How Tax Planning for Retirement Actually Works
- Andrew Casteel CFP®
- 5 hours ago
- 12 min read
Retirement tax planning is a forward-looking strategy that coordinates withdrawals, income sources, and account types to manage your total tax burden over your lifetime—not just this year's return.
For affluent retirees with $1M or more in investable assets, effective tax planning can mean the difference between paying 12% and 32% on the same retirement income, depending on when you recognize it, what type of income it is, and which accounts you draw from.
The difference between a "good" retirement and an "optimized" retirement often comes down to one thing: how intentionally you manage taxable income once paychecks stop. And yes—high-net-worth retirees usually have more levers, not fewer.
This guide walks through the step-by-step framework we use at Covenant Wealth Advisors to help clients from California, to Texas, Florida, Virginia and nationwide to build multi-year tax plans that account for RMDs, Roth conversions, IRMAA thresholds, and the 3.8% Net Investment Income Tax.
Key Takeaways
Retirement taxes are driven by income timing (which year), income character (ordinary vs. capital gain), and income control (which account you tap).
RMDs generally begin at age 73, and they can compress taxable income later if you ignore planning earlier.
Medicare Part B premiums in 2026 are $202.90/month standard, but IRMAA tiers can raise that meaningfully for higher-income households.
A Roth conversion can be useful—but it can also raise current taxes and potentially move you into higher premium tiers.
NIIT (3.8%) can apply once MAGI crosses certain thresholds, especially for affluent retirees with portfolio income.
Good plans are iterative: you revisit them as markets, laws, and life events change.
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What is Tax Planning for Retirement, and Why is it Different from “Tax Prep”?
Retirement tax planning is a forward-looking process that coordinates withdrawals, income sources, and account types to manage taxes over your lifetime—not just this year’s return.
It focuses on controlling when income shows up, what type of income it is, and how it affects brackets, surtaxes, and Medicare premiums.
Tax Prep Looks Backward. Tax Planning Looks Forward.
Tax Prep: Reports what happened (W-2s, 1099-Rs, 1099-DIVs, K-1s, etc.).
Tax Planning: Decides what should happen—how much to take from each account, whether to convert to Roth, how to harvest gains/losses, and how to avoid avoidable thresholds.
The Three Levers: Timing, Type, and “Where it Comes From”
Timing: Real control often comes from which year you realize income.
Type (character): Ordinary income vs. qualified dividends vs. long-term capital gains vs. tax-exempt interest.
Source (account location):
Tax-Deferred (traditional IRA/401(k)): withdrawals generally taxed as ordinary income
Tax-Free (Roth): qualified withdrawals may be tax-free (subject to rules)
Taxable Brokerage: capital gains/dividends rules apply
Why Affluent Retirees Need a Lifetime View
Once you retire, you typically shift from accumulation (contribute/save) to distribution (spend). That’s when you’re actively “building” your tax return via:
Withdrawal decisions
Realizing capital gains
Roth conversions (Form 8606 / Form 1099-R)
Charitable planning
Managing MAGI for IRMAA and NIIT
Brackets Still matter—Because You can Choose How Much Income to “Create”
For tax year 2026, the IRS increased the standard deduction and published updated bracket thresholds.
Those numbers are not “trivia”—they become planning rails for how much ordinary income you may choose to recognize in a given year.
How Do You Build a Retirement Tax Plan Step-by-Step?
A practical retirement tax plan starts by mapping every income source and account type, then projecting your taxable income year-by-year.
From there, you set bracket and Medicare-premium “guardrails,” choose a withdrawal order, and decide when Roth conversions or charitable strategies may fit.
The goal is flexibility and control, not perfection.
Below is the framework we use in fiduciary planning conversations.
Step 1: Inventory Your Retirement “Income Engines”
List every source with estimated amounts and start dates:
Social Security (Form SSA-1099)
Pensions
RMDs from traditional accounts
Dividends/interest/capital gains in taxable accounts
Part-time/consulting income
Rental income / business income
One-time items: property sale, large bonus, option exercise, inheritance, etc.
Step 2: Categorize Every Account by Tax Treatment
This is the foundation of withdrawal sequencing:
Tax-deferred: traditional IRA, traditional 401(k), SEP/SIMPLE
Tax-free: Roth IRA, Roth 401(k)
Taxable: brokerage, trusts (important for NIIT and gain planning)
Step 3: Build a “Pro Forma” Tax Return (Multi-Year)
A real plan runs multiple years, not one. You’re trying to answer:
What is our baseline taxable income if we “do nothing”?
What years are naturally low-income (retirement gap years)?
When do RMDs begin—and what do they do to the income stack?
Step 4: Set Guardrails for Thresholds That Create Surprise Costs
For affluent retirees, two categories matter most:
Marginal bracket management (ordinary income)The IRS publishes bracket thresholds annually; you plan around those rails.
MAGI-driven cliffs and surtaxes.
NIIT (3.8%) can apply once MAGI exceeds thresholds (e.g., $250,000 MFJ / $200,000 single).
Medicare Part B premiums and IRMAA tiers can move based on income.
Step 5: Choose a Withdrawal Order (and Admit it’s Not One-Size-Fits-All)
A common starting point many planners consider (not a rule):
Taxable brokerage (manage gains intentionally)
Tax-deferred (fill brackets strategically)
Roth last (protect tax-free growth + flexibility)
But the “right” order depends on:
RMD timing
Social Security taxation
IRMAA
Cash flow needs
Market environment
Legacy goals
And whether you’re doing Roth conversions.
Step 6: Decide Whether Roth Conversions Belong in Your Plan
A Roth conversion can be a purposeful way to:
Diversify future tax exposure
Reduce future RMD pressure
Increase tax-free assets for heirs
But it can also:
Increase current-year taxes
Raise MAGI (potentially influencing IRMAA tiers)
Reduce flexibility if done too aggressively
As Scott Hurt, CFP®, CPA puts it:
“A Roth conversion isn’t ‘good’ or ‘bad’—it’s a trade. You’re choosing to recognize income today to potentially buy flexibility later. The math only works when you model it with your other income sources, not in isolation.”
Step 7: Incorporate “Still-Working” Levers if You’re 55+
If you’re still earning, retirement plan contribution limits matter for bracket control and future RMD pressure.
For 2026:
401(k) employee deferral limit: $24,500
Catch-up (50+): $8,000 (higher catch-up for ages 60–63: $11,250)
IRA limit: $7,500 (plus IRA catch-up adjustments)
Even affluent households sometimes overlook that these limits can support a “last-mile” tax strategy before retirement.
Data Visualization: 2026 Medicare Part B IRMAA tiers (Full Part B Coverage)
2024 MAGI (Individual) | 2024 MAGI (Married Filing Jointly) | 2026 Part B IRMAA add-on | 2026 Total Part B Monthly Premium |
≤ $109,000 | ≤ $218,000 | $0.00 | $202.90 |
$109,001–$137,000 | $218,001–$274,000 | $81.20 | $284.10 |
$137,001–$171,000 | $274,001–$342,000 | $202.90 | $405.80 |
$171,001–$205,000 | $342,001–$410,000 | $324.60 | $527.50 |
$205,001–$499,999 | $410,001–$749,999 | $446.30 | $649.20 |
≥ $500,000 | ≥ $750,000 | $487.00 | $689.90 |
CMS also confirms the standard 2026 Part B premium is $202.90/month and the annual Part B deductible is $283.
Practical implication: if you’re doing a sizable Roth conversion or realizing capital gains, it’s not just “taxes”—it may also change what you pay for Medicare.
How Do RMDs, Social Security, and Medicare Premiums Interact?
These three systems often collide in your 70s: RMDs push ordinary income up, Social Security benefits can become partially taxable based on your income mix, and Medicare premiums can rise in higher-income tiers.
A coordinated plan models them together so you’re not surprised by bracket compression, surtaxes, or premium increases.
RMDs: The “Income You Didn’t Choose” (if You Didn’t Plan Earlier)
The IRS is clear: You generally must start taking distributions from most retirement accounts at age 73.
Key mechanics that matter for planning:
RMDs are based on prior year-end balance ÷ life expectancy factor (Uniform Lifetime Table).
Roth IRAs generally do not require RMDs during the owner’s lifetime (but beneficiaries still have distribution rules).
First RMD deadline is often April 1 of the following year, which can create a “two distribution year” if not managed.
Missing an RMD can trigger a 25% excise tax (reduced to 10% if corrected within 2 years) and may involve Form 5329.
Social Security Taxation: “Taxable Benefits” Isn’t the Same as “Taxing Social Security Twice”
Many affluent retirees are surprised that Social Security benefits can be taxable. IRS Publication 915 explains that up to 50% of benefits are generally taxable in some cases, and up to 85% can be taxable in higher-income situations.
This is one reason why the “income stack” matters: adding RMDs and portfolio income can pull more benefits into the taxable column.
Medicare: Premiums are Another Form of “Means Testing”
CMS states the standard Part B premium is $202.90/month in 2026, and it also outlines income-related premium adjustments (IRMAA) for higher-income beneficiaries.
Even if you view the IRMAA surcharge as “not a tax,” it behaves like one in your household budget because it’s driven by income.
A Realistic Interaction Example (Conceptual)
In your early 70s:
RMDs increase ordinary income
Higher income can increase the taxable portion of Social Security benefits
Higher income may also move you into higher Medicare premium tiers
That’s why experienced retirement tax planning tends to focus on pre-RMD years as a planning window, when you can still choose how much ordinary income to recognize.
What Strategies Do Affluent Retirees Commonly Consider to Manage Lifetime Taxes?
Affluent retirees typically focus on four categories: (1) managing ordinary income in the bracket “sweet spot,” (2) reducing future RMD pressure, (3) controlling surtaxes like NIIT, and (4) coordinating charitable and legacy goals.
The best approach depends on cash-flow needs, investment risk, time horizon, and the tradeoffs of recognizing income sooner versus later.
Below are strategies many high-net-worth households discuss with advisors and CPAs—along with the risks and caveats that keep this compliant and realistic.
1) Bracket “Fill” Planning (Intentional Ordinary Income)
Rather than letting income happen to you, you set a target bracket and:
Fill the bracket with planned withdrawals or conversions
Avoid accidental spikes from one-time events
The IRS publishes bracket thresholds and standard deduction changes that become the “guardrails” for this approach.
2) Roth Conversion Planning (with Medicare and NIIT Awareness)
Roth conversions are commonly discussed because:
Roth assets can add flexibility later (especially if RMDs are a concern)
Roth IRAs generally don’t require distributions while you’re alive
But you have to model second-order effects:
Does the conversion push you into a higher bracket?
Does it raise MAGI above NIIT thresholds?
Does it move you into higher Medicare premium tiers?
As Megan Waters, CFP® frames it:
“The goal isn’t to pay the least tax this year. It’s to avoid getting cornered later—when RMDs, Social Security taxation, and premium tiers can stack on top of each other.”
3) RMD Risk Management
RMD rules are mechanical—and they can create “tax bracket compression” if large balances build up.
Planning options can include:
Earlier distributions (before 73) to reduce later forced income
Partial Roth conversions in selected years
Coordinating retirement plan contributions while still working (limits updated for 2026)
4) NIIT Management for Households with Significant Portfolio Income
NIIT is a 3.8% tax that can apply when MAGI exceeds thresholds (e.g., $250,000 MFJ / $200,000 single) and you have net investment income.
Common planning conversations include:
Asset location (what you hold in taxable vs IRA vs Roth).
Managing capital gains realization.
Municipal bond interest considerations (note: municipal interest may be treated differently in certain calculations; coordinate with your tax professional).
Reducing passive income exposure where applicable.
5) Charitable Planning That also Improves Tax Efficiency
High-net-worth retirees often have charitable intent. The planning question becomes:
Do we give in a way that aligns with our tax profile and income stack?
Strategies frequently discussed:
Bunching charitable deductions into high-income years
Donor-advised funds (DAFs)
Qualified Charitable Distributions (QCDs) when eligible (coordinate with custodian/CPA for rules and reporting)
6) Risk Disclosure: These Strategies Have Real Tradeoffs
A compliant article can’t pretend this is “free money.” Real risks include:
Market risk: Selling assets to fund taxes/withdrawals can lock in losses during down markets.
Legislative risk: Tax rules can change; planning assumptions should be revisited.
Liquidity/timing risk: Large conversions or withdrawals may create cash needs for withholding/estimated taxes.
Threshold risk: Higher income can influence Medicare premiums and surtaxes.
At Covenant Wealth Advisors, we typically coordinate these decisions across your investment strategy, cash-flow plan, and tax projections—because treating them separately is where expensive surprises happen.
Not Sure If You're Making the Right Retirement Decisions?
Schedule a free Strategy Session to discuss your situation and get honest answers.
What's keeping you up at night about retirement
How we approach tax planning, income, and investments differently
Whether we're the right fit—or if you're better off on your own
No pressure. No obligation. Just an honest conversation.
Frequently Asked Questions
How do I determine how much to convert to a Roth IRA each year without triggering higher Medicare premiums?
The key is understanding that Medicare premiums are based on your MAGI from two years prior—so a 2024 conversion affects your 2026 premiums. Start by identifying where you currently fall relative to IRMAA thresholds ($218,000 for married filing jointly at the first tier in 2026). Then work backward: calculate your baseline income (Social Security, pensions, dividends, RMDs if applicable), subtract that from the threshold, and that's your conversion "room" before triggering the next tier.
But here's what most people miss: IRMAA brackets aren't marginal like tax brackets. Crossing a threshold by even $1 means paying the higher premium for the entire year—for both spouses. A $100,000 Roth conversion that pushes you from Tier 1 to Tier 3 could add nearly $5,000 in annual Medicare premiums. The math only works when you model the conversion against your full income picture, including capital gains, dividends, and any one-time events.
As Scott Hurt, CFP®, CPA puts it: "A Roth conversion isn't 'good' or 'bad'—it's a trade. You're choosing to recognize income today to potentially buy flexibility later."
Should I do Roth conversions before or after I start taking Social Security and RMDs?
For most affluent retirees, the years before Social Security and RMDs represent your best conversion opportunity—and it's a window that closes permanently. Here's why: once RMDs begin at 73, you're required to take distributions that count as ordinary income before you can convert anything else. Add Social Security (up to 85% of which can be taxable), and you may find yourself in the 24% or 32% bracket with no room to convert at favorable rates.
The sweet spot is typically ages 60–70 for married couples, or 60–72 for single filers who delay Social Security to 70. During these years, you can often fill the 12%, 22%, or even 24% brackets with conversions while your other income is minimal.
As Megan Waters, CFP® frames it: "The goal isn't to pay the least tax this year. It's to avoid getting cornered later—when RMDs, Social Security taxation, and premium tiers can stack on top of each other."
One nuance worth noting: if you're 63 or older, conversions done that year will affect your Medicare premiums when you enroll at 65. Converting before 63 avoids this entirely.
In what order should I withdraw from my retirement accounts—taxable, IRA, or Roth?
The conventional starting point—taxable accounts first, then tax-deferred (traditional IRA/401k), then Roth last—makes sense as a baseline because it lets your tax-advantaged accounts compound longer. But for affluent retirees, blindly following this order often leaves money on the table.
The better framework is to think in terms of bracket management, not account order. In years when your income is naturally low (early retirement, before Social Security), you may want to pull from tax-deferred accounts strategically—even if you still have taxable assets—to fill lower brackets and reduce future RMD pressure. This is the logic behind partial Roth conversions during "gap years."
Your withdrawal sequence should also account for:
RMD timing: If you have large tax-deferred balances, taking distributions before 73 can prevent bracket compression later
Social Security taxation: Additional income can push more of your benefits into the taxable column
IRMAA thresholds: A spike in one year can raise Medicare premiums for two years
Legacy goals: Roth assets pass to heirs tax-free and stretch over 10 years
The right order depends on running a multi-year projection—not just looking at this year's tax return.
Conclusion
If you have $1M+ in investable assets, the highest-value move is usually building a multi-year plan that integrates taxes, Medicare premiums, and your withdrawal strategy—then updating it annually.
You’re not trying to predict the future perfectly; you’re designing flexibility so one market year or one tax year doesn’t force bad decisions.
If you’d like a professional second set of eyes, contact us today for a complimentary Strategy Session.
About the author:
Chief Investment Officer
Andrew is the Chief Investment Officer for Covenant Wealth Advisors and a CERTIFIED FINANCIAL PLANNER™ practitioner. He has over 11 years of experience in the financial services industry in the areas of wealth management and financial planning for retirement.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible, no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
