Why Tax Planning Still Matters in Retirement

Important Disclosure: The information in this blog as of July 2025, based on current IRS, SSA, and CMS rules. Tax laws, income thresholds, and Medicare premiums are subject to change, and future legislation (such as the scheduled 2026 estate tax changes) may alter these strategies. Always review annually and consult a qualified tax professional before making decisions.

Retirement isn’t the time to stop thinking about taxes. The way you withdraw money, handle required minimum distributions (RMDs), and give to family or charity can have a major impact on how long your savings last.

And remember: healthcare will likely be one of your largest retirement expenses. Medicare premiums, long-term care, and out-of-pocket costs can add up to hundreds of thousands of dollars over a lifetime. Tax-smart strategies can free up more money for those medical costs, protect your income, and reduce stress later in life.

Even if your family is well under the federal estate tax exemption ($13.61 million per person in 2024; scheduled to drop to ~$6–7 million in 2026 unless Congress acts), careful planning can:

✔️ Reduce how much of your Social Security and RMDs are taxed
✔️ Lower Medicare premiums by managing income
✔️ Keep more invested and compounding for future years
✔️ Leave more to family by reducing taxable events

1. Required Minimum Distributions (RMDs): What They Are & How to Minimize Taxes

What Are RMDs?

Once you turn 73 (or 75 if born in 1960 or later), the IRS forces you to withdraw a minimum amount from Traditional IRAs, 401(k)s, and other tax-deferred accounts each year. These withdrawals are taxed as ordinary income, which can:

• Push you into higher tax brackets

• Increase how much of your Social Security is taxed

• Trigger Medicare IRMAA surcharges (higher premiums)

✅ Example: RMD on a $500,000 IRA

Let’s say you turn 73 in 2025 with a Traditional IRA worth $500,000 as of December 31, 2024.

The IRS uses a Uniform Lifetime Table to determine your RMD factor. At age 73, the divisor is 26.5.

Calculation:

$500,000÷26.5 = $18,868

✅ Your Required Minimum Distribution: $18,868

• This $18,868 will be taxed as ordinary income in 2025.

• You can have taxes withheld (e.g., 20–30%) or set money aside to cover the bill.

• The remaining after-tax amount can be reinvested in a taxable account to continue compounding.

Pro Tip: As you age, the divisor decreases (meaning the percentage you must withdraw increases). At age 80, for example, the divisor is 18.7, which means a 5.3% withdrawal rate.

✅ How to Minimize the Tax Hit

• Only Take the Required Amount – Pull the RMD, but don’t withdraw extra unless you need it.

• Save for Taxes – Set aside 20–30% in a savings account or have taxes withheld so you aren’t surprised at filing time.

• Keep the Remainder Growing – Reinvest the after-tax amount into a taxable brokerage account using tax-efficient ETFs, municipal bonds, or dividend stocks.

• Use Qualified Charitable Distributions (QCDs) – After age 70½, send part or all of your RMD directly to a charity, up to $100,000 per person per year (indexed for inflation starting 2024 but still $100k for 2025). This counts toward your RMD but isn’t added to taxable income.

2. Tax-Efficient Withdrawal Order

The order you pull money from accounts matters for long-term taxes.

General Guideline (But Customize):

• Taxable Accounts First – Use brokerage accounts with capital gains treatment first. Long-term capital gains may be taxed at 0–15% (or 0% if income is below ~$94,050 for married couples in 2024; 2025 brackets may rise slightly).

• Tax-Deferred Accounts Next – Use Traditional IRAs/401(k)s strategically to avoid large RMDs later.

• Roth Accounts Last – Let Roth IRAs grow as long as possible; withdrawals are tax-free and great for heirs.

3. Roth Conversions (Before and After RMDs)

Before RMD Age: The Best Window

The “golden window” for conversions is early retirement (ages 60–72), before Social Security and RMDs begin. Converting in the 12% or 22% bracket locks in today’s rates and shrinks future RMDs.

✅ Important: You’ll need sufficient funds outside your retirement accounts to pay the tax bill on the conversion. Using retirement assets themselves to cover taxes reduces the amount moved into the Roth and limits future tax-free growth.

You can elect to have taxes withheld at the time of distribution, but doing so reduces the converted amount and may limit long-term Roth growth — which is why paying taxes from non-retirement funds is generally preferred.

After RMD Age: Still Useful

• You must take your RMD first (it can’t be converted).

• You can convert additional amounts after taking the RMD if you stay in a manageable tax bracket.

• Paying taxes on the conversion from after-tax savings or RMD money avoids reducing Roth growth.

• Pro Tip: Consider IRMAA — conversions increase MAGI and may push Medicare premiums higher.

4. Qualified Charitable Distributions (QCDs): A Hidden Tax Gem

For retirees who are 70½ or older, QCDs are one of the most overlooked — and powerful — tax tools.

✅ Why QCDs Beat Regular Charitable Giving

• Avoids Adding Income – Unlike taking an RMD and then donating cash, a QCD never hits your taxable income, which helps keep you below IRMAA income thresholds.

• Counts Toward RMDs – Every dollar donated through a QCD reduces how much you must withdraw for your RMD.

• No Itemizing Needed – Even if you take the standard deduction, you get the full tax benefit.

✅ Key Rules & Example

• Limit: Up to $100,000 per person, per year (indexed for inflation starting 2024).

• Eligible Accounts: Traditional IRAs (not 401(k)s; you’d need to roll funds to an IRA first).

• Direct Transfer Required: The check must go directly from your IRA to the charity. QCDs cannot fund donor-advised funds (DAFs).

Example:
You have a $30,000 RMD due. You donate $10,000 as a QCD. That $10,000:

• Satisfies $10,000 of your RMD obligation

• Isn’t reported as taxable income, lowering your adjusted gross income and possibly saving you on Medicare premiums and Social Security taxes

5. Manage Social Security Taxation

Up to 85% of Social Security can be taxable if your “provisional income” is too high.

Strategies:

• If possible, delay Social Security to 70 – Live off IRAs first to reduce future RMDs and get a higher benefit later.

• Spend Taxable or Roth Accounts First – Avoid pulling heavily from IRAs once benefits start.

• Do Partial Roth Conversions Before Claiming – Reduces future taxable income.

6. Harvest Capital Gains (and Losses) Intentionally

• ✅ 0% Capital Gains Opportunity – If your taxable income is below ~$94,050 for married couples filing jointly or ~$47,025 for single filers (2024; watch for 2025 updates), you can sell appreciated investments tax-free.

• Tax-Loss Harvesting – Use losses in taxable accounts to offset gains, lowering taxable income.

7. Medicare IRMAA Management: Avoiding Expensive Surprises

The Income-Related Monthly Adjustment Amount (IRMAA) can add thousands of dollars to Medicare premiums if your modified adjusted gross income (MAGI) crosses certain thresholds.

✅ Why IRMAA Matters

• Even $1 over the income threshold pushes you into the next premium tier.

• In 2025, if MAGI exceeds $206,000 for married couples ($103,000 single), Medicare Part B premiums can jump from $174/month to $244/month per person — an extra $1,680 annually for a couple.

✅ Strategies to Stay Below IRMAA Cliffs

• Time Roth Conversions Carefully – Spread conversions over several years.

• Use QCDs for Charitable Giving – Every dollar donated through a QCD reduces MAGI.

• Control Capital Gains & RMD Timing – Harvest gains in years when you’re comfortably below a threshold.

• Bunch Medical Deductions or DAF Contributions – If you can’t avoid crossing a tier, at least offset the tax with deductions.

✅ Pro Tip: Work with an advisor to project MAGI two years ahead — IRMAA is based on your tax return from two years prior.

8. Annual Tax-Free Gifting

Even if you’re below the estate tax exemption, annual gifting shifts assets efficiently:

• $18,000 per person (2024; may increase to $19,000 in 2025) – Double for couples ($36,000).

• 529 College Plans – Take advantage of the 5‑year front-load option: in 2024, you can contribute up to $90,000 per beneficiary (or $180,000 for couples) in a single lump-sum gift. For gift-tax purposes, the IRS treats it as if you made $18,000 per year over five years (or $36,000 per year if you and your spouse elect to split gifts).

9. Step-Up in Basis Planning

Highly appreciated assets in taxable accounts receive a step-up in basis at death. Holding onto these can erase decades of unrealized gains for heirs.

10. Donor-Advised Fund (DAF) for Larger Gifts

For bigger charitable goals:

• Make a large one-time gift in a high-income year (lump charitable deductions).

• Distribute grants to charities over time.

• Reminder: QCDs cannot be used to fund DAFs.

11. Consider State Taxes

Some states tax retirement income or Social Security differently. Relocating or spending part of the year in a low-tax state can save thousands.

📊 Annual Retirement Tax Strategy Checklist

FAQs

1. Can I still do a Roth conversion after RMDs start?
Yes, but you must take your RMD first. Only amounts above your RMD can be converted.

2. Should I reinvest RMDs in a brokerage account?
Absolutely. After paying taxes, keeping the remainder invested in a taxable brokerage account can help keep your assets growing and working for you in retirement.

3. Are QCDs better than donating cash?
Yes. Cash donations require itemizing; QCDs directly reduce taxable income, which also helps control Medicare premiums.

Final Thoughts: No One-Size-Fits-All Solution

Every retiree’s tax picture is different. Your income sources, healthcare needs, charitable goals, and family situation all change what’s “optimal.” There’s no perfect, one-size-fits-all strategy — but small, proactive moves can add up to tens of thousands of dollars saved over a lifetime.

Healthcare, in particular, deserves special attention. With long-term care and out-of-pocket medical costs potentially reaching $250,000–$300,000 over retirement, every dollar you save in taxes is a dollar that can be redirected to protecting your health and independence.

Important Disclaimer

This blog is for educational purposes only and does not constitute personalized tax or financial advice. Consult a qualified professional before making financial decisions.