Retirement Tax Issues – Prepare Now

Aside from being the start of a new life chapter, retirement changes your finances. Your sources of income shift and so do your deductions and taxes. Whether currently you are saving, getting close to retirement, or already retired, planning ahead matters. Thinking now about how your income will be taxed and what deductions you have in retirement can help keep your taxes and your Medicare premiums lower later on.

Distributions from tax-deferred accounts.

Once you stop working and have no more regular income, you can start using the money you saved for this purpose in tax-deferred accounts like IRAs, 401(k)s, and 403(b)s. The distributions (withdrawals) from these accounts are reported to the IRS and are taxed as income. Some rules:

• You are eligible to take money from your retirement accounts at age 59 ½ without a penalty (10%).
• When you turn age 73 (or 75 for those born in 1960 or later) the IRS requires that you to start taking your Required Minimum Distribution (RMD) out of all your  tax-deferred accounts every year. This RMD is based on the value in your tax-deferred accounts at the end of the previous year. Failure to take the distribution will
  subject you to a 50% penalty on the amount you failed to take out.

When you have contributed regularly to your retirement accounts and that money is invested, the total amount of the RMD could be a high amount. This, plus income from Social Security, dividends, interest, and capital gains, can bring you in a higher tax bracket, increasing your taxes on Social Security and increasing the Income-Related-Monthly-Adjustment Amount (IRMAA) to your Medicare premium.

Early strategies

One of the most effective ways to lower taxes in retirement is to hold as many retirement assets as possible in Roth IRA accounts. With a Roth IRA, there are no tax deductions on the contributions, but withdrawals in retirement are tax-free, and there is no required age or amount for distributions.

1. IRA/401k/403b versus Roth contributions

While contributions to traditional retirement accounts can lower your current taxes, in some cases it can be more valuable to save in a Roth. With current tax laws, you have the option to contribute to a Roth 401k/403b. You also can open a Roth IRA in addition to the employer savings account and contribute to it annually, with a direct contribution or, if your income is over the IRS income limit, with an indirect contribution via an IRA and then convert it to the Roth IRA. Sounds complicated, but we can guide you through this.

2. Roth Conversions

In some situations – especially during lower-income years – you may be able to convert all or part of an existing traditional IRA to a Roth IRA. The amount you convert is regarded as income for that year and is taxed in addition to other income, which is why conversions often make the most sense when you are in a lower tax bracket; for instance, when you stop working, but before you start taking your Social Security Benefits. For some retirees, this strategy can still be beneficial even after starting the RMDs.

Taxes on Social Security Benefits

In this table you see how your income affects the taxes on Social Security Benefits (SSB); it depends on your total income. If your total income is low, there are some tax breaks.

Medicare Premiums

Medicare Part B premiums and Part D premiums are affected by your income (as your 2024 Modified Adjusted Gross Income (MAGI) ) including the IRA distributions. See how the IRMAA (income-related monthly adjustment amounts) increase the premiums:

Medicare Premium 2026

Thoughtful tax planning at any age can help reduce your tax costs in retirement. We are happy to help you think through these decisions and create a multi-year tax plan that supports your long-term goals.