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Tax Planning For Retirement

Tax Planning

The focus for retirement planning is usually on saving and investing to ensure that you have a sufficient nest egg. However, a key part of retirement planning involves tax planning. Proper tax planning can save retirees a significant amount of money, leaving them with more to enjoy during retirement.     

There are a number of tax considerations and issues that need to be incorporated into your retirement planning. Here is a discussion of some of them. 

Taxation of retirement accounts 

There are a variety of retirement accounts that retirees might have. It’s important to understand how these accounts will be taxed in retirement as these are a major component of the retirement nest egg for many people. 

Note our discussion below is mostly focused on federal taxes. The taxation of pensions and distributions from retirement accounts like IRAs and 401(k)s varies by state, you will want to check with a local tax expert based on your location. Here in our home state of South Carolina, withdrawals from retirement accounts are partially taxed as are pensions. 

IRA accounts 

IRA accounts can be traditional or Roth. Each one has different tax implications when you withdraw money from the account. 

For traditional accounts: 

  • All funds in the account are subject to taxes upon withdrawal except the value of any contributions made on an after-tax basis. The value of any after-contributions can be excluded; however the account holder must maintain a record of these contributions in order to be able to exclude them.

  • Taxes are paid at the account holder’s ordinary income tax rate.

  • Money withdrawn from the account prior to reaching age 59 ½ might incur a 10% penalty in addition to the tax on the amount withdrawn. Exceptions to the 10% penalty include:

o   Transferring money to a spouse under the terms of a divorce agreement.

o   The disability or death of the account owner.

o   The purchase of a first home for the owner or certain family members.

o   Distributions made to a qualified military reservist.

o   Distributions made to cover higher educational expenses for you or certain family members.

o   Substantially equal periodic payments made under section 72(t).

o   Withdrawals made to cover the cost of healthcare insurance premiums if the account holder is unemployed.

o   Withdrawals made to pay the cost of unreimbursed medical expenses that are greater than 7.5% of the account holder’s adjusted gross income. 

Roth IRA contributions are made with after-tax contributions. Therefore the amount contributed to the account can be withdrawn tax-free and penalty-free. If the conditions below are met, all money in the account can also be withdrawn tax-free as well. 

Withdrawals from a Roth IRA can be made penalty and tax-free if the account holder’s first contribution to a Roth IRA account was made at least five years ago and at least one of the following conditions are met: 

  • The account holder is at least age 59 ½.

  • The distribution is made due to the account holder’s disability.

  • The payment is made to the account holder’s estate or to one or more designated beneficiaries upon their death.

  • The money withdrawn is used toward building or the purchase of a first home.

  • A withdrawal of up to $5,000 can be used to cover costs relating to the adoption or birth of a new child. 

Note that Roth IRAs are exempt from required minimum distributions, we will cover RMD related issues later on in this article. 

401(k) plans 

Like an IRA, 401(k) plans may offer both traditional and Roth options. 

Distributions from traditional 401(k) accounts are taxed as ordinary income, with the exception of any after-tax contributions that may have been made into the account. Withdrawals made prior to age 59 ½ will generally be subject to both the tax and a 10% penalty. 

One exception to this is the “rule of 55.” If you leave your employer in the calendar year in which you reach age 55 or later, a withdrawal from your 401(k) will not be subject to a penalty. Any withdrawals will be subject to income taxes. 

Money in a designated Roth account can be withdrawn tax-free as long as the account holder is at least age 59 ½ and at least five-years have passed since their first Roth 401(k) contribution. The account holder’s death and disability also count as qualified distributions. Non-qualified distributions could be subject to taxes and a 10% penalty. 

Other retirement plans 

A 403(b) plan is typically offered to employees of public schools, non-profit organizations and other tax-exempt employers. These plans used to exclusively offer an annuity type option, but now are very similar to 401(k) plans, including the availability of a Roth option in some plans. Taxation is largely similar to that of a 401(k) plan. 

A 457(b) plan is a deferred compensation plan offered by state and local governments and some non-profit organizations. There are traditional accounts and in some cases the sponsoring organization may offer a Roth option. The tax issues surrounding distributions are similar to 401(k) and other plans, however withdrawals from a 457 plan can be made prior to age 59 ½ without a penalty, but taxes will still apply. 


Pension payments that are paid as a monthly annuity are generally taxable for federal taxes. A portion of the payments may be tax-exempt to the extent that the recipient contributed to the pension over their years of working. 

Taxation of pension payments at the state level will vary, currently there are 14 states that don’t tax pensions all or in part. 

In some cases, pension recipients may be offered the opportunity to take their pension as a lump-sum payment. In this instance, should they take the payment in cash it would generally be taxable. If it is rolled over to an IRA, they can retain the tax-deferred nature of the money until it is withdrawn from the IRA account. 

With all of the retirement plans listed above, and some others not discussed, it's important to plan a withdrawal strategy once you leave your employer. This includes having an affirmative plan for rolling the account over or taking withdrawals that takes into account your overall retirement planning and the tax implications of your choice. 

Required minimum distributions 

Required minimum distributions (RMDs) must be taken each year from most retirement accounts. This is the government essentially saying that they gave you a tax break for any pre-tax contributions and the ability for your earnings in the account to grow on a tax-deferred basis over the years. 

Roth IRAs are a notable exception. This aspect of these accounts makes them an excellent tax and estate planning vehicle in retirement. 

The age for commencing RMDs has changed. The SECURE Act passed at the end of 2019 raised the age for commencing RMDs to 72 for those who had not reached age 70 ½ prior to January 1, 2020. Those who had already commenced taking their RMD or who had reached age 70 ½ prior to January 1, 2020 must take their RMDs based on the rules in effect prior to the SECURE Act. 

A further wrinkle for 2020 is the waiver of RMDs for 2020 as a result of the CARES Act, a relief package to help offset some of the financial impact of the COVID-19 pandemic. 

Roth 401(k) accounts are subject to RMDs, but the distributions are not taxable. An easy workaround is to roll the account over to a Roth IRA. The money rolled over will then be treated in the same way as the rest of the IRA account. 

One other notable exception is for those who are working past the age for RMDs to commence. For this exception, if you are a participant in your employer’s 401(k) plan, if you own less than 5% of the company and if your employer has elected this exemption, you can defer RMDs on the money in that account. This exemption does not cover RMDs that would be required on any other IRA or retirement plan account. 

The SECURE Act made significant changes to RMDs for the beneficiaries of inherited IRAs. For those who were the beneficiaries of an inherited IRA prior to January 1, 2020, there is no change to their RMDs. However, for most non-spousal beneficiaries on or after January 1, 2020, RMDs and the ability to stretch the accounts via the use of RMDs has gone away. They now must fully withdraw the full value of the account within ten years, this change can represent a significant tax hit in some cases. 

Note that Roth IRAs are also subject to this ten year requirement, but the distributions from the account will not be taxable to the beneficiaries. 

Qualified charitable distributions 

Qualified charitable distributions (QCDs) were originally put in place to supply IRA account holders who are charitably inclined with a vehicle to give some or all of their RMD amount to a qualified charity. IRA account holders can contribute up to $100,000 of their RMD amount to a qualified charity. 

The tax planning advantage of QCDs is that the amount donated to charity is not taxed but will be counted towards the amount of your RMD. There is no charitable deduction with a QCD, however. For those who are charitably inclined but who cannot itemize, a QCD is a tax-efficient way to make a charitable donation. 

In a weird quirk in the SECURE Act, the minimum age for a QCD was left at 70 ½ even though the age to commence RMDs was raised to 72. 

Taxes and Social Security 

Your Social Security benefits can be subject to federal income taxes depending upon your income. Up to 85% of you combined income can be subject to taxes as follows: 


Filing status

Combined income level

Percentage of benefits that might be subject to taxes


$25,000 - $34,000

Up to 50%


Greater than $34,000

Up to 85%

Married joint

$32,000 - $44,000

Up to 50%

Married joint

Great than 44%

Up to 85%

Source: Social Security website, Retirement Benefits, Income Taxes and Your Social Security Benefit. https://www.ssa.gov/benefits/retirement/planner/taxes.html

Social Security defines combined income as:

Adjusted gross income + ½ of your Social Security Benefits + non-taxable interest (such as from muni bonds) 

Currently 13 states tax Social Security benefits in some format. 

Some tax planning strategies 

While taxes shouldn’t be the primary motivation behind any retirement or financial planning steps you take, tax considerations are a part of the process. Proper tax planning in the context of your overall financial planning can often result in significant benefits to you. Here are a few tax planning steps that could result in meaningful tax savings for you.

Roth conversions 

Converting a traditional IRA account to a Roth can be a solid idea in many cases. While you will pay taxes on the amount converted, tax rates are at historically low levels in 2020 due to the tax reform legislation passed at the end of 2017. 

The main benefit for many is that any money converted to a Roth will not be subject to RMDs in future years, potentially providing tax savings down the road. Additionally, money in a Roth can be withdrawn tax-free if the five year rule is met and the account owner is at least 59 ½ if needed in the future. The Roth conversion provides a level of tax diversification for those whose retirement nest egg is heavily invested in traditional IRA and 401(k) accounts. 

It’s important to be sure that you have sufficient cash outside of the IRA account to pay the taxes due on the conversion, otherwise this can become a very expensive proposition. 

With the waiver of RMDs for 2020, a strategy for those who would otherwise have been required to take their RMD is to do a Roth conversion in the amount they would have taken as their RMD. They will reduce the balance in their traditional IRA and their tax bill will be the same as if they had taken the RMD as required in a normal year. 

Retirement account distribution strategies 

Taxes should be a key part of your planning as to the order in which you tap different types of accounts within your retirement nest egg. For example, for those who continue to work into retirement they might tap taxable accounts if needed while their income is higher, deferring distributions from tax-deferred accounts until later in retirement when they might be in a lower tax bracket.

Decisions as to which accounts to tap can be made on a yearly basis. If one year looks like your income will be lower perhaps it makes sense to take distributions from an IRA or similar tax-deferred account to fill up your tax bracket in that year. 

Charitable contributions 

As mentioned above in the discussion of RMDs, qualified charitable distributions are an excellent way to reduce the tax bill from your RMD, especially for those who are not able to itemize their deductions. 

For those who can itemize, making charitable contributions can be a great way to manage taxable income during retirement. This might be done with a cash contribution or using appreciated securities. In the latter case this also avoids the capital gains taxes that might be due if the shares were sold. 

For those who are charitably inclined and financially able to do so, these deductions can help offset income from a Roth conversion or an income spike in a given year. This can serve to help keep retirees in a lower income bracket for purposes of lower Medicare premiums or reducing the amount of Social Security benefits subject to taxes. 


Some investors think that worrying about taxes stops when they stop working. However, tax planning in retirement can be equally important in terms of making your retirement nest egg last. Being tax aware and incorporating tax issues into your planning in retirement makes good sense. This is a priority for us in working with our clients who are retired and those who are approaching retirement. Please give us a call to discuss your retirement and financial planning needs, we’d love to be of help. 

This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.