Saving for retirement often means lower taxes while you’re working. But what happens when you stop working—and start drawing income from those savings? Are you stuck paying high taxes when you’re most focused on preserving what you’ve saved?
Many folks share your concerns about losing a significant portion of your retirement nest egg to income taxes or experiencing unwelcome unexpected tax surprises. The data backs up the concerns, as well. Studies have shown that poor tax and wealth planning can cost you as much as 3% return per year from your assets.
While a lack of planning can be costly, there are actionable strategies and solutions to help you navigate the complexities of tax planning and help ensure you make the most of your retirement income.
You need a plan, not just a portfolio
It’s crucial to go beyond just portfolio management and work out a financial plan strategy. Think of retirement like a road trip. Your portfolio is the fuel—but without a roadmap, you risk wasting it on wrong turns. You need a roadmap to help prevent these wrong turns, making the most of your full gas tank.
A comprehensive financial plan, or financial roadmap, can add years of life to your investment portfolio by mapping out your goals, showing you how much spending is sustainable, and identifying ways to reduce taxes. Let’s take a look at a few strategies that have a significant impact on reducing the tax burden you might experience year to year. Learn more about the difference between a portfolio and a plan.
Mind your income sourcing
Many retirees accidentally jump into a higher tax bracket. You can avoid this by paying close attention to how you source your retirement income. Not all retirement income is taxed the same. Social Security, pensions, real estate, 401(k)s, and brokerage accounts each come with different tax rules. For example, you pay higher income tax rates on your traditional 401(k) pay, lower capital gains rates on most brokerage investments, and no tax at all on Roth account earnings. Understanding your expected tax bracket for the year allows you to strategically plan and optimize your income sources accordingly. For more on how to optimize your income sources, including an example where this cuts income tax by two-thirds, see The Four Quadrants of Retirement Income.
Hold high tax investments in low tax accounts
Vanguard’s research shows that holding each investment in a tax efficient account can add up to 0.6% per year in return to your bottom line. What does this mean practically? In retirement, stable income becomes more important, so it can be beneficial to own bonds and dividend-paying stocks. You’ll pay tax on this income—even if you don’t spend it. Consider holding these investments in tax-deferred retirement accounts, which can allow them to reinvest and grow while you’re not spending them. On the other hand, you can keep low tax rate investments like growth stocks, which don’t pay much income, in your brokerage portfolio limit taxes to lower capital gains tax rates.
Take advantage of lower tax rates with Roth conversions
Use historically lower tax rates or years with abnormally low income to your benefit by converting pre-tax retirement accounts to a tax-free Roth. By converting funds to a Roth IRA, you pay taxes at current rates today and enjoy tax-free growth for the rest of your life (and your beneficiary’s life, if you leave it as an inheritance). You’ll also reduce future required minimum distributions (RMDs) because Roth accounts are exempt from this requirement.
Leverage high medical costs deductions
No one wants high medical expenses, but if you or your spouse are facing medical costs exceeding 7.5% of your adjusted gross income, you can take advantage of the opportunity with Roth conversions. The deduction created by these medical expenses can be used to offset the tax impact of the Roth conversions, allowing you to possibly create more tax-free dollars for your future to help manage your tax bill, as we discuss in Turn Long-Term Care Expenses into Tax-Free Income.
Give smartly
Do you plan to give to charity in retirement? Consider the following strategies to reduce taxes and increase the impact of your charitable dollars.
Donate Stock Using a Donor Advised Fund (DAF)
Planning to give to charity in retirement? If you’re selling highly appreciated stock to fund your gift, you may be triggering unnecessary capital gains tax.
Instead, consider funding a Donor Advised Fund (DAF) with long-term appreciated stock:
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The charity can sell the stock tax-free
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You eliminate the capital gains tax
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You get a deduction for the full fair market value of the stock (not just what’s left after tax)
This strategy can create federal income tax savings of up to 37%, while increasing your charitable impact by 20% or more—with the same dollars.
A DAF is also a great option in high-income years or when you want to give gradually over time.
Use Qualified Charitable Distributions (QCDs) to Offset RMDs
If you’re age 70½ or older, you can donate up to $100,000 per year directly from your IRA to a qualified charity using a Qualified Charitable Distribution (QCD).
Why this strategy matters:
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It satisfies your Required Minimum Distribution (RMD)
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The distribution is 100% tax-free (not just deductible)
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You don’t need to itemize to benefit
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It’s excluded from your taxable income, which can help keep Medicare premiums and Social Security taxes lower
This method allows you to support causes you care about—while optimizing your tax strategy in retirement.
Taxes are a major concern for most retirees. However, understanding and implementing these strategies can help ensure you don’t pay more taxes than necessary. Reach out to learn more about how we can help you make a plan, reduce taxes in retirement, and safeguard your wealth for generations to come.
Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. This information is for general tax guidance. The application and impact of tax laws can vary widely based on the specific facts involved. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional. Tax services are not offered by Alterra Advisors or Lion Street Financial, LLC.
Grant Monson
CFP®, CLU®, ChFC®
Partner, Financial Advisor
About the Author
Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.
Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.
Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.
