Retirement taxes could become your biggest expense. The IRS can tax up to 85% of Social Security benefits. About 40% of people receiving Social Security pay income taxes on their benefits. Managing taxes becomes even more complex when you have multiple sources of income.
Our team specializes in retirement tax planning, and we see these challenges every day. Federal income tax rates will range from 10% to 37% in 2025. On top of that, some individuals may have to pay state income taxes depending on where they live.
The good news is you have many ways to keep more of your hard-earned money. You can use Roth conversions, plan your withdrawals carefully, or move to tax-friendly states like Florida or Texas.
This piece will show you proven ways to reduce your retirement tax burden and help you make smart choices about your financial future.
Understanding How Retirement Income is Taxed
Tax rules for retirement income work differently than during your working years. Our experience as financial planners shows that clients can save thousands in taxes by learning about these rules. Let’s look at how taxes affect different types of retirement income.
Social Security taxation thresholds
Your Social Security benefits might be taxable – this surprises many retirees. The tax calculation (called the provisional income formula) depends on your “combined income” which adds up your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits.
For single filers:
- Combined income below $25,000: No taxes on benefits
- Combined income $25,000-$34,000: Up to 50% of benefits taxable
- Combined income above $34,000: Up to 85% of benefits taxable
For married filing jointly:
- Combined income below $32,000: No taxes on benefits
- Combined income $32,000-$44,000: Up to 50% of benefits taxable
- Combined income above $44,000: Up to 85% of benefits taxable
401(k) and traditional IRA withdrawals
The IRS taxes distributions from traditional retirement accounts are taxed as ordinary income. This happens because you got a tax deduction when you contributed the money.
Here’s what you need to know:
- Your current federal income tax bracket determines the tax rate
- You’ll pay an extra 10% penalty for early withdrawals (before age 59½)
- You must start Required Minimum Distributions (RMDs) at age 73
- Missing an RMD can cost you a 25% penalty on the amount you should have withdrawn
Your 401(k) or IRA provider usually holds back 20% for federal taxes. You can change this amount using Form W-4P.
Roth IRA and Roth 401(k) distributions
Roth accounts offer tax-free qualified distributions as their biggest benefit. You paid taxes on the money you put in, so you won’t pay taxes when you take it out in retirement.
Tax-free withdrawals require:
- Your account must be at least five years old
- You must be 59½ or older
The SECURE Act 2.0 made Roth accounts even better. Starting in 2024, Roth 401(k)s won’t require RMDs, just like Roth IRAs.
Pension income tax considerations
You’ll pay ordinary income tax on pension payments unless you made after-tax contributions. With after-tax contributions, part of each payment comes back to you tax-free as a return of your investment.
What to know about taxable pensions:
- Expect 20% automatic federal tax withholding
- You’ll get Form 1099-R in January showing your taxable amount
- Report all pension income on your tax return, even with tax withholding
On top of that, thirteen states tax some Social Security benefits. Seven states don’t tax retirement income at all. Our retirement tax calculator at fuchsfinancial.com helps you visualize your retirement income to help you make informed decisions.
Learning these tax rules helps you minimize taxes during retirement. Join our webinars to learn the quickest way to structure your withdrawals for better tax efficiency.
The Impact of Where You Live on Retirement Taxes
Relocating to a different state could be your smartest tax-saving move in retirement. Our experience as financial planners shows clients save thousands each year by choosing their retirement location wisely. Your choice of zip code plays a bigger role in stretching retirement dollars than most people realize.
States that don’t tax retirement income
Eight states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Your Social Security benefits, pension income, and distributions from IRAs or 401(k)s stay completely tax-free at the state level.
Four other states give special treatment to retirement income while taxing other earnings:
- Illinois exempts all retirement income, including Social Security, pensions, and retirement account distributions
- Iowa excludes retirement income for residents 55 and older
- Mississippi exempts Social Security, pensions, and retirement account distributions
- Pennsylvania doesn’t tax traditional retirement income including pensions and distributions from IRAs and 401(k)s
These geographic differences can substantially affect your retirement finances. To cite an instance, a move from a high-tax state to Florida might save you thousands each year. This extra money could support your lifestyle or help build your legacy.
States with partial exemptions for retirees
Beyond the tax-free states, many others provide partial relief. Thirty-nine states plus Washington D.C. don’t tax Social Security benefits. All but nine of these states tax these benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Many states offer retirement income exclusions based on age or income:
- Georgia’s retirement income exclusion ranges from $35,000 to $65,000 per person based on age
- Delaware lets taxpayers 60 and older deduct up to $12,500 of qualified retirement income
- Military retirement pay stays tax-free in 33 states
Our retirement tax planning seminars help clients understand these details and find states that match their financial needs.
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How property and sales taxes affect retirees
Income tax breaks grab headlines, but property and sales taxes can make a huge difference in your retirement budget. Property taxes vary across states. Mississippi residents pay the lowest median property tax bill at $1,189, while some high-tax states charge more than $4,000 yearly.
States help seniors through various property tax relief programs:
- Homestead exemptions that protect part of home value from taxation
- Circuit breakers that limit tax relative to income
- Property tax deferrals that let seniors postpone payments
Sales taxes affect daily expenses, especially on fixed incomes. Most states help by exempting necessities like groceries and prescription medications. This makes retirement dollars go further.
Smart retirees look at the complete tax picture before choosing where to live. Our retirement tax calculator at fuchsfinancial.com analyzes how different state tax structures affect various retirement income sources. A consultation with our team provides a detailed state-by-state tax analysis based on your specific situation.
Creating a Tax-Efficient Withdrawal Strategy
A well-planned withdrawal strategy helps maximize your retirement savings. Our financial planning firm’s research shows your withdrawal method matters as much as your savings amount. Let’s explore how a tax-efficient withdrawal plan could save you thousands in taxes you don’t need to pay.
Balancing taxable and tax-free income sources
Managing your tax burden requires knowledge of three main account types:
- Taxable accounts: Standard brokerage accounts funded with after-tax money where you pay capital gains taxes on growth
- Tax-deferred accounts: 401(k)s, 403(b)s, traditional IRAs funded with pre-tax money, taxed as ordinary income upon withdrawal
- Tax-exempt accounts: Roth 401(k)s and Roth IRAs funded with after-tax money, providing tax-free withdrawals when requirements are met
Roth accounts should be kept longest because of their tax-free nature, especially since they won’t require RMDs after 2024. Your heirs will have more flexibility with these inherited accounts.
Taxable accounts become surprisingly tax-efficient with the 0% long-term capital gains tax bracket. Single filers with taxable income up to $47,025 (2024) can benefit from this.
Managing your tax brackets year by year
Your retirement success depends on yearly tax planning. Each year deserves a fresh tax analysis rather than following conventional withdrawal sequences blindly.
Start by looking at your projected tax bracket. Then decide whether to speed up income through IRA withdrawals or Roth conversions or slow it down. The 12% bracket might allow room before hitting 22%. That’s your chance for additional IRA withdrawals.
The years between retirement and age 73 offer a special window before RMDs begin. These “gap years” often come with lower income, making them perfect for Roth conversions. Converting traditional accounts to Roth during this time helps avoid the tax increase when Social Security benefits and RMDs overlap.
Our firm creates detailed yearly tax projections for clients. This method reduces current taxes and future RMDs, potentially saving large amounts across decades of retirement.
Let’s take a closer look at your optimal withdrawal strategy. Try our retirement tax calculator at fuchsfinancial.com or join our upcoming webinars for tailored approaches based on your situation. A free consultation will help determine whether proportional or traditional strategies better match your needs.
Smart Strategies to Minimize Taxes in Retirement
You can save thousands of dollars throughout retirement with smart tax-minimization strategies. Our financial planning firm helps clients use these powerful techniques to protect their wealth and boost financial security during their retirement years.
Roth conversion opportunities
The “gap years” between retirement and the start of Required Minimum Distributions (RMDs) give you a perfect chance for Roth conversions. You can convert traditional IRA funds to Roth accounts if you can live off cash or other untaxed assets.
Paying taxes at your current rate through conversion might work better if you expect higher tax brackets later. This strategy works especially when you have large traditional IRA balances and want more flexibility. Qualified Roth withdrawals stay tax-free after conversion, which protects your money from future tax rate increases.
So, we recommend spreading conversions across multiple years to control the tax impact and get the most long-term benefits.
Qualified charitable distributions (QCDs)
You can make qualified charitable distributions straight from your IRA to eligible charities once you reach age 70½. These distributions count toward your RMDs and keep that amount out of your taxable income.
To cite an instance, see how a $20,000 RMD becomes only $10,000 in taxable distribution when you donate $10,000 through QCD. The money must go directly from your IRA custodian to the charity, you can’t touch the funds first.
QCDs let you support your favorite charities while lowering your taxable income, whatever your tax deduction choices.
Tax-loss harvesting in retirement
Tax-loss harvesting lets you sell investments that lost value to offset capital gains or up to $3,000 of ordinary income each year. You can carry forward unused losses forever.
This strategy stays valuable all through retirement. You can sell underperforming investments and buy similar (but not “substantially identical”) ones to avoid the wash-sale rule.
Smart tax-loss harvesting keeps your investment mix stable while cutting your tax burden by a lot.
Health Savings Accounts (HSAs) as retirement tools
HSAs come with three amazing tax benefits:
- Contributions are tax-deductible
- Growth is tax-free
- Qualified medical expense withdrawals remain tax-free
HSAs become even more useful after age 65. You can spend HSA money on non-medical costs without penalties (though regular income taxes apply). Medical withdrawals stay completely tax-free at any age.
HSAs don’t require minimum distributions, unlike traditional retirement accounts. This means your money keeps growing tax-free throughout retirement. Your spouse keeps these tax advantages if they’re your designated HSA beneficiary.
Visit fuchsfinancial.com to use our retirement tax calculator or book a free consultation with our retirement tax planning specialists to create your best retirement tax strategy.
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Navigating Required Minimum Distributions (RMDs)
Required Minimum Distributions can affect your retirement tax picture once you reach a certain age. Our tax planning specialists help guide clients through these mandatory withdrawals to reduce their tax effect.
Current RMD rules and age requirements
The SECURE Act 2.0 changed the starting age for RMDs. You must begin withdrawals at age 73 as of 2023, which increased from age 72. This age requirement will rise to 75 in 2033. These rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and most other tax-deferred retirement accounts.
You have until April 1 of the year following your 73rd birthday to take your first RMD. After that, you must take all RMDs by December 31 each year. Remember that delaying your first RMD until April means taking two distributions that calendar year, which might push you into a higher tax bracket.
Roth IRAs don’t require RMDs during your lifetime. Roth 401(k) accounts became exempt from RMDs in 2024. We can explore these tax planning opportunities during our retirement planning consultations.
Strategies to reduce RMD tax effect
Here are proven strategies that help lower RMD-related taxes:
Qualified Charitable Distributions (QCDs) let people aged 70½ or older donate up to $108,000 yearly (2025 amount) from their IRAs to qualified charities. These distributions count toward your RMD requirement without raising your taxable income.
Taking proactive distributions before RMD age or making strategic Roth conversions during lower-income years works well. This reduces your tax-deferred balance and leads to smaller future RMDs.
What happens if you miss an RMD
Missing your full RMD comes with steep penalties. The IRS charges a 25% excise tax on the amount not withdrawn, down from the previous 50%. This penalty drops to 10% if fixed within two years.
File Form 5329 with your federal tax return to report a missed RMD. The IRS might waive the penalty if you can show the shortfall happened due to “reasonable error” and you’re fixing it.
Calculating and Estimating Your Retirement Tax Burden
Tax estimation serves as the foundation to plan your retirement effectively. Calculating your retirement tax burden means you need to understand several tools and stay informed about tax law changes that could affect your financial future.
Using retirement tax calculators effectively
Retirement tax calculators are a great way to get insights into your future tax obligations. The IRS Tax Withholding Estimator helps retirees estimate tax on Social Security benefits and pension payments through a user-friendly six-step process. This tool automatically calculates the taxable portion by incorporating pension income and Social Security benefits. Fidelity’s Retirement Income Calculator gives quick estimates of monthly spending capability, while their Retirement Strategies Tax Estimator shows how Roth conversions, QCDs, and different withdrawals could affect your current or prior year taxes.
TIAA’s Retirement Advisor goes beyond simple calculations to deliver customized Retirement Action Plans with savings and investment recommendations. These calculators work best when you input accurate information about all income sources, potential deductions, and current tax rates for reliable projections.
Factoring in state and local taxes
State and local taxes can dramatically affect your retirement finances. Property tax rates differ significantly between states. Mississippi has the lowest median property tax at just $1,189. Many states give property tax exemptions to seniors through homestead exemptions, circuit breakers, or tax deferrals.
Adjusting estimates as tax laws change
Tax law changes need constant watchfulness. You should review IRS updates and check reputable financial news sources regularly. The IRS announced inflation adjustments for 2025. The 401(k) contribution limit increases to $23,500 (up from $23,000) starting in 2025, with a special catch-up contribution limit of $11,250 for those aged 60-63.
Our tax planning webinars or a consultation with our retirement specialists at fuchsfinancial.com can help you create a personalized plan.
Tax Planning By Age
Tax planning opportunities vary at each retirement stage and can substantially affect your financial future. Smart tax planning at specific ages helps you keep more of your money.
Early Retirement 59(1/2)
A key milestone happens at age 59½ when you can take money from retirement accounts without paying the 10% early distribution penalty. However, you still need to pay ordinary income tax on withdrawals from traditional IRAs and 401(k)s.
People who are still working between 50 and 59½ can take advantage of catch-up contributions. By 2025, those over 50 can put an extra $7,500 into employer plans and $1,000 into traditional or Roth IRAs.
The “Rule of 55” can be a game-changer for early retirees. This rule lets you withdraw money penalty-free from employer plans after leaving your job at 55. Remember, this only works with your most recent employer’s plan, not IRAs or other 401(k)s.
Middle Retirement (60s)
Social Security decisions become vital in your 60s. Starting benefits at 62 means getting about 30% less than if you wait until full retirement age.
Medicare becomes a priority at 65. You could face lasting premium penalties if you miss the seven-month original enrollment window. Self-employed retirees can write off Medicare premiums, including Part B, Part D, and supplemental coverage.
Managing tax brackets should be your top focus during this phase. The years between retirement and age 73 give you a unique chance to do Roth conversions when your income might be lower.
Late Retirement (70-73 and beyond)
Your Social Security benefit reaches its peak at 70, giving you 54% to 62% more than if you had claimed at 62.
At age 70½, Qualified Charitable Distributions become an option. You can donate up to $108,000 directly from IRAs in 2025. These distributions count toward RMD requirements without increasing your taxable income.
Required Minimum Distributions kick in at 73 for most retirement accounts. These distributions can have major tax implications. Our webinars on RMD strategies can help you figure out how to calculate your RMD along with managing them.
Conclusion
Tax planning for retirement involves several key factors that affect your financial future – Social Security benefits, RMDs, state tax policies, and withdrawal strategies. Retirees can save thousands of dollars annually through smart moves like strategic Roth conversions, tax-loss harvesting, and qualified charitable distributions.
Your tax situation becomes more significant as you near retirement. Different states provide varying tax benefits, which makes your choice of location a vital part of planning. The right sequence of withdrawals between your taxable, tax-deferred, and tax-free accounts can substantially lower your lifetime tax burden.
Let our team help you develop a complete retirement tax strategy that fits your needs. We’ll work together to create a plan that reduces your tax burden and maximizes your retirement income.
FAQs
Some effective strategies include utilizing Roth conversions during lower-income years, making qualified charitable distributions from IRAs, taking advantage of tax-loss harvesting opportunities, and maximizing Health Savings Accounts (HSAs) as retirement tools. It’s also important to create a tax-efficient withdrawal strategy by balancing withdrawals from different types of accounts.
Your state of residence can significantly impact your retirement taxes. Some states don’t tax retirement income at all, while others offer partial exemptions. Additionally, property and sales taxes vary widely between states. It’s crucial to consider the complete tax picture, including income, property, and sales taxes, when choosing where to retire.
RMDs are mandatory withdrawals from certain retirement accounts that begin at age 73 (as of 2023). To manage RMDs, consider strategies like qualified charitable distributions, investing in qualified longevity annuity contracts (QLACs), or making strategic withdrawals before RMD age. It’s important to calculate RMDs accurately to avoid penalties for insufficient withdrawals.
A tax-efficient withdrawal strategy involves carefully sequencing withdrawals from different account types (taxable, tax-deferred, and tax-free), balancing taxable and tax-free income sources, and managing your tax brackets year by year. Consider using a proportional withdrawal approach and take advantage of years when you’re in a lower tax bracket for Roth conversions or additional IRA withdrawals.
In early retirement (around age 59½), focus on penalty-free withdrawals and catch-up contributions. In your 60s, carefully consider Social Security claiming strategies and Medicare enrollment. After 70, take advantage of qualified charitable distributions and prepare for Required Minimum Distributions starting at 73. Throughout retirement, stay informed about changing tax laws and adjust your strategy accordingly.
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.
