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A POPULAR JOKE about retirement is that it can be hard work. That’s because financial planning is like a jigsaw puzzle, and retirement often means rearranging the pieces.
In the past, I’ve discussed two key pieces of that puzzle: how to determine a sustainable portfolio withdrawal rate and how to decide on an effective asset allocation. But there’s one more piece of the puzzle to contend with: taxes. Especially if you’re planning to retire on the earlier side, it’s important to have a tax plan.
When it comes to tax planning for retirement, there’s one key principle I see as most important, and that’s the idea that in retirement, the goal is to minimize your total lifetime tax bill. That’s important because a fundamental shift occurs the day that retirement arrives: In contrast to our working years, when taxes are, to a large degree, out of our control, in retirement, taxes are much more within our control. By choosing which investments to sell and which accounts to withdraw from, retirees have the ability to dial their income—and thus their tax rate—up or down in any given year.
The challenge, though, is that tax planning can be like the game Whac-A-Mole. Choose a low-tax strategy in one year, and that might cause taxes to run higher in a future year. That’s why—dull as the topic might seem—careful tax planning is important. To get started, I recommend this three-part formula:
Step 1
The first step is to arrange your assets for tax-efficiency. This is often referred to as “asset location.” Here’s an example: Suppose you’ve decided on an asset allocation of 60% stocks and 40% bonds. That might be a sensible mix, but that doesn’t mean every one of your accounts needs to be invested according to that same 60/40 mix.
Instead, to help manage the growth of your pre-tax accounts, and thus the size of future required minimum distributions, pre-tax accounts should be invested as conservatively as possible. On the other hand, if you have Roth assets, you’d want those invested as aggressively as possible. Your taxable assets might carry an allocation that’s somewhere in between.
If you can make this change without incurring a tax bill, it’s something I’d do even before you enter retirement.
Step 2
How can you avoid the Whac-A-Mole problem referenced above? If you’re approaching retirement, a key goal is to target a specific tax bracket. Then structure things so your taxable income falls into that same bracket more or less every year. By smoothing out your income in this way from year to year, the goal is to avoid ever falling into a very high tax bracket.
To determine what tax rate to target, I suggest this process: Look ahead to a year in your late-70s, when your income will include both Social Security and required minimum distributions from your pre-tax retirement accounts. Estimate what your income might be in that future year and see what marginal tax bracket that income would translate to.
In doing this exercise, don’t forget other potential income sources. That might include part-time work, a pension, an annuity or a rental property. And if you have significant taxable investment accounts, be sure to include interest from bonds. Then, for simplicity, subtract the standard deduction to estimate your future taxable income.
Suppose that totaled up to $175,000. Using this year’s tax brackets, that would put your income in either the 24% marginal bracket (for single taxpayers) or 22% (married filing jointly). You would then use this as your target tax bracket.
Step 3
With your target tax bracket in hand, the next step would be to make an income plan for each year. The idea here is to identify which accounts you’ll withdraw from to meet your household spending needs while also adhering to your target tax bracket. This isn’t something you’d map out more than one year in advance. Instead, it’s an exercise you’d repeat at the beginning of each year, using that year’s numbers.
What might this look like in practice? Suppose you’re age 65, retired and not yet collecting Social Security. In this case, your income—and thus your tax bracket—might be quite low. To get started, you’d want to withdraw enough from your tax-deferred accounts to meet your spending needs but without exceeding your target tax bracket. This would then bring you to a decision.
If you’ve taken enough out of your tax-deferred accounts to meet your spending needs and still haven’t hit your target tax rate, then the next step would be to distribute an additional amount from your pre-tax accounts. But with this additional amount, you’d complete a Roth conversion, moving those dollars into a Roth IRA to grow tax-free from that point forward.
How much should you convert? The answer here involves a little bit of judgment but is mostly straightforward: You’d convert just enough to bring your marginal tax bracket up into the target range. Some people prefer to go all the way to the top of their target bracket, while others prefer to back off a bit. The most important thing is just to get into the right neighborhood.
What if, on the other hand, you’ve taken enough from your pre-tax accounts to reach your target tax rate, but that still isn’t enough to meet your spending needs? In that case, you wouldn’t take any more from your pre-tax accounts, and you wouldn’t complete any Roth conversions. Instead, you’d turn to your taxable accounts, where the applicable tax brackets will almost certainly be lower. Capital gains brackets currently top out at just 20%. Thus, for the remainder of your spending needs, the most tax-efficient source of funds will be your taxable account.
What if you aren’t yet age 59½? Would that upend a plan like this? A common misconception is that withdrawals from pre-tax accounts entail a punitive 10% penalty. While that’s true, it isn’t always true, and there’s more than one way around it.
One exception allows withdrawals from a workplace retirement plan like a 401(k) as long as you leave that employer at age 55 or later. In that case, as long as you don’t roll over the account to an IRA, you’d be free to take withdrawals without penalty.
If you’re retiring before age 55, you’ll want to learn about Rule 72(t). This allows for withdrawals from pre-tax accounts at any age, as long as you agree to what the IRS refers to as substantially equal periodic payments (SEPP) from your pre-tax assets. The SEPP approach definitely carries restrictions, but if you’re pursuing early retirement, and the bulk of your assets are in pre-tax accounts, this might be just the right solution.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Single & successfully retired since 2013. I am not reaching the 24% bracket, due to the limit of the IRMAA cliff. Next year is my 1st RMD which I intend on using to pay the taxes on my Oct-Dec Roth conversion on Jan 15. My goal is to re-locate and diminish my IRA ASAP, but run into a brick wall of the IRMAA cliff.
If you are well-off, it is impossible to avoid taxes completely.
My plan involves keeping ordinary income in the 24% bracket, and taking the rest taxable as qualified dividends taxed at 15% plus 3.8% NII. With deductions and non-taxable income, this leaves my average Federal tax rate at about 16%.
A couple of years ago, I began doing Roth conversions for both of us—about $80K per year. At that level, the impact on our future taxes was minimal.
After running the numbers again, my calculations suggested I needed to be more aggressive. To confirm, I reviewed the plan with Schwab Wealth Management and later consulted a CPA who specializes in investment-related tax planning.
After reviewing all of my accounts, the CPA told me my situation was very clear. He said he has handled at least 50 cases with similar numbers. His guidance was that households with $2–3 million in traditional IRAs (TIRAs) should consider converting $250K–$300K annually after age 65, especially in today’s relatively low-tax environment.
He also recommended bringing each TIRA down to roughly $200K per account, which would significantly reduce the risk of paying higher taxes later. My wife’s family has a history of living to 100, so if I were to pass away first, she could face substantially higher taxes as a single filer.
Based on that analysis, I increased my annual conversion from $80K to $280K.
As a result, our annual tax bill rose from roughly $30K to about $80K. However, this strategy is designed to achieve several important goals:
I began the larger conversions last year. Next year I will finish converting my smaller TIRA after just 3 years. My wife’s conversions will begin in 2028 and should be completed within about six years.
By the time she reaches age 73, the conversions should be finished. At that point, our taxable account will be depleted, both TIRAs will be minimal or gone, and our future tax burden should be very small.
Will reducing those TIRAs to $200K also help with future IRMAA surcharges?
Converting large amount now to Roth with a large T-IRA account makes lots of sense if the money stays in Roth for a long period of time like 20-30 years. Stay healthy and live longer!
Remember or consider … It’s wise to leave some $s in the pre-tax tank (your TIRAs) for possible/likely large(r) medical expenses that can provide sizable tax deductions later in life. How many tax savvy dollars is a guess or could be another discussion point.
Is anyone aware of a study that addresses the optimal taxable/pre-tax/post-tax(Roth) percentage mix for a handful of life-situation examples?
“His guidance was that households with $2–3 million in traditional IRAs (TIRAs) should consider converting $250K–$300K annually after age 65”
Wow!!! Your CPA isn’t shy. That’s some serious conversion and front loading of tax. I get the point of Adam’s article but that seems like a lot.
It may sound like a lot, but once you run the numbers, it really isn’t. When you have millions, paying higher taxes comes with the territory. I’ll gladly accept that outcome compared to the alternative.
Agreed as well here… It sounds like a lot, BUT I would guess based on the numbers you provided… once you have full SSI kicking in and with RMDs coming from the $400K split… You’ll have around $80K coming in and owe $0 taxes on that… Plus a substancial Roth IRA you can take what you need and never pay addtional tax..
Really depends on “where the lines cross” in terms of break-even age. I’ve run this analysis is income lab and in our case it doesn’t break even until I’m in my late 80s.
So many things can change between now and then in terms of my health, the tax code and numerous other things.
so to me, it doesn’t make sense to sustain a sure immediate tax bill that is way out of the ordinary and would require me to incur capital gains on investments just to pay it.
i’d rather take my chances and see how things pan out in terms of the tax laws associated with the huge tax bills that these relatively new accounts will incur for the older retirees who started saving in them before anyone really understood how the decumulation from them would pan out.
Keep these thought provoking articles coming. I try to figure out my taxes a couple of times a year, in maybe August and again in November. I work to minimize taxes, maximize deductions, and watching the Social Security maximums, where one dollar can triggers thousands more in payments. That jigsaw puzzles needs a lot of attention. For my own tax situation along with my wife MFJ, I developed a spreadsheet comparing the last two years and all the puzzles pieces to put in place, it is exhausting and only sometimes works they way you like it too.
I’ve tried twice to reply here, both times it has been disallowed by editorial, I guess. Why? I’ve replied other times over the last number of years with no problems. I even posted an article several years ago with RMD questions related to excess annuity income. I read Jonathan in the WSJ starting in the early 90s. Now I am not allowed to comment? A sad state of affairs and sure way to dwindle the HD audience. I assume this comment will also be deleted. Disappointing.
My first attempt to reply here was disallowed. Why? Let me try again. Please clarify how one dollar at the “Social Security maximums” triggers “thousands more in payments.” Thanks.
Would you explain the SS one dollar triggering thousands more in payments? I’m not following you there. Thanks!
In the other potential income sources grouping part-time work can provide a lot of tax decision flexibility. For 2025 I was able to choose to make deductible IRA and spousal IRA contributions to the extent of my 2025 earned income and to do so in 2026 after knowing our exact taxable income items and after mid year 2025 tax changes, in our case the $6K age 65 and over senior deductions.
I saved a lot in tax deferred accounts because I expected to have a lower income in retirement. Not so! This year I have to take RMD and that will push me into IRMMA surcharge territory plus state and local income taxes. The only way out is Qualified Charitable Distributions. I’m wondering if doing one massive Roth conversion in one year would be a good idea?
Maybe this is assumed from your discussion in step 2, but in step 3, I’d suggest before withdrawing any pre-tax money, again you must first look at your taxable account expected tax liability due to investment interest/dividends – and even likely/estimated capital gains distributions from funds that you may not have complete control over – to get an initial picture of the first “stack” of your tax liability for the year.
Good point. This is why we generally avoid pulling anything from pretax accounts, or intentionally realizing gains in taxable accounts, until close to year end when it’s easier to see what income the whole year will have already delivered in one form or another.
Great points, Adam, but I would add that for those retiring early—before age 65, when eligible for Medicare—the dominant concern is qualifying for ACA tax credits to keep health insurance premiums low. This can make the difference between spending less than $100/month, with NO deductible, versus up to $1000/month with high deductible ($7000-$8000). In Minnesota, if one can keep his income below ~$30,000 one can qualify for the former example. Thus drawing from maturing CDs or Notes in a taxable account—and avoiding regular income tax from tax-deferred account withdrawals—becomes a strategy. High health insurance costs are really a dominant concern for those in the early retirement, pre-65 group.
Great post, Adam. Love the simplicity of just targeting the bracket rather than having the goal of converting all pre-tax to Roth by a certain date no matter what the early tax hit is.
In terms of total life-time taxes, seems to me state taxes figure into the calculation, too, for people who live in high-tax states like California (which is where I live).
The progressive income tax brackets here go in roughly 1% steps from 0 to over 13%. Most retirees won’t exceed 9.3% with its upper income limit of $740,000 MFJ. We hit the 8% bracket, though, in 2025 and will again in 2026 with very little ordinary income, no Roth conversions – just LTCG and qualified dividends.
As a result, our state tax will exceed our Federal tax in 2026 by 4 to 1.
The other consideration for us is the ACA subsidy, which my wife will need for another 7 years. This costs us another $7000 because every dollar counts against the ACA subsidy income threshold whether it’s qualified dividends or regular income.
So lots to consider when trying to minimize lifetime taxes in retirement.
Thank you… wondering if “pre-tax” and “tax-deferred” mean same things (e.g. 401 k type accounts) OR there is a subtle difference ?