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Taxes are an important part of retirement planning, but they don't have to be complicated.
The challenge is that retirees often have several different sources of income, and those sources don't all get taxed the same way. You might have Social Security, a pension, an IRA, a 401(k), a taxable brokerage account, and a Roth IRA. Each one can have a different tax treatment.
This guide covers the basics of how those pieces fit together.
We'll refer back to these concepts throughout our retirement planning content, so you don't need to memorize everything here. The goal is simply to give you a foundation for understanding how taxes can affect your retirement income plan.
There are three main types of investment accounts to think about: taxable, tax-deferred, and Roth.
Taxable accounts are accounts such as a brokerage account. You contribute money that has already been taxed, and then you may owe taxes on interest, dividends, and realized capital gains along the way.
Tax-deferred accounts include traditional IRAs and many 401(k), 403(b), and similar retirement accounts. You generally receive a tax benefit when the money goes in, the investments grow tax-deferred, and withdrawals are generally taxed as ordinary income.
Roth accounts include Roth IRAs and Roth 401(k)s. You contribute money that has already been taxed, and qualified withdrawals can generally be taken tax-free.
The reason this matters is that having money in all three buckets can give you more flexibility.
Instead of being forced to take all of your retirement income from one account type, you may be able to decide where the income comes from based on your tax situation that year.
Traditional IRAs and most traditional 401(k) accounts are tax-deferred.
The basic tradeoff is that you generally receive a tax benefit when you contribute, but you pay ordinary income tax when you eventually take the money out.
For example, if you withdraw $50,000 from a traditional IRA, that $50,000 generally gets added to your taxable income for the year.
The same basic concept applies to distributions from traditional 401(k)s, 403(b)s, and other pre-tax retirement accounts.
This is different from a Roth account, where you've already paid the tax before contributing and qualified withdrawals are generally tax-free.
Roth IRAs are funded with money that has already been taxed.
The big benefit comes later: assuming the requirements for a qualified distribution are met, withdrawals of both contributions and investment growth can generally be taken tax-free.
That makes Roth money particularly valuable in retirement because it doesn't generally create additional taxable income when you take a qualified withdrawal.
It also gives you another lever to pull when you're managing your income.
For example, if taking another $20,000 from a traditional IRA would push you into a higher tax bracket, you may have the option of taking that $20,000 from a Roth IRA instead.
The right decision depends on the overall plan, but that's the value of having different account types available.
A taxable brokerage account is different from a retirement account because you don't receive the same tax deferral.
You contribute money that has already been taxed, and you may owe taxes along the way on things such as interest and dividends.
When you sell an investment for a gain, you may also owe capital gains tax.
If the investment was held for more than one year, the gain will generally receive long-term capital gains treatment. If it was held for one year or less, the gain is generally treated as a short-term capital gain and taxed at ordinary income rates.
One benefit of a taxable account is that you have a lot of flexibility around when you realize gains.
That flexibility can become particularly valuable in retirement when we're trying to coordinate taxable income from several different sources.
Ordinary income is the tax system that applies to many common sources of income.
For retirees, this can include:
When we talk about managing your tax bracket in retirement, we're often talking about managing this type of taxable income.
Federal income tax brackets are marginal.
This is one of the most important concepts to understand.
A common misconception is that if you move into the 22% tax bracket, all of your income is suddenly taxed at 22%.
That's not how it works.
Instead, your taxable income fills the tax brackets from the bottom up.
So if you have $150,000 of taxable income, you don't simply multiply $150,000 by your highest marginal tax rate. The first dollars are taxed at the lower rates, and only the dollars that fall into the higher bracket are taxed at that higher rate.
This is why you may hear us talk about "filling up" a tax bracket.
If you have room remaining in a particular bracket, there may be an opportunity to recognize additional income, such as through a Roth conversion or capital gain, without pushing all of your income into that higher rate.
That doesn't mean you should always fill a bracket. It simply means that tax brackets can be something we actively manage rather than something that happens to you.
Think of the tax brackets like buckets.
You fill the first bucket before you move into the next one. Once the first bucket is full, additional taxable income starts filling the next bucket.
For example, if you're in a situation where you're comfortably below the top of your current marginal bracket, you may have room to recognize additional income.
A Roth conversion is one example.
You could convert some money from a traditional IRA to a Roth IRA, recognize that conversion as taxable income, and intentionally use some of the space remaining in your current tax bracket.
That doesn't mean you should always fill the bracket. It simply means that tax brackets can be something we actively manage as part of the larger retirement plan.
Long-term capital gains generally receive different tax treatment than ordinary income.
For federal taxes, long-term capital gains can be taxed at 0%, 15%, or 20%, depending on your taxable income and filing status.
The important part is that capital gains interact with the rest of your taxable income.
For example, imagine you have taxable income from an IRA distribution and pension, but you also have appreciated investments in a brokerage account.
Depending on your overall taxable income, you may have room to realize some long-term capital gains at a lower rate.
This is one of the reasons taxable brokerage accounts can be useful in a retirement income plan. You're not just looking at how much money you have. You're looking at how and when that money can be accessed.
Potentially, yes.
There is a 0% federal long-term capital gains rate for taxpayers whose taxable income falls within the applicable range.
But this doesn't mean that everyone with a $100,000 capital gain automatically pays no tax on it.
Your other taxable income matters.
If you have $100,000 of taxable income from IRA distributions, pension income, and other sources, that income occupies some of the available capital gains brackets before you get to the gains.
This is why capital-gain planning needs to be looked at alongside the rest of your income rather than in isolation.
It can be.
Depending on your overall income, up to 85% of your Social Security benefits can be included in taxable income.
The tax rules determine how much of your benefit is included in your taxable income based on your other income. The formula is complicated and really isn't necessary for the typical retiree to know.
This is another reason retirement income sources can't always be evaluated independently.
A large IRA withdrawal, Roth conversion, pension, or realization of capital gains can potentially increase the amount of Social Security that is taxable.
IRMAA stands for Income-Related Monthly Adjustment Amount.
It's an additional amount that some Medicare beneficiaries pay for Medicare Part B and Part D when their income is above certain thresholds.
In other words, your Medicare premiums can be affected by your income.
This is important because IRMAA isn't simply a tax. It's an additional Medicare premium, and it can become a meaningful expense for retirees.
This is one of the most important things to understand about IRMAA.
Medicare generally looks at your modified adjusted gross income from two years earlier when determining whether you owe an IRMAA surcharge.
So, for example, your income in 2024 can generally affect your Medicare premiums in 2026.
That means a financial decision you make today can potentially affect your Medicare premiums two years from now.
This is why we want to be thinking about IRMAA before someone actually gets the higher Medicare bill.
Potentially, yes.
A Roth conversion from a traditional IRA generally counts as taxable income in the year of the conversion.
That increases your modified adjusted gross income, which can potentially affect IRMAA two years later.
For example, if you complete a large Roth conversion in 2026, that higher income could potentially affect your Medicare premiums in 2028.
This doesn't mean Roth conversions are bad.
It means the tax cost of a conversion isn't necessarily limited to the income tax you pay on the conversion itself. We also want to consider the potential effect on Medicare premiums and the rest of the retirement income plan.
Yes.
Capital gains can increase your income for purposes of the IRMAA calculation.
So if you're selling appreciated investments in a taxable brokerage account, it's important to consider how those gains interact with your other income.
Again, this is why we don't want to look at a capital gain, Roth conversion, IRA distribution, or RMD as a completely isolated event.
The different pieces can interact with each other.
Potentially.
There are certain life-changing events that can allow someone to request a reconsideration of an IRMAA determination.
Retirement can be one of those events when the higher income used to calculate the Medicare premium was caused by employment income that has since ended.
For example, imagine someone was still working two years ago and had a high W-2 income. They retire, their income drops substantially, and then Medicare uses that earlier high-income year to determine their IRMAA.
There may be an opportunity to request that Medicare reconsider the surcharge.
The rules and documentation requirements matter, so this is an area where it's important to work through the specific situation rather than assuming an appeal will automatically be granted.
RMD stands for Required Minimum Distribution.
RMD rules generally require owners of certain tax-deferred retirement accounts to begin taking distributions once they reach the applicable RMD age.
The rules have changed several times over the years, so the age at which RMDs begin depends on factors such as your birth year and the type of account.
The basic concept is simple:
You received a tax benefit when money went into the traditional retirement account, and that money was allowed to grow tax-deferred. At some point, the IRS requires distributions so that the money begins being taxed.
RMDs from traditional accounts are generally included in ordinary taxable income.
This is where RMD planning becomes particularly important.
Let's say you retire at 65 and have accumulated a large amount of money in traditional IRAs and other tax-deferred accounts.
You may only need $80,000 a year to support your lifestyle, but eventually the required distribution from those accounts could be substantially larger than what you actually need to spend.
You're still required to take the distribution.
If you don't need the money, you may end up reinvesting the excess in a taxable brokerage account.
Now you've moved money from a tax-deferred account into a taxable account, created additional taxable income, and potentially increased other costs tied to your income.
That can include higher taxes, additional taxation of Social Security, and potentially higher Medicare premiums through IRMAA.
This is one reason we want to look at RMDs before they begin, not after.
Potentially, yes.
RMDs generally increase your taxable income.
As your income increases, the amount of your Social Security benefits that is taxable can also increase, subject to the applicable Social Security taxation rules.
So a large RMD can have a bigger effect than simply the income tax on the RMD itself.
It can interact with several other parts of your retirement plan.
Potentially, yes.
Because RMDs generally increase your income, they can also affect the income Medicare uses to determine IRMAA.
Remember that two-year lookback.
A large RMD today can potentially contribute to higher Medicare premiums two years from now.
This is one of the reasons we want to project future RMDs rather than simply waiting until they arrive.
A Roth conversion is when you move money from a traditional tax-deferred retirement account into a Roth account.
The amount converted is generally included in your taxable income for that year.
For example, if you convert $50,000 from a traditional IRA to a Roth IRA, that $50,000 will generally be treated as taxable income.
You're essentially choosing to pay the tax now in exchange for moving that money into a Roth account where qualified future withdrawals can generally be tax-free.
Whether that tradeoff makes sense depends on your situation.
There isn't one universal answer.
One situation we often look at is the period between retirement and the beginning of significant RMDs.
Imagine someone retires at 62 but doesn't need to start taking Social Security immediately. They may also have several years before RMDs begin.
During that period, their taxable income could be substantially lower than it was while they were working—and potentially lower than it will be later in retirement.
That can create an opportunity to evaluate Roth conversions.
The question isn't simply:
"Can I convert money to a Roth?"
The better question is:
"What does converting this money today do to my overall retirement plan?"
We want to look at the current tax cost, future tax rates, future RMDs, Social Security, Medicare premiums, and the household's overall income needs.
Because flexibility matters.
If all of your retirement assets are in traditional IRAs and 401(k)s, most of your withdrawals will generally create ordinary taxable income.
If everything is in a Roth account, you have a different situation.
If you have a combination of taxable, tax-deferred, and Roth assets, you have more options.
In one year, you might take more from a traditional IRA.
In another year, you might realize capital gains from your brokerage account.
In another, you might use Roth money to avoid creating additional taxable income.
You may also decide to combine several of these sources.
The right withdrawal strategy depends on the household, but the underlying principle is simple:
Different account types give you different levers to pull.
Because many of the biggest retirement tax decisions are easier to plan for before they become mandatory.
Once RMDs begin, you don't get to choose whether to take the required distribution.
Once a large capital gain has already been realized, you can't go back and undo it.
Once a Roth conversion has been completed, the taxable income has already been created.
And once an IRMAA surcharge is being calculated from income two years ago, that income event is already in the past.
Planning earlier gives you more options.
For someone approaching retirement, we may want to project several years into the future and ask:
That is where tax planning becomes part of retirement income planning.
The years between retirement and the beginning of significant RMDs can sometimes create a unique planning opportunity.
While you're working, you may have substantial W-2 income.
Later in retirement, you may have Social Security, pensions, RMDs, and investment income.
But there can be a period in between where your taxable income is relatively low.
That period can potentially provide room for strategies such as Roth conversions or intentional capital-gain realization.
There isn't necessarily a single "right" strategy for everyone, but it's a period worth looking at because once the opportunity passes, you can't get those years back.
There are a lot of rules surrounding taxes in retirement, but the foundation is fairly simple.
Different types of income are taxed differently.
Different account types give you different tax characteristics.
Tax brackets are marginal.
Social Security taxation can be affected by your other income.
Medicare premiums can be affected by income from two years earlier.
RMDs can create taxable income whether or not you actually need the money.
And perhaps most importantly:
Tax planning is most useful when you do it before the tax event occurs.
The goal isn't simply to find a way to pay less tax this year. It's to understand how today's decisions can affect your taxes, Medicare premiums, Social Security, and retirement income over the years ahead.
That's why we consider tax planning an important part of comprehensive retirement income planning.
This content is provided for educational purposes only and is not individualized tax, legal, or investment advice. Tax laws, income thresholds, Medicare premiums, and retirement account rules can change. Individual circumstances vary, and strategies such as Roth conversions, capital-gain realization, and withdrawal sequencing should be evaluated based on your specific circumstances. Consult with your tax and financial professionals before implementing any strategy.
Beau Kemp, CFP®, RMA®
Founder, Financial Advisor
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