The Tax Bill Worth Seeing Early: Tax Planning Strategies for Retirement, and Why Your Highest-Tax Years May Be Ahead of You.

One of the more surprising conversations we have with newly retired clients is the one where we show them what their tax picture will look like at age 75.

Most people assume that retirement means a lower tax bill. They spent decades deferring income into traditional 401(k)s and IRAs, and they were told, correctly at the time, that they would be in a lower tax bracket later. But for clients with meaningful pre-tax savings, the math does not always work out that way. Required minimum distributions, Social Security benefits, and the compounding growth of deferred accounts can combine to produce a tax bill in retirement that is higher than anything they paid while working.

This piece is about tax planning for retirement: not in the abstract, but in the specific, year-by-year sense that actually changes outcomes. If you are approaching retirement or recently retired, the retirement tax strategies below are the ones we find ourselves returning to most often in our planning work.

Why tax planning in retirement is different from tax planning while working

When you are working, tax planning is relatively straightforward. You earn income. You take deductions. You try to defer where you can. The levers are limited, and most people use the same ones every year.

In retirement, the picture changes. You have multiple income sources, and you control when and how much you draw from each one. Social Security, pensions, traditional IRA withdrawals, Roth withdrawals, taxable brokerage accounts, and potentially rental income or part-time work. Each source is taxed differently. The order in which you draw from them, and the amounts, determine your tax bracket, your Medicare premiums, your capital gains rate, and whether your Social Security benefits are taxable.

This is what makes tax planning for retirees fundamentally different from tax planning for earners. The complexity is not in the tax code itself. It is in the number of decisions you make each year that affect the outcome. Most of those decisions, left on autopilot, may default to the most tax-inefficient path.

The three phases of retirement taxes

When we build a retirement income projection for clients, we typically see three distinct tax phases, and understanding them is the foundation of any good retirement tax planning strategy.

The first phase is the gap years, from retirement to the start of Social Security. For many clients, this is the lowest-income period of their adult life. If you retire at 62 and delay Social Security until 67 or 70, you may have several years where your only income is portfolio withdrawals. This is often the most valuable tax planning window you will ever have, and it is the one most often left unused.

The second phase is the middle years, from Social Security through the start of required minimum distributions at age 73, or 75 for those born in 1960 or later. Income rises, but it is still manageable. The tax planning decisions in this phase are about managing the interaction between Social Security benefits and other income, since up to eighty-five percent of Social Security can be taxable depending on your total income.

The third phase is the RMD years, from 73 or 75 onward. This is where the surprise lives. If you have substantial balances in traditional IRA and 401(k) accounts, your required minimum distributions alone can push you into a higher bracket than you were in during your peak earning years. Add Social Security on top of that, and the combined income can trigger Medicare surcharges, higher capital gains rates, and the net investment income tax.

Most people do not see the third phase coming. The ones who do plan for taxes in retirement years before it arrives are the ones with the most flexibility.

Retirement tax strategies that actually move the needle

The tax strategies for retirees that we use most often in our practice are not exotic. They are structural. They are about which dollars come out of which accounts, in which years, in which order.

The first is Roth conversions in the gap years. We have written about this separately, but it bears repeating in the context of tax planning. Converting portions of a traditional IRA to a Roth during the low-income years between retirement and Social Security may allow you to pay tax at a lower rate today than you might face later. The goal is to fill up the current bracket without triggering the next one. Done carefully over several years, this can meaningfully reduce the size of your future RMDs and the tax burden that comes with them. Conversions carry trade-offs as well: they cannot be undone, the tax is due in the year of the conversion, the added income can raise Medicare premiums or reduce health insurance subsidies for those not yet on Medicare, and future tax rates may differ from what is projected.

The second is strategic withdrawal sequencing. The conventional wisdom is to draw from taxable accounts first, then tax-deferred, then Roth. The reality is more nuanced. In some years, it makes sense to draw from a Roth to keep your income below a threshold that would trigger Medicare surcharges. In other years, it makes sense to draw from a taxable account to harvest losses or to manage capital gains. The right sequence depends on the year, and it changes as your income picture changes.

The third is managing the Social Security tax torpedo. There is an income range where every additional dollar of income causes an additional eighty-five cents of Social Security benefits to become taxable. In that range, the effective marginal tax rate can spike well above the statutory rate. Tax planning strategies for retirement that account for this interaction can meaningfully reduce the effective rate by timing withdrawals to stay below or jump above the torpedo zone rather than landing in the middle of it.

The fourth is charitable giving from the right accounts. If you are charitably inclined, qualified charitable distributions from a traditional IRA after age 70½ allow you to send money directly from the IRA to a charity, satisfying your RMD without increasing your taxable income. This is one of the most straightforward retirement planning tax strategies available, and it is consistently underused.

Why this is annual work, not a one-time decision

One thing we want to emphasize. Tax planning strategies for retirees are not something you set once and forget. The optimal strategy changes every year based on market performance, income changes, tax law changes, and life events. A year where the market is down may be the best year to do a large Roth conversion, because you can convert more shares at a lower value. A year where you have unusually high medical expenses may change the charitable giving calculus.

This is why we revisit the tax plan with clients every fall, before the year-end window closes. The difference between a plan that adjusts annually and one that runs on autopilot Compounds meaningfully over a long retirement.

How to plan for taxes in retirement: where to start

If you are approaching retirement and you have not yet mapped out your tax picture across the three phases, the single most valuable exercise you can do this year is to build that projection. Not a rough estimate. A year-by-year picture of expected income by source, expected tax brackets, and the decision points where the strategies above can make a difference.

The projection is what turns tax planning in retirement from an abstract concept into a set of specific, actionable decisions. Without it, you are guessing. With it, you are planning.

The projection that may pay for itself

Many clients who go through the three-phase tax projection for the first time tell us the same thing: they had no idea the numbers would look like that. The projection does not just reveal the strategies. It can make the next steps clearer.

We run this analysis as part of our fall planning cycle every year. If you have never seen your retirement tax picture mapped year by year, this fall is a good time to start. It is the kind of work that turns a complicated picture into a set of decisions you can actually make.

This material is for informational and educational purposes only and is not personalized investment, tax, or legal advice. The strategies discussed may not be appropriate for everyone, and results depend on each person’s circumstances. Tax laws are subject to change. Consult your own tax and legal advisors regarding your situation. Tilson Financial Group, Inc. is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.