Tax Planning for Retirees: Strategies for Optimizing Your Income

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Tax planning is a critical aspect of financial management, especially for those entering retirement. It’s about understanding and applying strategies to help minimize tax liabilities and maximize income throughout your golden years. As a retiree, the decisions you make regarding your income can significantly impact your financial health. But what does tax planning really mean for someone who is no longer in the workforce?

It involves a strategic approach to managing your assets and income streams in a way that aligns with your retirement lifestyle and long-term financial goals. An essential part of this strategy is deciding when to accelerate or defer income. This decision can influence which tax bracket you’re in, eligibility for certain benefits, and overall financial well-being. Let’s delve into the intricacies of tax planning for retirees—highlighting key strategies for when to accelerate and when to defer income—to help ensure that your retirement years are as financially comfortable as possible.

Understanding Tax Planning

Tax planning for retirees is fundamentally about managing how much tax you pay and when you pay it. During your working years, tax planning often revolves around reducing taxable income through deductions and credits. However, in retirement, the focus shifts to strategically timing the withdrawal of funds from various income sources. Illustrated in the visual below is a hypothetical income over time and when you would ideally defer income vs. accelerating it.


All content is for informational purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results.

The first step in effective tax planning is understanding your taxable income sources in retirement. These can include Social Security benefits, pensions, retirement account withdrawals, investment income, and any part-time work. Each of these sources is taxed differently, and their timing can significantly impact your annual tax bill.

For instance, traditional IRAs and 401(k)s are tax-deferred accounts. Withdrawals from these accounts are taxed as ordinary income. In contrast, Roth IRAs offer tax-free qualified withdrawals, as taxes are paid upfront on contributions. Understanding the nuances of these accounts is crucial in tax planning.

When it comes to Social Security benefits, up to 85% of your benefits can be taxable depending on your overall combined income. Therefore, if you have other significant income sources, you might want to consider strategies to minimize the tax impact on your Social Security benefits.

When to Accelerate Income

Accelerating income in retirement might sound counterintuitive, but there are scenarios where it can be advantageous. One such scenario is if you anticipate being in a higher tax bracket in future years. This might be due to changes in tax legislation, increased income from required minimum distributions (RMDs) from retirement accounts, or other factors.

In such cases, it might make sense to accelerate income into the current year. For example, converting a portion of a traditional IRA to a Roth IRA can be a smart move. While this increases your taxable income in the year of the conversion, it allows for tax-free growth and withdrawals in the future.

Another strategy is to realize capital gains in years when your income is lower. This might involve selling off investments that have appreciated in value. By doing this in a lower-income year, you might pay less in capital gains taxes compared to a year when your income is higher.

When to Defer Income

Conversely, there are times when deferring income can be beneficial. This is particularly true in years when your income is higher, which could push you into a higher tax bracket. By deferring income to a future year, you might be able to keep yourself in a lower tax bracket, reducing your overall tax liability.

One way to defer income is by carefully planning your retirement account withdrawals. If you have a mix of Roth and traditional accounts, consider withdrawing from Roth accounts in years when your other income is high. Since Roth withdrawals are tax-free, they won’t add to your taxable income.

Another strategy is to delay Social Security benefits. While you can start receiving benefits at age 62, delaying them until age 70 can significantly increase the monthly benefit amount. Additionally, if you have other income sources, delaying Social Security can help manage your tax bracket more effectively.

Another method for delaying income before you retire is using a deferred compensation plan. This could be a 401k, but for individuals who have very high earnings toward the end of their careers, they may consider using a deferred compensation plan that allows them to defer income now—ideally when they are in a higher tax bracket—to a point in the future, ideally when they are in a lower tax bracket. These plans are not offered by all employers and are not offered to all employees, but they can be a great tax tool to lower your lifetime tax bill. They are typically more rigid than a 401k in that you often will elect up front when you’d like to receive your deferred compensation contributions. Most commonly, you would elect it as a single lump sum payment in the future, or a payment over 5 years.

Personalizing Your Tax Strategy

Every individual’s financial situation is unique, especially in retirement. Therefore, a one-size-fits-all approach doesn’t work in tax planning. It’s essential to consult with a financial planner who can tailor a tax strategy to your specific circumstances, helping ensure you maximize your income and minimize tax liabilities in your retirement years. We work with a team of experienced, credentialed tax professionals to help ensure that our clients’ plans are fully optimized to help them keep more of their earnings and grow their wealth for the future. Contact us to learn more.


Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona. Sonmore Financial LLC does not offer tax planning or legal services but may provide references to tax services or legal providers. Sonmore Financial LLC may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.


Matthew Benson, CFP®

Owner / Certified Financial Planner™

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Important Disclosure

Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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