How Can You Lower Taxes in Retirement Without Risking Your Lifestyle?
Retirement Planning and Taxes: Why They Matter
For many people, retirement represents freedom — more time to travel, see family, and enjoy the life they’ve built. But one surprise often catches retirees off guard: taxes don’t retire when you do.
In fact, some retirees find their tax bills go up once they stop working. We often meet people who’ve done an incredible job saving — sometimes too good of a job. The issue isn’t that you saved “too much,” but that too much of it ended up in pre-tax retirement accounts. When it’s time to start taking withdrawals, that nest egg can turn into a tax problem in retirement.
If you’re nearing retirement and finding yourself in this situation, you’re not alone. The good news is there are still strategies to help manage withdrawals, reduce unnecessary taxes, and keep more of your savings working toward the lifestyle you want.
Read on for some high-level tips — and if you’d like to explore how these strategies may apply to your situation, let’s meet.
Key Takeaways
Retirement income sources — Social Security, pensions, RMDs, and investments — are all taxable in different ways.
IRMAA surcharges can increase Medicare premiums for higher-income retirees.
Roth conversions are a powerful tool for reducing future tax spikes.
Withdrawal strategies should be customized — not one-size-fits-all.
Charitable giving and gifting can reduce taxable income and support wealth transfer goals.
Tax-smart investing can lower unnecessary gains and distributions.
Understand How Retirement Income Is Taxed
Retirement planning starts with knowing how the IRS treats each income source:
Social Security: Up to 85% may be taxable depending on your total income.
Required Minimum Distributions (RMDs): Starting at age 73, you must take withdrawals from traditional IRAs and 401(k)s — and they’re fully taxable.
Pensions and annuities: Typically taxed as ordinary income.
Investment income: Dividends, capital gains, and interest can create additional tax exposure.
Rental income or side businesses: Generally taxable as ordinary income.
All of these interact, and the combined picture determines whether you face higher tax brackets, IRMAA surcharges, or other costs.
Watch Out for IRMAA (Medicare Premium Surcharges)
One of the most overlooked costs in retirement is IRMAA — the Income-Related Monthly Adjustment Amount.
If your income crosses certain thresholds, your Medicare Part B and Part D premiums increase. For higher-income retirees, this can mean paying thousands more per year for healthcare.
A smart retirement plan doesn’t just look at tax brackets — it also watches IRMAA thresholds to help avoid costly surprises.
Use Roth Conversions to Manage Future Taxes
Roth IRAs can play a critical role in retirement tax planning. Converting funds from a traditional IRA or 401(k) to a Roth means paying taxes now in exchange for tax-free withdrawals later.
Why this matters:
Roth accounts don’t have RMDs.
Withdrawals don’t add to taxable income.
Roth balances can help fund expenses without triggering higher tax brackets or IRMAA surcharges.
The key is to convert strategically — often during lower-income years — to smooth taxes over time instead of facing a sharp increase later.
Be Strategic With Withdrawals, Not One-Size-Fits-All
There’s no universal rule for which accounts to tap first. Some retirees may benefit from drawing from taxable accounts first, while others may be better off using IRAs early to take advantage of lower brackets.
When planning withdrawals, consider:
Your other income sources (Social Security, pensions, rental income).
Whether funds are needed for regular expenses or larger, one-time purchases.
How withdrawals impact your tax bracket and IRMAA thresholds.
The right withdrawal plan is personalized — blending income streams to reduce lifetime taxes while maintaining your lifestyle.
Charitable and Gifting Strategies
Charitable giving and wealth transfer planning can also reduce taxable income:
Qualified Charitable Distributions (QCDs): For those over 70½, direct IRA-to-charity gifts satisfy RMDs without raising taxable income.
Donor-Advised Funds (DAFs): Bunch donations for a larger deduction in one year, then distribute over time.
Annual gifting: Up to $18,000 per person (2025 limit) can be gifted tax-free, reducing your estate.
These strategies let you give purposefully while also lowering taxes.
Optimize Your Investments for Tax Efficiency
Your investment structure plays a significant role in retirement tax planning. Thoughtful portfolio design can help reduce unnecessary taxes each year:
Asset location: For example, you could hold tax-inefficient assets (bonds, REITs) in tax-deferred accounts, and tax-efficient ones (ETFs, index funds) in taxable accounts.
Managing gains: Plan investment sales carefully to avoid triggering higher taxable income.
Tax-loss harvesting: Use realized losses to offset gains and reduce taxable income.
A tax-efficient investment plan ensures more of your money stays working for you in retirement.
Plan Ahead for Changing Tax Laws
Tax laws don’t stand still, and retirees are often among the first impacted when rules shift. Changes to deductions, retirement account rules, or Medicare thresholds can create unexpected costs if you’re not prepared.
That’s why retirement planning isn’t a one-and-done task — it’s an ongoing process. Staying proactive ensures you can adjust your strategy when laws change, instead of reacting after the fact.
Retirement planning isn’t just about managing investments — it’s about managing taxes strategically. From Social Security and RMDs to IRMAA, Roth conversions, and charitable giving, smart planning can help you reduce taxes without sacrificing your lifestyle.
The right strategies look different for everyone, but one principle is universal: when you plan with taxes in mind, your wealth can last longer.
If you’d like to understand how taxes may affect your retirement plan, schedule a call to learn how a fiduciary advisor can help you plan with confidence.
This content is provided for informational purposes only and should not be construed as legal, tax, or investment advice. The information is not an offer to sell or a solicitation to buy any securities or investment products. TARA Wealth is a Registered Investment Advisor with the State of California and the State of North Carolina. Advisory services are only offered to clients or prospective clients where TARA Wealth and its representatives are properly licensed, exempt, or excluded from registration. All investments carry risk, including the possible loss of principal. Past performance is not a guarantee of future results. Consult with a qualified advisor before making any financial decisions.
