Retirement brings the promise of relaxation and freedom, but it also introduces new financial challenges. Learning how different income sources are taxed and implementing strategies to reduce tax liabilities is important for a secure retirement. This guide explores key aspects of taxes in retirement.

By proactively addressing these areas, you can preserve more of your wealth and enjoy a financially comfortable retirement.

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Understand How Retirement Income Is Taxed

Retirement income comes from different sources, and the IRS taxes each differently. Knowing how these taxes in retirement work helps you plan better for the future.

The IRS has a helpful guide on taxes in retirement to help retirees plan accordingly.

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Social Security Benefits

If Social Security is your only income, you might not pay taxes on it, so that’s your tax-free retirement income. But if you have other income, up to 85% of your benefits could be taxable.

The IRS uses a formula called “combined income” to decide this. Combined income includes:

• your adjusted gross income
• any nontaxable interest
• part of your Social Security benefits

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Pensions

Most pensions are taxable. You’ll get a Form 1099-R each year that shows how much is taxable. If you contributed after-tax dollars, a portion might be tax-free.

The taxable portion depends on how much you contributed and how your employer handled the plan. It's important to know this breakdown so you can budget for the taxes owed on your pension income.

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401k and IRA Withdrawals

The IRS treats and taxes withdrawals from traditional 401ks and IRAs as ordinary income. These affect how much total tax you owe in a year. Taking large withdrawals in a single year can push you into a higher tax bracket. Spreading withdrawals over several years can help manage your tax rate and preserve your savings.

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Required Minimum Distributions (RMDs)

Once you turn 73, you must start withdrawing from traditional retirement accounts. These withdrawals are taxable and must meet IRS rules. The amount you must withdraw each year depends on your account balance and life expectancy. Failing to take your RMD on time can lead to penalties and extra taxes.

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Strategically Manage RMDs for Taxes

RMD and taxes go hand in hand. These strategies help manage taxes in retirement. Starting at age 73, the IRS requires annual withdrawals from traditional IRAs and 401ks. The IRS taxes these as income.

Without a plan, RMDs could push you into a higher tax bracket. That raises your tax bill and affects how much of your Social Security is taxable. Failing to withdraw the correct amount can also lead to a penalty.

There are a couple of things you can do to reduce the impact of RMDs on your taxes:

• Convert parts of your traditional IRA to a Roth IRA before age 73
• Donate directly from your IRA using Qualified Charitable Distributions (QCDs)

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Leverage Roth Accounts for Tax-Free Retirement Income

Roth IRAs and Roth 401ks are strong tools for managing retirement taxes. They offer tax-free retirement income if you meet two rules:

• Account must be at least five years old
• You must be 59½ or older to make qualified withdrawals

Roth accounts grow tax-free and have no RMDs. Converting traditional IRAs to Roth accounts before RMD age helps cut taxes in retirement over time. You gain control over your income and avoid triggering Medicare surcharges or higher tax brackets. While both are beneficial, you should also assess whether either make sense for your financial position.

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Take Advantage of Tax-Free Income Sources

There are ways to receive income in retirement without paying taxes. Here are a few ways to minimize taxes in retirement:

• Municipal bonds are often free from federal and sometimes state income tax
• HSAs offer tax-deductible contributions, tax-free growth, and tax-free medical withdrawals
• Roth accounts provide tax-free withdrawals under certain conditions
• Life insurance withdrawals up to your basis can be tax-free
• Certain annuities, structured correctly, some offer tax-free payouts

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Be Smart with Investment Withdrawals

Withdraw funds in a way that controls taxes and preserves your assets. This sequence of events would make sense for most:

• Use taxable accounts first
• Next, draw from tax-deferred accounts
• Leave tax-free accounts for last

This order helps reduce taxable income early in retirement and allows tax-advantaged accounts to keep growing. Monitor how your income affects Medicare premiums and how much of your Social Security is taxable.

To manage capital gains tax in retirement, consider tax loss harvesting:

• Selling losing investments to offset gains
• Holding investments longer for favorable tax rates

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Use Charitable Contributions to Reduce Tax Burden

Charitable giving helps reduce taxable income, even if you don’t itemize deductions.

Qualified Charitable Distributions (QCDs) let you donate directly from your IRA. If you're 70½ or older, you can give up to $100,000 per year tax-free. This counts toward your RMD and lowers taxable income.

Other ways to give strategically to reduce taxes in retirement:

• Donor-Advised Funds bunch donations in one year for tax savings
• Bunching gifts to give more in one year, less in the next, to qualify for itemizing

These moves can minimize taxes in retirement.

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Relocate for Lower State Taxes

Some states help retirees pay less in taxes. A few states, like Florida and Texas, have no income tax. Others don’t tax retirement income at all.

Think beyond taxes, though. Also consider:

• General cost of living
• Healthcare quality and access
• How close you are to family and friends

Relocating can stretch your retirement budget. AARP breaks down the best states for retirement tax savings.

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Work with a Financial Advisor or Tax Professional

Planning your retirement taxes on your own is tough. A financial advisor helps you:

• Coordinate withdrawals, investments, and taxes
• Time Roth conversions and manage RMDs
• Create a plan that fits your goals and lifestyle

A tax professional ensures you're taking full advantage of deductions, credits, and strategies. Personalized advice keeps your retirement plan strong and tax-smart.

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Focus on the Big Picture

Managing taxes in retirement takes planning, but the rewards are clear. You’ll have more income, more control, and more peace of mind.

Seeing the whole picture is what makes the difference. A smart, flexible plan protects your wealth and supports your lifestyle. Get a free portfolio review to see where you stand and how you can pay less in retirement taxes.

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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.

A Qualified Charitable Distribution ("QCD") is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met. Some charities may not qualify for QCDs.  First consult your tax advisor or the charity  for its applicability.

Tax-loss harvesting is a strategy that attempts to lower one’s federal taxes during a current tax year by choosing to sell a tradable security at a loss. It is only appropriate for certain taxpayers in certain scenarios.  Please first consult  with a qualified tax advisor to be sure this strategy is appropriate for your circumstances

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.