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  • Writer's pictureW. Scott Hurt, CFP®, CPA

How To Reduce Taxes In Retirement

Updated: Feb 24, 2023

How to reduce taxes in retirement.

Knowing how to reduce taxes in retirement is paramount to making your money last.

Unfortunately, retirement savings plans like 401ks can create a massive tax problem when you retire because every dollar invested on a pre-tax basis is taxable upon withdrawal.

When you retire, Uncle Sam wants his portion of your nest egg. If you are not prepared, you may pay more taxes than necessary.

Fortunately, there are some key tax planning strategies to consider to make sure he doesn't take too much.

Here are some top ways you can reduce taxes in retirement.

Manage Your Withdrawal Strategy

Many people think taking withdrawals from their retirement savings is all about deciding how much they can withdraw.

That's a critical component, but how you create income (a.k.a the method you use) from your savings can be just as vital.


Because it affects how much of that withdrawal you will lose to taxes. With a little planning, you can reduce your tax bill significantly.

To manage your income and tax brackets efficiently, you must plan how and when you'll withdraw from taxable, tax-deferred, and tax-free savings.

Conventional wisdom vs. customized plan

Most people think you should withdraw from your retirement accounts in a set order. We see this in our audience polling during taxes in retirement webinars all the time.

For example, conventional wisdom starts by taking after-tax money held in a bank or taxable investment accounts first, then withdraw tax-deferred savings like Traditional IRA, and then take distributions from tax-free Roth IRA accounts last.

This conventional wisdom isn't terrible, but it usually isn't optimal either. Our suspicion is it became a status-quo because it's easy to implement, and most people, including many financial advisors, don't like digging into the details on taxes.

However, the order in which you withdraw money from your savings is an area that can substantially impact your retirement income plan.

Ask the experts

Because this topic is so important, it has unsurprisingly drawn the attention of academic researchers. Multiple studies show how a holistic approach to income withdrawal planning can affect retirees. Some of those studies include:

  • Converting to Roth IRA under New Tax Law: a Decision Framework, by Kenneth E. Anderson and David S. Hulse, Journal of Financial Service Professionals, 2007

  • The Effects of Social Security Benefits and RMDs on Tax-Efficient Withdrawal Strategies, by Greg Geisler, Ph.D.; and David S. Hulse, Ph.D., Journal of Financial Planning, 2018

  • Tax-Efficient Withdrawal Strategies, by Kirsten A. Cook, William Meyer, and William Reichenstein, CFA. Published in Financial Analysts Journal, 2015

These studies, and many others like them, have shown that the conventional approach to withdrawing money in retirement is rarely ideal, and we don't rely on general rules of thumb for our clients at Covenant Wealth Advisors.

Our take on retirement withdrawal strategies

Based on this research and our own experience, we often use a blended approach to withdrawals depending upon a client's tax situation.

Here's how it works in a nutshell.

Consider taking advantage of Roth IRA conversions in low taxable income years.

Converting the money from your Traditional IRA while you're in a lower tax bracket potentially decreases the amount of taxes you'll owe in the long run.

Let's break this down a bit further.

Your pre-tax contributions and earnings to a Traditional IRA will be taxed as ordinary income. When Required Minimum Distributions (RMDs) kick in at age 72, the IRS forces you to make a withdrawal. The more money you have in your account, the higher your annual RMDs will be—often putting you in a higher tax bracket or forcing you to pay taxes on income you may not need in the first place!

Alternatively, qualified distributions from your Roth IRA aren't taxed, nor are they subject to RMDs, providing more flexibility and breathing room tax-wise.

Converting funds from your Traditional IRA in low-tax years saves you from potentially much larger distributions (and subsequently higher tax bills) later. This blended approach gives you more flexibility to use your tax-free Roth money strategically in future years.

Does a blended approach work?

How much impact would a blended approach have on your retirement income?

In the academic studies we mentioned, retirement income strategies may increase your savings' lifespan (a.k.a portfolio longevity) by as much as two years. While not always the case, we've seen projected tax savings on Roth conversion strategies exceed $200,000 over a lifetime for individuals and couples.

Think about that.

By simply being more deliberate about your withdrawals, there is potential to save a tremendous amount of money. Additionally, reducing the amount you accumulate in tax-deferred IRAs may reduce your future RMDs, which provides you with another element of flexibility and control.

For this strategy to work, you have to think of your retirement as a multi-year event and realize that a lower average tax bill is better than having a lower tax bill in any given year.

You should always consult your tax professional when considering a plan like this, and no strategy works for everyone.

Maximize Roth Accounts

Roth accounts are one of the best tools you have for retirement income planning. You can, of course, use Roth accounts to save for retirement, but they're also a valuable tool in retirement —even if the bulk of your savings is in tax-deferred accounts.

You can do a Roth conversion in retirement, even a partial one, any year with relatively low taxable income. In our experience, we've seen that Roth conversions can be optimal in the first few years of retirement if you haven't started collecting Social Security or pension funds, for example.

Since you know your taxable income will go up once social security or pension benefits start, it can make sense to consider Roth conversions beforehand.

That's why it is so important to manage your tax bracket. Ask yourself,

  • What's your current federal tax bracket?

  • What's your IRMAA tax bracket?

  • What's your long-term capital gains tax bracket?

  • How will your tax bracket change with the other sources of income in the future?

  • How much time do I have to let my Roth savings grow?

For example, John and Mary have taxable income of $40,000. This puts them squarely in the 12% tax bracket, ranging from $19,900 to $81,050 in 2021. This means an additional $41,050 of taxable income they can receive will be taxed at the 12% rate.

They have also decided to defer taking social security until age 70. However, once social security benefits kick in, they anticipate being in the 22% tax bracket.

John and Mary decide to convert $41,050 from their Traditional IRA to their Roth IRA, thus paying only 12% federal tax on that income. As a result, they have:

  1. Reduced their future required minimum distributions from their Traditional IRA.

  2. Created a tax-free source of income

  3. Created more flexibility in the taxation of their income in future years.

The concept is pretty simple—it's better to pay taxes at 12% than 22%.

Maintain Your Charitable Giving

One of the most impactful ways to reduce your taxes in retirement is through charitable giving. There are many ways to reduce your taxes in retirement, and several relate to your distributions. In the case of RMDs, you may want to consider donating via a Qualified Charitable Distribution to avoid paying taxes on amounts up to $100,000.

You can also set up a Donor Advised Fund (DAF) to set aside money for future charitable gifts. A DAF allows you to gift a highly appreciated investment, avoiding paying taxes on the gain and potentially qualifying for a charitable deduction.

Take Advantage of Tax Opportunities

Don't forget about the everyday tax-planning items that still apply in retirement.

For example, maximizing your itemized deductions can allow you to reduce your total taxable income. We've found that a lot of people in retirement mistakenly use the standard deduction. Proper tax planning can help identify ways to itemize deductions instead.

You will still need to manage your taxable investments efficiently. Effectively harvesting tax losses and even harvesting tax gains in low-income years when you qualify for 0% taxes on long-term capital gains can be effective strategies to reduce your taxes in retirement.

How about the grandkids?

If you want to help them in a lasting way, consider giving to a 529 plan. In Virginia, you can deduct up to $4,000 in contributions to each 529 account per year and carry forward any amount above that to deduct in future years. If you are age 70 or older, you can deduct the full amount of the contribution.

Remain Conscious of Extra Income

Consider the total effect that a given source of income has on your total income, which is what will drive your tax bill. This is especially important regarding Social Security. As your income increases, the amount of your Social Security benefit that is subject to income taxes increases.

That makes it even more important to think of your income in retirement across multiple years.

As outlined previously, delaying Social Security benefits can create an opportunity to convert some of your tax-deferred savings into a Roth IRA. But remember, you must take into account multiple tax considerations, including federal income tax, state tax, long-term capital gains taxes, and a little-known tax call IRMAA. That's a lot of taxes to consider, but the payoff can be significant.

Remember, qualified withdrawals from a Roth IRA won't increase your taxable income and may keep more of your Social Security payments from being taxable.

The bottom line

Withdrawal planning is a crucial part of retirement planning. You must know how to reduce taxes in retirement to give yourself a fighting chance at making your money last.

Spending in retirement is about a lot more than just investing and deciding on an amount to withdraw from you accounts.

You need to focus on the order of your withdrawals, different tax rates, and how those decisions impact your personal situation.

Unfortunately, tax planning doesn't come naturally to most people. Even if you need help, finding a professional to guide you can be hard because most financial advisors rarely provide tax planning as part of their investment centric services.

The good news is that you don't have to go it alone.

At Covenant Wealth Advisors, we build personalized retirement income plans that consider your entire financial situation. From taxes to investments to creating income in retirement, we can help create a plan that gives you the peace of mind you want.

If you'd like more help, we'd be glad to discuss developing a plan to manage your retirement income withdrawals effectively.

Call us today to see how we can work together.



Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. 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. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.


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