Navigating your finances in retirement can be stressful. What was once a straightforward process of using pensions and Social Security has grown more complex with multiple types of accounts and unique circumstances to manage. This blog presents effective strategies for managing your retirement withdrawals with a focus on reducing taxes in retirement, helping you minimize your tax liability and keep more of your hard-earned money. Whether you’re just starting to plan for retirement or are looking to optimize your existing strategy, these strategies can help you make informed decisions to strengthen your financial security and lower your taxable income.

Understanding the Impact of Your Marginal Tax Rate and Income

When planning withdrawals, it’s crucial to understand your marginal tax rate — the rate you pay on the last dollar of income earned. A common misconception is that being in the 24% income tax bracket means all your income is taxed at 24%. Rather, income is taxed progressively. Each layer of ordinary income is taxed at different rates, from 10% to 37%, depending on how much you earn. For example, if you file as single with $90,000 of taxable income in 2025, part of it is taxed at 10%, part at 12%, and only the top slice at 22%.

Like ordinary income tax, there are other taxes and tax rates that are important to be cognizant of. Long-term capital gains tax, alternative minimum tax, and net investment income tax all can come into play and should be considered when creating a withdrawal strategy in retirement. It’s important to have a holistic view of each of these so that you can be aware of how yearly changes in income will affect your overall tax liability.

With this, you must know what does and does not create income. Some transactions will yield you cash, but they don’t generate “income” in the IRS’s eyes. Roth account distributions are a great example of this. They provide a source of funds to live on but do not generate income on your tax return. On the other hand, reinvesting dividends generated in a taxable brokerage account creates income, yet you do not actually receive the cash in your bank account. IRA withdrawals both provide cash flow and generate taxable income on your tax return (except that if you have “basis” in your IRA, there isn’t as much income). Social Security provides cash flow, but the amount that is taxable depends on your other income.

Each additional dollar of taxable income can push you into a higher bracket, meaning more of your money goes to taxes. This is especially important when considering large one-time withdrawals, Roth conversions, or required minimum distributions (RMDs) later in retirement. These items can potentially push you into higher brackets if not managed correctly. Careful tax and withdrawal planning helps you limit unnecessarily crossing into higher brackets.

Some other important thresholds to monitor include:

• Income-related monthly adjustment amount (IRMAA): Higher income can increase Medicare premiums. It’s important to note that your Medicare premiums are based on your modified adjusted gross income (MAGI) from two years ago. That means your 2025 premiums are based on your 2023 income figure. You start paying a surcharge if your income in 2023 was over $106,000 as a single filer or $212,000 as a married couple filing jointly.
• Net investment income tax (NIIT): This is a 3.8% surtax on investment income above certain thresholds. Your interest, dividends, and capital gains are subject to this additional tax once your MAGI exceeds $200,000 (single) or $250,000 (married filing jointly).
• Social Security taxation: Depending on your combined income, up to 85% of your Social Security benefits may become taxable. Taxation begins once combined income exceeds $25,000 (single) or $32,000 (married filing jointly).

Knowing where you fall relative to these thresholds each year can guide smarter withdrawal decisions and keep more money in your pocket. They can also help you determine which account to pull income from in retirement.

Smoothing Your Income

Taxable income often fluctuates in retirement, incurring different levels of taxation accordingly. Without careful planning, these spikes create uneven tax burdens over time, resulting in higher taxes during peak-income years and inefficient use of low tax brackets early on. Instead, smoothing income across retirement — by intentionally pulling forward income into low-tax years and minimizing it in high-tax years — can significantly reduce your lifetime tax bill.

By smoothing income:

• You keep more of your withdrawals taxed in lower brackets, rather than having more of them be taxed at higher rates at another time.
• You lower exposure to IRMAA and NIIT in later years by preventing large one-time income events.
• You extend the life of your portfolio by minimizing how much you must withdraw to cover taxes.

Some triggers of taxable income that need management include withdrawals from traditional IRAs or 401(k)s; Social Security benefits, up to 85% of which can be taxable; pension income; annuity payments; realized capital gains; and business or rental income. Some non-triggers, or sources that typically don’t affect your taxable income, include qualified Roth IRA withdrawals, loans against life insurance policies, and distributions from Health Savings Accounts (HSAs) used for qualified medical expenses. Planning ahead means being proactive about not just how much you withdraw but also when and from where.

Key Strategies to Smooth Income

Roth Conversions

A Roth conversion moves money from a traditional IRA into a Roth IRA. You pay taxes on the converted amount today at your current marginal rate, but future qualified withdrawals from the Roth are tax-free. This simple but powerful tool allows you to strategically “prepay” taxes when rates are relatively low, avoiding potentially higher rates later.

Roth conversions are especially attractive during early retirement when you have low taxable income — often after you stop working but before RMDs and full Social Security benefits begin.  Since your income is already low during these years, you have an opportunity to deliberately fill up lower tax brackets, such as the 10%, 12%, 22%, or even 24% bracket. Doing so can prevent you from spilling into even higher brackets later on.

By reducing the size of your traditional IRA or 401(k) balances, Roth conversions help lower future RMDs, avoiding sudden tax spikes later in retirement. Furthermore, since Roth IRAs have no RMDs during the account owner’s lifetime, they provide flexibility for both spending and estate planning purposes.

However, it’s essential to plan conversions carefully; large one-time conversions can accidentally trigger excessive IRMAA surcharges or the NIIT or push more capital gains into higher brackets. An annual Roth conversion “filling up” lower brackets gradually over several years is often the most effective approach, although it can make sense to do larger Roth conversions to take advantage of down markets.

Timing Social Security Distributions

Deciding when to take Social Security can also have an impact on your overall tax situation. Benefits are currently taxed as ordinary income, so they too have an effect on your tax bracket management. While you are eligible to start taking benefits as early as age 62, delaying Social Security benefits until your full retirement age or even as late as age 70 may be a smart way to “move” income into later years when your taxable income might be lower. Delaying Social Security provides more flexibility in managing your tax bracket. It enables you to take income from your traditional IRAs and 401(k)s at lower tax rates. It also provides more room to do strategic Roth conversions, especially if you have assets in taxable brokerage accounts to provide cash flow to live on. Furthermore, each year you delay Social Security beyond your full retirement age (up to age 70) increases your benefit by about 8%, providing more guaranteed, inflation-adjusted income down the line.

Tax-Gain Harvesting

Tax-gain harvesting involves intentionally selling appreciated investments during low-income years to realize gains at more favorable long-term capital gains tax rates.

In years when your taxable income falls below certain thresholds ($48,350 for singles and $96,700 for married couples filing jointly in 2025), realized long-term capital gains and qualified dividends may be taxed at 0%. This creates a golden opportunity to either generate cash flow early in retirement or simply reset your cost basis higher, which limits federal taxes when you ultimately take distributions later on.

For example, a retiree might sell $50,000 worth of appreciated stock in a year when their taxable income is low, pay no federal capital gains tax, and immediately reinvest the proceeds. Future gains are then calculated from this new, higher basis, reducing the tax hit if the investments are sold later during a higher-income year.

Tax-gain harvesting is an underused but powerful technique to both increase portfolio flexibility and reduce taxes over the course of retirement.

Tax-Loss Harvesting

Tax-loss harvesting complements gain harvesting by strategically realizing losses on investments during market downturns. When you sell investments for a loss, you can offset those losses against realized gains, dollar for dollar, and even deduct up to $3,000 of net capital losses per year against ordinary income.

Any unused losses can be carried forward indefinitely to offset future gains. This tactic reduces your current tax bill and helps create tax flexibility for future years. Importantly, investors need to avoid “wash sale” rules by not repurchasing substantially identical securities within 30 days before or after the sale.

Integrating both gain and loss harvesting into your withdrawal planning ensures you capitalize on tax opportunities in both rising and falling markets.

Required Minimum Distribution Management

RMDs are mandatory withdrawals from traditional IRAs, 401(k)s, and similar tax-deferred retirement accounts. They begin at age 73 for most retirees today, though the SECURE 2.0 Act increased the starting age to 75 for those born in 1960 or later.

RMDs are calculated each year based on your account balance at the end of the previous year and a life expectancy factor provided by the IRS. For example, at age 73, the factor under the Uniform Life Table is 26.5. This equates to roughly 3.8% of your account that must be distributed that year. As you age, the factor decreases and the percentage of your account that must be withdrawn increases.

Because RMDs are taxable as ordinary income, they can dramatically increase your tax bill if you haven’t reduced your tax-deferred balances earlier. Large accounts will trigger large RMDs. Several strategies help manage RMDs proactively:

• Early withdrawals: Taking strategic withdrawals in your 60s reduces future account balance and RMD sizes.
• Roth conversions: Moving funds into Roth IRAs before RMDs begin allows for further tax diversification and flexibility during retirement, while also reducing your RMDs.
• Still-working exception: For an employee-sponsored plan like a 401(k), so long as you are still working any number of hours, you are eligible to delay RMDs for as long as you are employed, assuming you own less than 5% of the company.
• Qualified charitable distributions (QCDs): Starting at age 70½, you can donate up to $108,000 per year directly from an IRA to a qualified charity, satisfying RMDs without increasing taxable income. This is a great tax-efficient way to give back to causes you care about.

By planning ahead, you can prevent RMDs from creating painful tax spikes in your later retirement years.

Timing Large Asset Sales

If you plan to sell a business, investment property, or other major asset in retirement, timing is everything. Selling during a low-income year can minimize your exposure to higher ordinary income and capital gains rates. Alternatively, structuring the sale as an installment sale spreads taxable income over several years, smoothing tax exposure.

When possible, coordinate major asset sales with other income-smoothing strategies, such as Roth distributions for cash flow, tax-loss harvesting, QCDs, and charitable donations to donor-advised funds (DAFs) to help minimize your income and taxes that year.

Additional Retirement Tax Minimization Tactics

Beyond some of the main withdrawal strategies, other techniques help improve tax efficiency:

• Bunching charitable donations: Many people donate to charitable causes on an annual basis. Unfortunately, the tax deductions can only be taken if you can itemize your deductions. This means you may lose the tax benefits of your donations if you do not have enough deductions for it to make sense to itemize them. Instead of making annual donations, it may make sense to “bunch” multiple years’ worth of charitable giving into one year to exceed the standard deduction threshold so that taking itemized deductions provides a lesser tax liability, thereby realizing the tax benefits of your annual donations. A great way to do this is through large donations of appreciated securities to a DAF.
• HSA withdrawals: Use tax-free withdrawals from HSAs for qualified medical expenses, especially in high-cost health care years.
• Gifting strategies: Gift appreciated assets directly to a charity or to heirs in lower tax brackets to optimize family tax outcomes.

Each of these moves can compound small tax savings year over year into substantial portfolio longevity.

Asset Location

The last strategy that can reduce lifetime taxes from retirement portfolios is asset location. Different from asset allocation, which refers to portioning your entire portfolio into specific percentages of stocks, bonds, etc., asset location refers to which accounts these assets are placed in. Strategically placing the right assets into the right accounts can minimize taxes and put more money in your pocket. There are three main categories of investment accounts: tax-deferred, tax-free, and taxable accounts.

Tax-Deferred Accounts

Examples: Traditional IRA, 401(k), 403(b)

Tax-deferred accounts are funded with pre-tax dollars, and withdrawals are taxed as ordinary income during retirement. Assets that generate significant ordinary income are generally best suited for these accounts. This is because assets that generate ordinary income are taxable on an annual basis. In a tax-deferred account, these taxes are paid when money is withdrawn rather than annually, allowing the funds that would be used to pay taxes to grow in the account, increasing the overall return of your portfolio. Types of assets that are less tax-efficient due to ordinary income include:

• Higher-yield bonds: Bond interest is taxed as ordinary income annually if held in a taxable account.
• Dividend stocks and Real estate investment trusts (REITs): These trusts and dividend-paying stocks often generate substantial ordinary dividends.
• Actively managed mutual funds: High turnover (buying and selling) within mutual funds generates frequent taxable events such as short-term capital gains, which are taxed at ordinary income rates.
• Commodities and precious metals: Commodity funds are generally short term in nature and are taxed as ordinary income. Additionally, precious metals are taxed as collectibles at higher capital gains rates of up to 28%.

Tax-Free Accounts

Examples: Roth IRA, Roth 401(k), HSAs

Tax-free accounts are typically funded with after-tax dollars, and qualified withdrawals are completely tax-free. Like tax-deferred accounts, they offer significant tax advantages, but in this case, the tax benefit occurs on the growth side rather than the contribution side. Tax-free accounts are ideal for assets with higher expected growth, maximizing the value of tax-free compounding over time.

Assets that are well suited for tax-free accounts include:

• Small-cap stocks: These typically offer higher returns compared to large-cap stocks, and any dividends or capital gains generated grow entirely tax-free.
• Emerging markets: Emerging market stocks also tend to deliver higher long-term returns, making them ideal candidates for Roth accounts.
• Stocks in general: Since tax-free accounts don’t generate taxes, you can supercharge them by investing 100% in stocks, which can result in very large balances over long time periods.

Taxable Accounts

Example: Standard brokerage account

Taxable accounts are funded with after-tax dollars, but they do not offer up-front tax benefits. Interest and dividends are taxed as earned each year, and realized gains are taxed when an asset is sold. However, the tax code favors long-term investments by offering preferential long-term capital gains rates, which are typically lower than ordinary income rates. Because of this, assets best suited for taxable accounts are those that produce relatively low annual taxable income, primarily generate long-term capital gains rather than ordinary income, or offer special tax benefits that cannot be realized in tax-advantaged accounts. Ideal assets for taxable accounts include:

• Growth-oriented index funds and exchange-traded funds (ETFs): These funds typically have low turnover and limited taxable distributions, and most gains are realized at lower long-term capital gains rates when sold.
• International funds: Certain international investments offer foreign tax credits that help offset U.S. taxes, benefits that are only available when held in taxable accounts.
• Municipal bonds: Interest from municipal bonds is exempt from federal income tax (and often from state taxes if you buy in-state bonds), making them highly tax-efficient in taxable accounts.

Taxable accounts are also appropriate for assets you may need to access before retirement, as withdrawals from tax-deferred and tax-free accounts before certain ages (generally 59½) often trigger early withdrawal penalties and additional taxes.

To Conclude

Retirement today demands a much more active approach than simply setting a plan and forgetting it. Without careful planning, taxes can quietly chip away at your hard-earned savings. By gaining a clear understanding of your marginal tax brackets, intentionally smoothing income over time, and strategically leveraging tools like Roth conversions, RMD management, and asset location, you can meaningfully reduce your lifetime tax burden. With a little effort and planning, during retirement you can enjoy more of the money you worked for.

Taxes and financial planning are complex, but you don’t have to navigate them alone. A financial advisor can help you stay informed about tax law changes, optimize your savings and investments, and avoid costly mistakes. If you need tailored guidance, our team is here to help. Talk to an advisor or call (603) 589-8010 to integrate tax planning into your comprehensive financial strategy.