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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!
Great article – thank you!
Comment re Roth conversion timing. I’ve been doing it for last few years, just trying to stay within the tax bracket we’d be in otherwise, and so far so good. However, I have been lazy in delaying the conversion until the end of the year (December). In retrospect, I should be doing them earlier in the year. 2024 is a great example: had I done the conversion in January I would have the 15% or more the market has gone up as a tax free gain. By delaying until December I am paying tax on the gain, essentially.
By delaying until December you can be sure that your conversion isn’t going to bump you into a higher marginal tax rate.
And if you really want to talk about a taxing retirement, now imagine that of a survivor, taxed at significantly higher levels than married filing jointly.
Speaking of QCD’s, another way of reducing the IRA balance exposed to RMDs (and therefore taxes) is to buy a QLAC (qualified longevity annuity contract). This allows you to use up to $200,000 of IRA funds to purchase a deferred annuity contract inside your IRA, and set the annuity payment start date to as late as age 85. In the mean time your RMDs are only calculated on the remaining IRA balance. There are a few more details to understand before diving into one of these, but for some they could make sense. There are various brokers for them on the web – google around and you’ll find them. (I like stantheannuityman.com – I’ve bought MYGAs from him, but not a QLAC).
The column needs an update of this sentence (an update that Jonathan OK’d, by the way): “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 past few years have seen legislative enhancements of Affordable Care Act eligibility and coverage. The premium tax credit’s eligibility cutoff (aka, the “cliff”) had been 400% of the federal poverty level for years; for a family of three in 2024, that would be $103,280.
However, that cliff was temporarily eliminated in 2021 to expand eligibility to higher-income households. In my two-person household, if we have an adjusted gross income of $100,000 in 2025, I would get a tax credit of $328 a month. Without a tax credit, my 2024 high-deductible/HSA-eligible plan would have a full premium of just over $1,000 a month in 2025.
As AGI rises, the 2025 tax credit for my household shows a glide path down until it zeroes out at an AGI above $146,000. (Your numbers are likely to vary.)
The expansion of eligibility and the enhancements of subsidies are to expire at the end of 2025 — if the new powers-to-be in D.C. don’t change anything during the year.
Great article! I completed our final Roth conversion recently to take advantage of the 12% bracket. My goal is to reduce the taxability of our Social Security income for us as a couple as well as for a surviving spouse who will likely end up in a higher tax bracket.
All these strategies demonstrate one thing clearly. The tax code is too darn complicated. Why should people have to go through all this and in the end possibly still miss something?
There is no hope for me. I don’t have any Roth accounts, I have municipal bond funds, I will never avoid IRMAA or lower the bracket, but thanks to a past HD article, I do use QCDs
And I hope to avoid any possibility of using medical cost deductions above the standard deduction.
Using all these strategies, which is perfectly reasonable to avoid taxes, often makes me wonder why we frequently complain about the super wealthy using the tax code to do the same thing – avoid taxes.
‘’How much is all this collective tax avoidance adding to federal deficits – he said in jest😎
This is all great advice for the current tax code and will likely remain through 2025, but I think we should expect new rules for 2026 and beyond. But if the new administration moves as fast on taxes as expected in other parts of gov’t, even 2025 could be different. Regardless, new rules are coming and speculating how they will be to our benefit or detriment is complete conjecture at this point.
Excellent article!
One note on Roth conversions if you are collecting SS. You may need to do some ‘what ifs’ to determine the amount of the Roth conversion that’s best for your tax situation.
“If you or your spouse are currently drawing Social Security, it’s important to be aware that a Roth conversion could increase the taxability of your Social Security. The taxation of your Social Security benefits is determined by the amount of your provisional income. A Roth conversion adds to your provisional income, which in turn can increase the taxable amount of your Social Security.”
Example: Ryan and Bri just retired at age 62, have no pensions or deferred compensation income, and both decided to start drawing Social Security. Since they are in a low federal tax bracket, they consider doing a $100,000 Roth conversion. However, completing the $100,000 Roth conversion inadvertently increases the taxability of their Social Security from 0% to 85%, meaning they will now owe income tax on 85% of their Social Security.
Sounds like kitces.com.
quoted is from SmartAsset, but kitces.com is my usual ‘go to’.
“I do not whine for lower taxes. I do not petition for more tax breaks. I ask only for instructions an ordinary Ph.D. in economics can follow.”
This quote from Alan Blinder Ph.D. is what I think of whenever we have a good discussion of taxes. I’ve been using last year’s TurboTax to estimate the impacts mentioned above but I’m thinking about switching to a spreadsheet. TurboTax is a little cumbersome for these calculations.
Does anyone have a program or system that would work well for all the alternatives that Jonathan has described?
Thank you for the link! That will be handy.
Do you know about https://sites.google.com/view/incometaxspreadsheet/home
I’ve used them for a number of years for my taxes and I always use them for estimating.
(I recently switched to OLT for my taxes).
I also have an additional sheet i add to the Excel sheet above that calculates the maximum amounts to contribute, both employee and employer portions for my solo 401k for my wife and I, as well as keeps track of the HSA, IRA, college savings, and also auto-inputs into the W2 page, which I’ve updated to auto calculate as and Medicare taxes, etc.
President Truman was attributed to have asked to be sent a one-armed economist, having tired of exponents of the dismal science proclaiming “On the one hand, this” and “On the other hand, that”.
Given the scheduled expiration of the Tax Cuts and Jobs Act after tax year 2025 and likely upcoming federal tax law changes I plan to keep my tax and investment planning options as flexible as possible and I have doubts that any of the many good tax planning software packages that are currently available will have much value for tax years after 2025.
Thank you, Jonathan, for another great article.
I’d like to add another tax to your list: the Net Investment Income Tax (NIIT). This tax, used to help fund the Affordable Care Act (ACA), applies to investment income exceeding $250,000 annually (this threshold is not adjusted for inflation).
This means that capital gains, dividends, interest, and other investment income above that amount are subject to an additional 3.5% tax. This can significantly impact the after-tax income of many retirees who rely on investment income.
To clarify, NIIT doesn’t apply to investment income over $250,000 (for married filing jointly), but rather to all taxable investment income once Modified Adjusted Gross Income exceeds $250,000.
I said to clarify, not to simplify. 🙂
In case I didn’t get that exactly right…
https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
RMD’s and Roth conversions would be included in the $250000 threshold. However, the NIIT calculation would not include these items. Clear as mud!
Jonathan I had a couple thoughts as I read this. A client’s banker promised no tax liability when she sold him some muni bonds. The bonds, while tax free, still caused his tax on Social Security income to rise. The banker insisted I made a mistake on the tax return, which of course I did not. My experience is that many financial advisors working in banks are not proficient.
The other item is a warning for married taxpayers to be very careful with the married filing separate filing status. The IRMAA cliff for that status kicks in at 106k, increasing the Medicare premium to $589.90. In comparison the premium for a single taxpayer at that income is only $263.60. The professional tax program that I used (Drake) provided analysis for IRMAA, I cannot say the same for other software that I have used.
Thank you, Dan, for mentioning the MFJ v. MFS subject. In a post earlier this year, Mr. Bond mentioned using the “What-If” feature built into TurboTax versus my way of fudging the data using the previous years software as an estimating tool for the current year (for federal tax only). Very helpful (Thanks Jeff!). While using this feature, I was shocked when I ran a scenario of filing MFS, using 2024 limits that indicated a substantial “savings” in taxes versus MFJ. I had been assuming that TT (Premium) would have at least suggested the best way to file to minimize taxes. I went into a bit of a panic mode that I had inadvertently missed out on substantial tax savings over the years and reran the scenarios over and over. (Note: my understanding is that you cannot amend previous years to switch from MFJ to MFS, but you can amend in the other direction). However, as you point out, it appears that it does not take IRMAA into account. With the bulk of our yearly income coming from one spouse, the savings shown would be eaten up by much higher premiums.
I did reach out to the folks at TT to try to verify what the program does or does not include in using the What-If feature or even during regular filing with any tax year. Regrettably, I was not able to gain much insight from the CS person. I have purchased the 2024 package (Costco online) and will load in my data-to-date to see how much room I have left before certain thresholds are reached and to run three separate filings to see how the numbers shake out overall between MJF and MFS.
Any fellow TurboTax users out there that can share any insight here would be appreciated.
The Finance Buff has helpful estimates for those looking to target 2024 income for 2026 IRMAA.
Not likely the IRMAA surcharge will be added to TT because it is not paid to the IRS the year you do your taxes. Rather it is paid to CMS nearly 2 years later.
Pro software such as from Drake does the calculations for federal, state, and IRMAA with a single keystroke. TT could do this as well and it would be tremendous addition to the product.
Great overview, Jonathan. I will reach 70-1/2 in 2025 so I plan to use QCD. In recent years, since the standard deductible was increased, we have been doubling up our donations to make it worth itemizing every other year. For example in 2023, we made our usual donations for 2023 in Jan. and those for 2024 in Dec. 2023. We then itemized in 2023. In 2024 we will take the standard deduction. The QCD will, I think and hope, simply our giving while retaining a tax advantage.
Thanks Jonathan. This is an excellent summary of some complex, and interrelated, topics. Two other thoughts – if you or a loved one has significant medical expenses, it may be that you can use those expenses as deductions to reduce or eliminate your federal tax bill. This happened with my mother-in-law when she was diagnosed with dementia and lived in an expensive facility. Because of her diagnosis, much of the costs of care were qualified medical deductions.
Second, don’t forget your state taxes. States taxes vary widely for retirees. My adopted state of NJ has some steep cliffs regarding the taxability of pensions.
An excellent review Jonathan. A year or two before I retired at 62 I began researching all of these factors as I realized they were critical to get my head around. I was able to pay no more than $16/month premiums for both my wife and I with a ACA bronze plan (we are both healthy) due to the subsidies. That was the first year before I was fully versed in how to play the game. From there on we paid nothing.
Now that we are both retired and over 65 I’m playing the Roth conversion game until I turn 73, staying within the 12% tax bracket. That tax level is important because after exceeding the $126,950 12% taxable income level for married filing jointly with both 65+ years old the rate jumps to 22%.
For those of you who decide to follow Jonathan’s outline you have no idea how much research time he just saved you (although for a retirement research geek like me it was fun).
Hi David, looking in the rear view mirror are you pleased with your decision to delay the Roth conversions while you maximized ACA credits? I am at the decision point now and many feel that the tax credits aren’t worth it, and to just convert early as in the long run it will pay off. What do you think?
I am fine with my decision. We paid next to nothing in premiums, but unfortunately I had an ER visit that cost 5 K in out of pocket cost, but not bad for 3 years of both of us on ACA, and my wife for one additional year.
We are now doing nearly 100K of conversions the next two years before potential increases in tax rates in ‘26 (less likely now as a result of the election). If I had performed the same conversions during years of ACA I doubt I would have received any subsidies, would still have had the 5K ER expense and paid thousands more in premiums.
That’s how I view it. Could be wrong, could be right, but at this point to quote Bill Belichick, “It is what it is.”
Just be aware with the incoming administration’s enmity towards the ACA, and its previous irrational behavior I don’t know how you can plan on anything with ACA existing going forward.
Good luck!
If you have any qualified dividends or capital gains, and you exceed the 0% bracket for those, you will actually have a marginal rate of 27% on your Roth conversion. This is due to the extra income in the 12% tax bracket plus 15% on the qualified dividends and capital gains that get “pushed up” by the extra income.
Hey Randy,
Thanks for the input. Unfortunately I only have about a 21K long term capital loss this year. In the forum section you can read, “HELP, I want my money back” post.
And folks on Social Security may find marginal rates on their IRA withdrawals of 22.2%, 12% & 27% before getting back to the normal 22% bracket.