Tax Planning for Retirement: Strategies Before You Stop Working

The tax decisions you make in the years leading up to retirement can affect your finances for decades. Strategic planning before you stop working can mean the difference between paying taxes at the lowest possible rates and losing a significant portion of your savings to unnecessary taxation. 

Many people assume that taxes will simply be lower in retirement because their income will be lower. While this may be true for some, others discover that Required Minimum Distributions (RMDs) from retirement accounts, Social Security benefits, pensions, and investment income can push them into higher tax brackets than they anticipated. Without proper planning, retirees can face tax bills that erode their carefully accumulated savings. 

This guide, part of our Life Stage Tax Planning series, provides actionable strategies for minimizing your lifetime tax burden. Whether you are five years from retirement or already in your first year, these approaches can help you keep more of what you have saved. 

Understanding Retirement Income Taxation 

Before developing a tax strategy, you need to understand how different sources of retirement income are taxed. Each type of income receives different treatment, which creates opportunities for strategic planning. 

How Different Retirement Income Sources Are Taxed 

The Retirement Tax Sweet Spot 

For many people, there is a window of opportunity between when they stop working and when RMDs begin at age 73. During this period, your taxable income may be significantly lower than during your working years or later in retirement when RMDs kick in. 

This sweet spot is ideal for strategic tax planning moves, particularly Roth conversions. If you retire at 62 and have no pension or significant other income until RMDs begin at 73, you have roughly 11 years where you control how much taxable income you recognize each year. Using this window wisely can significantly reduce your lifetime tax burden. 

Even if you continue working part time or have some pension income during this period, you may still be in a lower tax bracket than you were during your peak earning years or will be once RMDs push your income higher. Moving funds from traditional accounts to Roth during lower bracket years may reduce your lifetime tax burden when properly structured and aligned with your long-term income projections. 

Roth Conversion Strategies 

Roth conversions are one of the most powerful tools in retirement tax planning. When executed strategically, they can save tens or even hundreds of thousands of dollars in lifetime taxes. 

What Is a Roth Conversion? 

A Roth conversion involves moving money from a traditional IRA or 401(k) to a Roth IRA. The converted amount is added to your taxable income for the year, but once in the Roth account, the money grows tax free and qualified withdrawals are completely tax free. There is no income limit for Roth conversions, unlike direct Roth IRA contributions. 

Think of it as paying taxes at today’s current rates rather than deferring taxation into an uncertain future rate environment. You give up the tax deferral benefit on the converted amount, but you gain permanent tax free growth and eliminate RMDs on those funds. 

When Roth Conversions Make Sense 

Roth conversions are generally most beneficial in these situations: 

• You are currently in a lower tax bracket than you expect to be in retirement (or than you expect tax rates to be in the future) 
• You have years remaining before RMDs begin and can spread conversions over time 
• You have a large traditional IRA or 401(k) balance that will generate substantial RMDs 
• You want to leave tax free assets to your heirs 
• You have funds outside retirement accounts available to pay the conversion taxes 
• You believe tax rates will increase in the future 

Conversions are less attractive if you are currently in a high tax bracket and expect to be in a much lower bracket in retirement, or if you would need to use retirement funds to pay the conversion taxes (reducing the amount that can grow tax free). 

How to Execute a Roth Conversion 

The most effective approach is usually to do partial conversions each year, carefully calibrated to your tax situation: 

Fill up the bracket strategy: Calculate how much additional income you can recognize before moving into the next tax bracket, then convert that amount. For example, if you are a married couple in the 12% bracket and the 22% bracket begins at $96,950 of taxable income, you would convert enough to bring your income to just under $96,950. 

Pay taxes from outside funds: If possible, pay the taxes due on your conversion from a taxable brokerage account or savings rather than withholding from the conversion itself. This allows the full converted amount to grow tax free in the Roth account. 

Time conversions strategically: Consider converting in years when your income is lower, such as between retirement and starting Social Security, after a large deductible expense, or in a year when you have significant capital losses to offset other income. 

Roth Conversion Mistakes to Avoid 

Even well intentioned Roth conversions can backfire without careful planning: 

• Converting too much in one year: A large conversion can push you into a much higher tax bracket, negate the benefit, and trigger other negative consequences. 
• Forgetting Medicare IRMAA impact: The income from conversions counts toward the Modified Adjusted Gross Income that determines your Medicare premiums. A large conversion can trigger significantly higher Part B and Part D premiums for two years. 
• Not accounting for state taxes: Your state may have different tax brackets or rates. A conversion that makes sense federally might be less attractive when state taxes are included. 
• Failing to consider the five year rule: Converted amounts must remain in the Roth for five years before you can withdraw them penalty free if you are under 59½. 
• Ignoring the impact on Social Security taxation: Conversion income can push more of your Social Security benefits into taxable territory. 

Maximizing Retirement Contributions 

In the years before retirement, maximizing contributions to tax advantaged accounts remains one of the most effective strategies. The tax benefits are immediate (for traditional accounts) or long lasting (for Roth accounts), and catch up provisions allow older workers to contribute even more. 

2025 Contribution Limits 

 Note the new “super catch up” provision for workers ages 60 through 63, which allows an additional $11,250 in 401(k) contributions beyond the standard catch up amount. This is an excellent opportunity to accelerate savings in the final years before retirement. 

Traditional vs. Roth Contributions 

The decision between traditional (tax deductible now) and Roth (tax free later) contributions depends on comparing your current tax rate to your expected rate in retirement: 

• If you are in a high tax bracket now and expect to be in a lower bracket in retirement, traditional contributions are usually better. You get the deduction at the higher rate and pay taxes on withdrawals at the lower rate. 
• If you are in a lower bracket now than you expect to be in retirement, Roth contributions may be preferable. You pay taxes at today’s lower rate and withdraw tax free at the higher future rate. 
• If your brackets are similar, Roth contributions often have a slight edge because they provide more flexibility, are not subject to RMDs, and offer insurance against future tax rate increases. 

HSA as a Retirement Account 

If you have access to a Health Savings Account through a high deductible health plan, the HSA offers unmatched tax benefits that make it an excellent supplement to traditional retirement accounts. Contributions are tax deductible (or pre tax if through payroll), growth is tax free, and withdrawals for qualified medical expenses are tax free at any age. 

After age 65, you can withdraw HSA funds for any purpose without penalty (though non medical withdrawals are taxable like traditional IRA withdrawals). Given that healthcare is often the largest expense in retirement, having a pool of tax free money available for medical costs can be extremely valuable. Consider paying current medical expenses out of pocket if possible and letting HSA funds grow for future use. 

Required Minimum Distribution (RMD) Planning 

Once you reach age 73, the IRS requires you to begin taking minimum distributions from traditional IRAs and most employer retirement plans. These RMDs can significantly impact your tax situation if not properly planned for. 

RMD Basics 

Required Minimum Distributions ensure that tax deferred retirement savings are eventually taxed. Key rules include: 

• RMDs must begin by April 1 of the year after you turn 73 (this is your Required Beginning Date) 
• Traditional IRAs, traditional 401(k)s, 403(b)s, and most other employer plans are subject to RMDs 
• Roth IRAs are NOT subject to RMDs during the owner’s lifetime (though Roth 401(k)s were until 2024) 
• The RMD amount is calculated by dividing your December 31 account balance by your life expectancy factor from IRS tables 
• If you are still working at 73 and participating in your employer’s 401(k), you may delay RMDs from that specific plan until you retire (does not apply to IRAs or other accounts) 

Strategies to Minimize RMD Impact 

Proactive planning can reduce the impact of RMDs on your tax situation: 

Roth conversions before age 73: Every dollar you convert from traditional to Roth reduces your future RMDs. While you pay taxes on the conversion, the funds then grow tax free and are not subject to RMDs. 

Strategic timing of first RMD: You can delay your first RMD until April 1 of the year after you turn 73. However, if you delay, you must take two RMDs in that year (the delayed one plus the current year’s), which could push you into a higher bracket. Calculate whether taking your first RMD in the year you turn 73 or delaying results in lower total taxes. 

Qualified Charitable Distributions: If you are charitably inclined, QCDs allow you to satisfy your RMD requirement while excluding the amount from taxable income. This can be particularly valuable if you do not itemize deductions. 

Qualified Charitable Distribution Strategy 

A Qualified Charitable Distribution is a direct transfer from your IRA to a qualified charity. The QCD counts toward your RMD requirement but is not included in your taxable income. You can donate up to $105,000 per year through QCDs (indexed for inflation). 

QCDs are available starting at age 70½, even before RMDs begin at 73. To qualify, the distribution must go directly from your IRA to the charity (not to you first), and the charity must be a 501(c)(3) public charity (donor advised funds and private foundations do not qualify). 

The tax benefit of QCDs is significant. If you would normally give $10,000 to charity anyway, doing so through a QCD effectively gives you a deduction even if you take the standard deduction. For someone in the 22% tax bracket, a $10,000 QCD saves $2,200 in federal income tax. 

Social Security and Tax Planning 

How Social Security Is Taxed 

Social Security benefits can be tax free, partially taxable, or up to 85% taxable depending on your “combined income” (also called provisional income). Combined income equals your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. 

For married filing jointly, the thresholds are $32,000 and $44,000 respectively. 

Strategies to Reduce Social Security Taxes 

Managing your other income sources can reduce how much of your Social Security is taxed: 

• Roth withdrawals do not count in the combined income calculation, so drawing from Roth accounts instead of traditional accounts can keep Social Security taxation lower. 
• Timing of when you claim Social Security affects this calculation. Delaying benefits increases each check but also increases the amount potentially subject to tax. 
• In years when you need significant income (such as for a large purchase), consider whether the timing pushes more Social Security into taxable territory. 
• Tax loss harvesting in brokerage accounts can offset other income and reduce combined income. 

Medicare IRMAA Considerations 

What Is IRMAA? 

The Income Related Monthly Adjustment Amount (IRMAA) is an additional charge added to your Medicare Part B and Part D premiums if your income exceeds certain thresholds. IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years prior. For example, your 2025 Medicare premiums are based on your 2023 income. 

For 2025, single filers with MAGI above $106,000 and married couples filing jointly above $212,000 pay higher Medicare premiums. At the highest income levels, IRMAA can add several hundred dollars per month to your Medicare costs. 

Planning Around IRMAA 

IRMAA should be considered when planning Roth conversions and other income events: 

• If you are approaching Medicare eligibility, large Roth conversions two years before enrolling could trigger higher premiums in your first Medicare years. 
• Consider spreading conversions across multiple years to avoid jumping IRMAA brackets. 
• If you experience a life changing event (retirement, death of spouse, divorce, loss of income) that significantly reduces your income, you can request that Social Security use your more recent income instead of the two year lookback period. 
• Track IRMAA thresholds when planning year end income, including timing of capital gains realization. 

Estate Planning Tax Considerations 

Retirement tax planning also intersects with estate planning. The accounts you leave to your heirs have different tax implications depending on account type. Traditional IRAs pass their tax burden to beneficiaries, who must now generally withdraw all funds within 10 years under the SECURE Act rules. Roth IRAs also must be distributed within 10 years, but withdrawals are tax free. For a detailed discussion of how inheritances are taxed, see our guide on inheritance tax vs estate tax. 

Converting traditional IRAs to Roth before death can benefit heirs by eliminating their tax burden, though this must be weighed against your own tax situation and need for the funds. 

How Manay CPA Can Help with Retirement Tax Planning 

Retirement tax planning is complex, with many moving parts that must be coordinated for optimal results. At Manay CPA, we help pre retirees and retirees develop comprehensive tax strategies. Our tax planning services include multi year Roth conversion analysis and implementation, RMD optimization and QCD coordination, Social Security timing analysis, Medicare IRMAA planning, and coordination with your financial advisor and estate planning attorney. 

We take a holistic view of your retirement finances, considering not just this year’s taxes but your projected lifetime tax burden. Small adjustments made over several years can compound into substantial savings. 

Retirement tax planning is complex but critical for preserving your savings. Manay CPA helps pre retirees develop tax efficient strategies. Contact us for a consultation to discuss your retirement tax planning needs. 

Frequently Asked Questions 

When should I start Roth conversions? 

Ideally, during years when your income (and tax bracket) is lower than expected in retirement. This is often between retirement and age 73 when RMDs begin. However, conversions can make sense at any age if you are in a lower bracket than you expect to be in the future or if you want to reduce future RMDs. 

How do I know if I should contribute to traditional or Roth accounts? 

Compare your current tax bracket to your expected bracket in retirement. If you are in a high bracket now and expect to be lower in retirement, traditional contributions are usually better. If you expect to be in a similar or higher bracket in retirement, Roth contributions often make more sense. When uncertain, splitting contributions between both provides flexibility. 

Can I avoid RMDs entirely? 

RMDs are required from traditional IRAs and employer plans starting at age 73, but they are NOT required from Roth IRAs during your lifetime. Converting traditional balances to Roth before RMDs begin can eliminate future RMDs on those funds. You will pay taxes on the conversions, but the funds then grow and are withdrawn tax free. 

What is the penalty for missing an RMD? 

The penalty for missing an RMD was recently reduced from 50% to 25% of the amount that should have been withdrawn (10% if corrected promptly). This is still a significant penalty, so careful tracking of RMD deadlines is essential. 

References 

• IRS Publication 590-A: Contributions to IRAs: https://www.irs.gov/publications/p590a 

• IRS Publication 590-B: Distributions from IRAs: https://www.irs.gov/publications/p590b 

• IRS Publication 915: Social Security and Railroad Retirement Benefits: https://www.irs.gov/publications/p915 

• Medicare IRMAA Information: https://www.medicare.gov/basics/costs/medicare-costs/income-related-monthly-adjustment-amount 

• IRS Retirement Plans FAQs: RMDs: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions