Minimizing taxes in retirement is just as important as it is during your working life – but since the source of your income has changed, you need to deploy different strategies. We’ll take a look at what assets are taxed and how a thoughtful plan that incorporates timing your withdrawals and paying attention to how you rebalance your portfolio can reduce them.
Pre-retirement Planning for Taxes on Social Security
Depending on your total income, up to 85% of your Social Security benefits may be subject to federal income tax. Once your provisional income crosses $34,000 for single filers or $44,000 for married couples, up to 85% of your benefits can be taxed.1 Provisional income is calculated by adding your Adjusted Gross Income (AGI), any nontaxable interest, and half of your Social Security benefits. By decreasing your AGI, such as through pre-tax retirement contributions or strategic withdrawals, you can potentially lower provisional income enough to reduce your tax liability.
Thinking about the order in which you tap retirement income can both increase income and reduce tax liability. Waiting until age 70 to claim social security will increase your benefit to the maximum amount, which will allow you take less from 401(k) or IRA accounts. In addition, if you still want to retire earlier, funding the years between retirement and accessing social security benefits with 401(k) or IRA withdrawals will reduce the value of those plans, so that once the required minimum distribution (RMD) kicks in at age 73, you’ll be taking the RMD from a smaller base, which will reduce income.
If you reach age 73 in 2026, your first RMD is for the 2026 tax year. While the IRS allows you to delay taking this first distribution until April 1, 2027, doing so means you must also take your second RMD (for the 2027 tax year) by December 31, 2027. Forcing two RMDs into a single tax year effectively doubles your required taxable distributions for 2027. This can artificially spike your income, push you into a higher marginal tax bracket, and potentially trigger steeper Medicare premium surcharges.
Another strategy is to convert 401(k) or IRA plans to a Roth, which allows for tax-free distributions. Both of these options require some advance planning. You want to start thinking about the income tax picture along with your pre-retirement planning so you can factor it into your decision-making process.
If You’re Already Retired
There are still steps you can take to reduce your taxes. Tax-loss harvesting, in which you realize losses by selling some positions that have declined in value, can create a tax offset to any capital gains you may have generated.
The Bottom Line
Setting up a solid plan for your retirement isn’t just about figuring out how much income you’ll need and what investments will create it for you. It’s also important to think through what your sources of income are, and in what order you’ll tap them, to make sure that you are maximizing income and minimizing income tax.
- Social Security Administration. Retirement Benefits. January 2026.