in retirement. The right mix may also reduce additional taxes like the alternative minimum tax and increase your tax efficiency.
Strategic Tax Planning for Retirement
Many people are surprised to learn that their Social Security benefits might be taxable. In fact, depending on your income level and filing status, up to 85% of your Social Security income could be subject to federal income tax.
Here’s how it works: The IRS uses something called “combined income” to determine how much of your Social Security is taxable. Combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits.
If you’re single and your combined income is between $25,000 and $34,000, you may pay taxes on up to 50% of your benefits. Over $34,000, and up to 85% may be taxed. For married couples filing jointly, those thresholds are $32,000 and $44,000, respectively.
Strategic planning can help reduce your tax burden here.
For example, withdrawals from traditional retirement accounts (like Traditional IRAs or 401(k)s) count as ordinary income, which can raise your combined income and trigger more taxes on your benefits. But pulling income instead from Roth accounts, which aren’t taxed in retirement, or from brokerage accounts, where only the gains are taxable, could help you stay under key thresholds and keep more of your Social Security.
State and Local Taxes
State and local taxes can eat into your retirement income just as much as federal taxes. Depending on where you live, your Social Security benefits, pension plans, and withdrawals from tax-deferred accounts may or may not be subject to state income tax.
Nine states, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not impose any personal income tax, meaning they also do not tax retirement income such as withdrawals from IRAs, 401(k)s, or pension income. New Hampshire currently taxes only interest and dividend income but is phasing that out by 2025.
Additionally, four states with income tax, Illinois, Iowa, Mississippi, and Pennsylvania, exempt all retirement income, including Social Security, pensions, and retirement account distributions.
Most other states either partially tax Social Security or exempt certain types of retirement income based on age or income thresholds. For example, some states phase out taxation of Social Security after reaching specific adjusted gross income levels.
Even in states without income tax, other taxes like property taxes, local taxes, and sales taxes can still be high. Tennessee, for instance, has no state income tax but some of the nation’s highest average sales tax rates and moderate property taxes.
Tax Planning and RMD’s
When deciding where to retire, don’t focus solely on the weather or scenery. Talk with a tax advisor to estimate your total tax burden, factoring in state income tax, sales and property taxes, and even potential estate or inheritance tax liabilities.
Required Minimum Distributions: commonly called RMDs, play a critical role in tax planning for retirees.
When do RMDs start? Under current IRS rules, you must begin taking RMDs at age 73, with a delayed option only for your first RMD. That initial distribution can be delayed until April 1 of the year following the year you turn 73. All subsequent RMDs must be withdrawn by December 31 each year.
RMDs are calculated based on your account balance and life expectancy. They apply to tax-deferred accounts, including Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b)s, but not Roth IRAs during your lifetime.
These distributions are taxed as ordinary income and must be withdrawn even if you don’t need the cash. If you miss an RMD or withdraw too little, the IRS assesses a 25% excise tax, which can be reduced to 10% if corrected within two years.
Tax Strategies Matter
Roth conversions do not count toward fulfilling RMDs—so you must first take your RMD before converting any remaining balances to Roth IRAs. Because RMDs are based on account balance at year-end, market fluctuations won’t delay or reduce your requirement, but strategic planning like Roth conversions before age 73 can reduce future RMD amounts and overall taxable income.
For those age 70½ or older, Qualified Charitable Distributions (QCDs) offer a smart way to meet RMDs while lowering your adjusted gross income. You can donate up to $100,000 annually directly from your IRA to a qualified charity. QCDs count toward your RMD and are excluded from taxable income.
Taking Control Over Your Income
Tax diversification isn’t just a buzzword—it’s a smart way to create flexibility and control over your income in retirement.
Let’s say you’re retired and need to withdraw $60,000 this year to cover your living expenses. If all your savings are in a traditional retirement account, that entire $60,000 counts as ordinary income, potentially bumping you into a higher tax bracket and increasing your Social Security benefit taxes, Medicare Part B premiums, and even your tax liability.
Now imagine you have a mix of accounts:
- You pull $30,000 from a Roth IRA, that income is tax-free and doesn’t affect your adjusted gross income.
- You take $20,000 from a taxable brokerage account, only the gains are taxed, and possibly at a lower long-term capital gains rate.
- You withdraw $10,000 from a Traditional IRA, triggering ordinary income tax, but keeping you under a bracket threshold.
By drawing strategically from different buckets, you control how much of your income is taxed—and at what rate.
This is why many tax professionals recommend diversifying your accounts during your working years. Contribute to tax-deferred accounts, Roth accounts, and taxable accounts so you have options later. It gives you room to adapt to future market conditions, unexpected expenses, or changes in federal income tax law.
Maximize your savings for a bigger return in future years
Let’s talk about saving money. If you can afford it, ensure that you are maximizing whatever amount you can save for retirement. If you can’t, put in the max that you can.
We all HATE to talk about compound interest when it comes to paying off debt or racking up credit cards. However, this is one of the ONLY times that compound interest can actually work in your favor…and MASSIVELY so.
Now, if you waited a while to start saving (and tax planning for retirement) and you’re kicking yourself now, show yourself some grace.
Yes, it would have been better to start saving for retirement the day you turned 18, but if you’re like most of us, you probably didn’t. Children, careers, and the everyday challenges of life take priority when retirement seems so far away.
Just like the best time to plant an oak tree was 20 years ago, the second-best time to plant one or start saving for retirement is today.
Take action today for retirement planning
We get it. You have a ton on your plate and a to-do list that feels 5 miles long. But at the end of your working years (whenever you decide that to be), you need to have enough money set aside and set aside in the right way and the right places so that you can live comfortably.
But unlike a lot of employee situations, there are no automatic contributions, no sweet little HR lady who makes sure that everyone’s 401K’s are set up properly.
YOU are in charge of YOUR retirement or at least getting the right people on your team!
Lower Your Taxable Income
Lastly, here’s a quick question to end on: What can you do NOW to lower your taxable income?
Consider several strategies. Contributing to employer-sponsored retirement plans like a 401(k) or 403(b) can reduce your taxable income, as contributions are made with pre-tax dollars. Similarly, contributing to a traditional IRA can also reduce your taxable income, with a contribution limit of $7,000 for 2025, plus an additional $1,000 for those 50 and older.
Other options like HSA’s (Health Savings Accounts), FSA’s (Flexible Savings Accounts), Roth conversions, and even charitable contributions are all things to consider when trying to lower taxable income. You might also consider using municipal bonds or reviewing your life insurance policy’s cash value to reduce your overall tax bill.
The important thing is you take the time to invest in a plan, hire a financial accountant, and get started today with tax planning for retirement. With the help of a qualified tax preparer and investment advice tailored to your filing status and income sources, you can create a plan that provides lasting financial security.
We Can Help You
For more help, be sure to schedule a call with us to talk about any questions you may have about moving forward with tax planning for retirement. It’s our goal to work with your financial advisor to get you started on the plan that makes the most sense to you (and is the least stressful!).
To talk more about how we can help you with your retirement savings, schedule a call with us.
