Retired couple laughs while lounging on a beach.

Tailor your taxes for retirement

From withdrawals to conversions, taxes in retirement can be a balancing act.

After a fruitful career and plenty of practice paying taxes, you may feel prepared for the tax man in retirement. But a review of your post-retirement taxable income may yield some surprising insights. Examining your position can help you design ways to optimize your current investment strategy. Taking a new look at both fixed and flexible expenses provides the opportunity to ask questions and have discussions with your financial advisor about the tax implications of your total portfolio. When it comes to taxation, the more thorough the examination, the better.

Solopreneur? Take deductions

If you’re still working as a solopreneur, you can actually deduct Medicare Part B and D premiums – even if you don’t itemize. Supplemental Medicare and Medicare Advantage costs are also deductible. But not everyone can deduct – this only applies if you don’t have access to a health plan for your business or through your spouse’s employer or business.

Taxes on Social Security income

Despite any widespread myths to the contrary, Social Security is taxable income. You could pay tax on up to 85% of your Social Security income under certain circumstances, so beware of your filing status and annual income. For example, if you file a return as an individual and your adjusted gross income plus nontaxable interest, in addition to half of your Social Security income, is more than $34,000, you’ll pay tax on up to 85% of that benefit. Adjusted gross income covers everything, from wages (if you are still working) to rental income and, most importantly, any withdrawals from 401(k)s and IRAs. However, Roth IRAs are exempt.

Offsetting required minimum distributions

Depending on your portfolio, required minimum distributions (RMDs) can bump you into a higher tax bracket than you were expecting. It’s important to take RMDs into consideration every year and factor in what you’ll be required to take out of your retirement accounts starting at 72 (or earlier if your plan allows). One way to balance an increased tax burden is with a qualified charitable distribution (QCD). After 70 1/2, you can donate up to $100,000 a year to an eligible charity directly from your traditional IRA – and you won’t have to pay any taxes on it. QCDs can also be a way to meet your RMD, with the caveat that you can’t then itemize the donation as a charitable deduction on your return.

To convert or not to convert

If you’ve got retirement funds in traditional IRAs or 401(k)s, you have the option to convert these to a Roth at any time. This strategy could potentially lower future taxes – but you’ll have to pay taxes in the year you convert. Look at current tax rates and potential future income from your assets and talk to your advisor and tax professional to forecast whether Roth conversions would make sense for you.

The right amount of withdrawals

Conventional wisdom says to follow the “4% rule” – withdrawing no more than that amount of your retirement portfolio every year. But this is only a general guidance – and deserves to be revisited, especially when there are market waves, inflation or other headwinds. Be sure to set up a time to renew and adjust your withdrawals as needed to manage your income bracket most effectively.

Tax implications can be overlooked too often when the focus has been on saving and investing for so many years. Whether you are pre-retirement or post-retirement, there’s always an opportunity to review – and adjust.


Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.

If certain conditions are met, ROTH IRA and ROTH 401(k) distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Investors should consult a tax advisor before deciding to do a conversion.

Withdrawals which exceed income will reduce the value of your portfolio.