When employees retire, their income typically shifts from a single paycheck to multiple sources. During this transition, many discover that managing taxes is not a one-time task but an ongoing responsibility.
Many retirees look for ways to lower taxes in retirement as part of protecting long-term purchasing power. Since taxes in retirement can hugely impact your retirement funds, it’s wise to explore different approaches for managing them effectively.
| Key takeawaysLocation matters: Relocating to a tax-friendly state may change your overall tax bill by altering how much you pay state and local taxes.Investment types impact taxes: Reassessing your investment portfolio to include tax-efficient investments may influence your taxable income.Withdrawal timing matters: Coordinating your retirement account withdrawals may help you navigate your current tax bracket and manage your exposure to federal taxes.RMDs require attention: Planning for required minimum distributions (RMDs) is a necessary step to manage your gross income during your retirement years.Professional wealth management guidance is valuable: Because tax laws may change, many people choose to review their tax situation with a financial planner and a tax professional. |
Reviewing your location and state taxes
One way some retirees explore potential tax savings is by reassessing where you live. After all, your geographic location determines your local taxes and state income tax obligations.
As of 2026, nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not impose state income taxes. This makes them particularly attractive to retirees looking to minimize taxes on their earnings. Federal law also ensures that if you relocate, your previous state cannot tax retirement benefits earned in your new location. For example, if you earned a pension in a high-tax state but retired to Florida, that retirement income is not subject to state income tax.
Additionally, many states offer specific tax benefits for retirees. Some do not tax Social Security benefits, while others provide partial or full exemptions for income from retirement accounts.
Reassessing your investment portfolio in retirement
As you transition into retirement, it’s important to reevaluate your investment portfolio. The types of assets you hold may directly affect your tax situation, and making strategic adjustments may influence how your investment income is taxed.
Here are some areas to consider:
Municipal bonds
Municipal bonds are often viewed as tax-efficient investments, as the interest earned is usually exempt from federal income tax. However, it’s worth noting that this interest could still factor into the taxation of your Social Security benefits. Some retirees evaluate holding municipal bonds in brokerage accounts as one way to manage taxable income, depending on their overall financial situation and current tax rules.
Dividend stocks
If you own stocks that pay qualified dividends (e.g., dividends from publicly traded US corporations), you may benefit from lower tax rates compared to standard income. The Internal Revenue Service (IRS) currently taxes qualified dividends at rates of 0%, 15%, or 20%, depending on your taxable income. These rates are often lower than ordinary income tax rates, making dividend stocks a tax-friendly way to generate income in retirement.
Tax-loss harvesting
When you sell investments in taxable accounts, you may generate realized capital gains, which can be subject to capital gains taxes. Some investors use tax-loss harvesting as one approach to help manage capital gains by realizing losses on other investments, subject to IRS rules and limitations.
In some cases, realized losses can offset realized capital gains, and if losses exceed gains, current tax law generally allows up to $3,000 of net losses to be applied against ordinary income, with remaining losses carried forward to future years. Tax-loss harvesting involves constraints and potential tradeoffs, including wash sale rules and portfolio considerations, and may not be appropriate for every investor.
Structuring retirement account withdrawals
As a retiree, you likely have savings spread across various account types. The way you withdraw these funds may affect your tax burden.
Tax-deferred accounts
Accounts such as a traditional IRA or a 401(k) are tax-deferred retirement accounts. While you may have received a tax deduction on your contributions, any withdrawals are subject to ordinary income taxes. Large withdrawals in a single year from these tax-deferred accounts could move you into a higher tax bracket and increase your current taxable income. If you are not careful, you may have to pay ordinary income taxes at a higher rate than you originally planned for.
Tax-free accounts
A Roth IRA and Roth 401(k) accounts are funded with after-tax dollars. Since you’ve already paid taxes on your contributions, you may be able to take tax-free withdrawals on both the principal and the earnings on these accounts, provided you meet IRS requirements. Drawing from these tax-advantaged accounts during years with high expenses may help manage your current taxable income and keep you within a lower tax bracket.
By strategically coordinating retirement account withdrawals from taxable accounts, tax-deferred accounts, and tax-free accounts, you could better manage your tax obligations and preserve your retirement savings.
Planning for required minimum distributions
Under current IRS regulations, you must begin taking required minimum distributions (RMDs) from specific retirement accounts at age 73. These withdrawals are treated as ordinary income and could increase your tax bill.
So, when planning for RMDs, it’s crucial to evaluate their potential impact on your financial situation, including:
- Your current tax bracket
- Your exposure to a higher-income tax year
- The tax implications for your Social Security benefits
- Your overall tax liability
Redirecting funds with a qualified charitable distribution
If you are 70½ or older, a qualified charitable distribution (QCD) lets you manage your RMDs while giving back to a cause that matters to you. With a QCD, you can move up to $111,000 directly from your IRA to a qualifying public charity for the 2026 tax year. This transferred amount can satisfy your RMD requirement but is excluded from your gross income, potentially lowering your adjusted gross income and improving your overall tax situation.
Postponing RMDs with a deferred annuity
Another retirement tax planning approach is to purchase a qualified longevity annuity contract (QLAC) within your retirement plan. As of 2025, you can invest up to $210,000 (indexed for inflation) in a QLAC. The retirement funds allocated to this annuity are exempt from RMD calculations, which may help lower your taxable income during your early retirement years. While the annuity payments are taxable when they begin, you may be able to defer them until as late as age 85.
Understanding the taxation of Social Security benefits
If you receive Social Security benefits, part of them may be included in taxable income, depending on your combined income.
Combined income = Your adjusted gross income + nontaxable interest
+ half of your Social Security benefits
When this total amount surpasses specific thresholds set by the IRS, up to 85% of your benefits may become taxable, causing you to owe taxes at your ordinary income rate. To potentially minimize the tax impact, consider exploring strategies for managing your modified adjusted gross income.
Leveraging health savings accounts
Healthcare is often the biggest expense retirees face. Thankfully, health savings accounts (HSAs) could help you effectively manage these costs. HSAs offer a triple tax advantage:
- Contributions offer a tax deduction.
- Funds grow tax-deferred over time.
- Withdrawals are tax-free when used for qualified medical expenses.
By using HSA funds to cover medical expenses in retirement, you could minimize the need to tap into tax-deferred retirement accounts, potentially lowering your current taxable income. Additionally, HSA withdrawals do not affect the taxation of your Social Security benefits or your eligibility for any tax credit, making them an efficient tool for retirement planning.
The value of a fiduciary wealth management advisor
Navigating the complexities of tax planning can be daunting, especially as rules surrounding long-term capital gains, ordinary income taxes, and required minimum distributions continue to evolve.
Tax matters are highly specific and nuanced, which is why we strongly recommend collaborating with a qualified tax advisor. A tax professional could confirm you’re meeting all IRS requirements while uncovering opportunities to optimize your tax strategy.
At MY Wealth Management, we take a holistic approach to managing your finances. As a registered investment adviser, we work to align your investment portfolio with your life goals while evaluating the tax implications across your various accounts.
Gain financial clarity with a free retirement evaluation
Retirement brings unique financial challenges, from turning your savings into an income stream to addressing your long-term tax burden. For individuals aged 50 and older with at least $750,000 in investable assets, a successful retirement strategy requires more than guesswork. You deserve clarity and a personalized plan that connects your financial resources with your goals.
MY Wealth Management offers a free retirement evaluation, a structured, three-step process designed to review your investments, identify potential tax-efficient planning opportunities, and help you better align your income strategy with your goals. Book your retirement evaluation today.
