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THE TOUGH PART COMES last.
Saving for retirement is pretty straightforward: You sock away as much as you can, favor stock funds, diversify broadly, keep investment costs low and make the most of tax-advantaged retirement accounts. By contrast, paying for retirement can involve mind-boggling complexity—and a big reason is the tax code.
The good news: Once you quit the workforce, you have a fair amount of control over your annual tax bill, especially if you aren’t yet taking required minimum distributions (RMDs) from your traditional retirement accounts, where all withdrawals are dunned as ordinary income. But how should you use that flexibility?
You might aim for a year with low taxable income, perhaps covering living costs with cash from your taxable account or by making tax-free Roth withdrawals. That way, you could potentially take advantage of the tax code’s various goodies for lower-income taxpayers.
Alternatively, you might go in the other direction, making large Roth conversions or pulling more out of traditional retirement accounts than you need for that year’s spending. Both strategies would drive up your taxable income. The goal: Shrink your traditional retirement accounts before RMDs kick in during your 70s and potentially push you into a higher income-tax bracket.
Intrigued? Here are some key 2025 tax thresholds.
Health-insurance premium tax credit. Did you retire early, and need to buy health insurance because you aren’t yet age 65 and eligible for Medicare? If you purchase coverage through your state or the federal government’s health-insurance exchange, you could receive a tax credit if your income, based on family size, is four times the federal poverty level or less.
The lower your income, the bigger the potential credit. For instance, for a couple, two times the federal poverty level in 2025 would be a modified adjusted gross income of $40,880. At that income level, the couple would receive a tax credit that covers much of their health-insurance costs.
Zero capital gains. Got winning investments in your taxable account that you’d like to sell? This is another reason to hold down your taxable income. In 2025, if you can keep your total income below $63,350 if you’re single or $126,700 if you’re married filing jointly, you could sell winning investments and pay nothing in capital-gains taxes. Your realized gains would count toward the income total. These figures assume you take the typical standard deduction. That standard deduction can be slightly higher if you’re blind or age 65 or older.
Managing brackets. Many retirees strive to avoid big income years, which could mean paying tax at a much higher rate. Instead, they try to manage their taxable income so they stay within the same income-tax bracket year after year.
Let’s say you want to pay tax at a marginal rate no higher than 12% in 2025—and avoid the next bracket, where your marginal rate would be 22%. In 2025, you should aim for total income of no more than $63,475 if you’re single or $126,950 if you’re married filing jointly. Again, these income totals assume you take the typical standard deduction.
What if you aren’t quite at the top of your target bracket? You might fill up the rest of the tax bracket by making a Roth conversion. Alternatively, you could use that as an opportunity to sell winning investments in your taxable account at a 0% capital-gains rate.
Social Security earnings test. If you’re aiming to keep your tax bill low in your 60s, so you can take advantage of the health-insurance premium tax credit or the 0% capital-gains rate, you’ll likely also want to delay claiming Social Security. Your Social Security benefits will reduce your premium tax credit, even if those benefits aren’t taxed. Similarly, a heap of municipal-bond interest could also hurt your eligibility for the tax credit.
What if you’re continuing to earn money, perhaps by working part-time during your initial retirement years? This is another reason to postpone Social Security. If you claim benefits before your full Social Security retirement age of 66 or 67 and continue to work, you could lose $1 of benefits for every $2 you earn above $23,400 in 2025. The amount you can earn without being penalized is higher in the year you reach your full retirement age.
Once you reach your full retirement age, your monthly benefit is adjusted upward to compensate for the benefits you earlier missed. Still, those with substantial earnings will likely want to avoid the hassles of the Social Security earnings test—by delaying benefits until they stop working.
Income-related monthly adjustment amount. Otherwise known as IRMAA, this is the premium surcharge for Medicare Part B and Part D that hits those with higher incomes. The surcharge, while not huge as a percent of total income, is disliked by many folks, in part because it’s a so-called cliff penalty, meaning $1 over the income threshold and you’re dunned for the entire surcharge for that IRMAA bracket.
The surcharge hinges on the total income reported on your tax return, plus municipal-bond interest, from two years earlier. For instance, 2025’s surcharges are driven by your 2023 tax return. If your 2023 income crossed the first IRMAA threshold—$106,000 for single individuals and $212,000 for married couples filing jointly—you’d pay an extra $73.60 per person per month for Part B in 2025 and an extra $13.70 for Part D.
Keep three key notions in mind. First, IRMAA becomes an issue once you turn age 63, because your income that year will affect your Medicare premiums at age 65. Second, it’s possible to appeal IRMAA surcharges if you’ve had a life-changing event, such as leaving the workforce.
Third, some retirees figure it’s still worth making big Roth conversions and paying the IRMAA surcharge, because the long-term tax savings offered by the Roth are so valuable. Even so, pay attention to the IRMAA thresholds, so you don’t sneak into the next IRMAA bracket and trigger the cliff penalty.
Qualified charitable distributions. Looking to give to charity and, in the process, also save on taxes? In 2025, you’d typically need to have donations and other itemized deductions that are greater than the standard deduction, which is $15,000 for individuals and $30,000 for couples filing jointly. That way, you can itemize your deductions and get some tax savings in return for your generosity.
But if you’re age 70½ or older, consider this alternative: Take the standard deduction while also making charitable contributions that are effectively tax-deductible—by donating directly from your IRA. What do I mean by “effectively” tax-deductible? Ordinarily, money coming out of a traditional IRA would be hit with income taxes, but that isn’t the case with qualified charitable distributions, or QCDs.
The annual amount you can give directly to charity from your IRA climbs from $105,000 in 2024 to $108,000 in 2025. If you’re age 73 or older and taking required minimum distributions, your QCDs count toward that year’s RMD. That can be a huge benefit. One example: You might use QCDs to meet part of that year’s RMD, thereby avoiding the next IRMAA bracket.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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Dang… I checked line 11 of my last years 1040 and that figure is just barely, less than 1000 dollars over the second level of earnings for IRMAA calculations. So, I’ll be ‘re-contributing’ $124.20 more per month from the S.S. deposit in the next year.
I sure hope it is put to good use!