Planning for Five Key Tax Challenges in Retirement

Developing a paycheck in retirement that generates the income you need while also keeping your taxes low is not an easy task. All the planning you did while working – saving diligently, using tax-deferred accounts – can turn into unwelcome tax surprises as you move through retirement.

The consequences of higher income aren’t limited to a bigger tax bill – they can also include expensive Medicare surcharges.

While there is no one-size-fits-all solution, there are some multi-year tax planning strategies that can lower your lifetime tax burden.

  • Roth conversions in early retirement
  • Delaying social security benefits
  • Managing required minimum distributions (RMDs)
  • Sale of second home
  • Surviving spouse income planning


Roth Conversions in Early Retirement

Withdrawals from tax-deferred accounts (such as 401(k), 403(b) and traditional IRA accounts) are taxed at ordinary income rates. Later in retirement, when RMDs kick in at age 72, the years of compounding that have resulted in a large account balance can mean a big tax bill. For a point of reference, a $1 million 401k account would have an RMD of $36,496 if the owner turned 72 in 2022.

Combine RMDs with taxable social security income for both spouses, pensions, and income from other sources, and you can quickly move up into higher tax brackets.

There are several benefits to a Roth conversion in the early years of retirement:

  • Removing funds from a tax-deferred account before RMDs kick in can mean lower or no RMDs at a later age.
  • Doing a conversion may lower your Medicare premiums.
  • Doing Roth conversions early in retirement may allow you to recognize income at lower tax rates.


Delaying Social Security as Long as Possible

Delaying social security increases the amount of your annual benefit by 8% per year for every year after your full retirement age, until age 70. Since 15% of social security benefits are tax-free, the higher the benefit, the greater the tax-free income.

For a married couple, several strategies can make delaying work for the budget now and for long-term income and tax benefits. For example, the higher-earner may delay while the lower-earner claims early.

It can be complicated to think through, however, it’s important to create a social security claiming strategy in the context of taxes and all other sources of income.


Managing Required Minimum Distributions

If you’ve converted tax-deferred assets to a Roth early in retirement, you’ve already lowered your RMDs. If you are looking for ways to further offset your RMDs, you may want to consider charitable giving options.

A qualified charitable distribution (QCD) of up $100,000 annually can be used to offset your RMD. The funds go directly to the charity and are counted as your RMD but not as income. This can be more beneficial from a tax perspective than taking the distribution, donating the funds, and taking the tax write-off.


Which is Your Primary Home? Switching Can Make a Big Difference

If you sell your primary residence, you can exclude up to $500,000 from capital gains taxes for a married couple. This replaced the one-time exclusion of all capital gains. The exclusion is lower, but you can use it more than once.

If you have a second home, it may make sense to follow the IRS rules and make it your primary residence for at least two of the five years before the sale. If you want to downsize from your family home in the future, you’ll need to wait at least two years for another sale, as you can only qualify for the exemption every other year.


Preparing for a Surviving Spouse

After the death of a spouse, the surviving spouse’s tax status will change to either single filer or qualifying widow/widower. While income may be lower, the change in tax status can result in a bump to a higher tax bracket. Planning can ease the tax burden and make the transition easier. Reviewing assets and developing a plan across the estate is a sound strategy.

Consider these strategies:

  • Step-up in basis on assets held outside retirement plans. These include real estate, stocks, bonds, funds, and other real property.
  • Rolling over retirement accounts.
  • Sale of primary home within two years of spouse for the maximum exemption.
  • Filing federal taxes to inherit any unused portion of the estate tax exemption.



Taxes may be your largest expense in retirement. Planning ahead with a multi-year approach can lead to lower lifetime taxes, allowing you to keep your retirement on track and your lifestyle in place. If you would like to talk with an advisor about how to develop a tax plan to ensure a successful retirement, you can schedule a call with us here.



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