Retirement Tax Planning: What to Do Before You Retire
Updated: 2 days ago
A married couple is two years from retirement. Both spouses currently receive W-2 income, contribute to traditional 401(k) plans, and have traditional IRAs. They also hold Roth accounts and a taxable brokerage account. Social Security benefits will be available in the future, Medicare enrollment is approaching, and they may sell their home. They would also like to make substantial charitable gifts.
Their first question may be straightforward: What tax bracket will we be in after we retire?
That question matters, but it is only the beginning. Retirement tax planning also requires asking which income sources will appear each year, which income can be controlled, when Social Security will begin, when required minimum distributions may begin, whether lower-income years exist between employment and later retirement income, and how a Roth conversion or capital-gain transaction could affect Medicare premiums and state taxes.
The important decisions often occur before income is received or a transaction is completed. Once a distribution has been taken or a gain has been realized, many planning choices may no longer be available.
Retirement Tax Planning: The Short Answer
Retirement tax planning means evaluating the timing, amount, and tax character of retirement income across multiple years—not simply estimating the tax on an IRA withdrawal after retirement.
A thoughtful plan may consider:
Traditional IRA and 401(k) withdrawals
Roth conversions and Roth withdrawals
Social Security benefits
Required minimum distributions, or RMDs
Pension and annuity income
Interest, dividends, and capital gains
Charitable distributions, including qualified charitable distributions when applicable
Medicare Income-Related Monthly Adjustment Amounts, commonly called IRMAA
Federal and state income taxes
Withholding and estimated tax payments
The goal is not automatically to pay the least tax in the current year. A decision that lowers this year's tax bill could increase taxes, Medicare premiums, or other costs in a later year.
A better objective is to understand the potential tax consequences across the retirement timeline while there is still time to evaluate alternatives. That is the foundation of retirement tax planning.
Why Taxes Can Change When You Retire
Retirement can change both the amount and the composition of your income.
Before retirement, your tax return may be dominated by wages, bonuses, business income, and employer benefits. After retirement, income may come from several sources, each with different tax treatment:
Traditional retirement accounts generally produce ordinary taxable income when pretax funds are distributed.
Qualified Roth distributions may be tax-free when applicable requirements are satisfied.
Long-term capital gains may be taxed under preferential federal rates, depending on taxable income and other rules.
Social Security benefits may be partly taxable under a separate federal calculation.
Pension and annuity income may depend on the terms of the arrangement and any after-tax basis.
Rental or business income may continue after employment ends.
Tax-exempt interest may still be relevant to certain calculations, including the federal Social Security taxation formula.
The result depends on how these income sources interact. Looking at each account separately can miss the effect that one decision has on the rest of the tax return.
The Retirement Tax Timeline
Retirement tax planning works best as a lifecycle rather than a list of isolated tax tips.
Final working years
The years before retirement may include high wages, retirement-plan contributions, business income, equity compensation, capital gains, charitable gifts, or the sale or transition of a business. The timing of retirement itself can affect the tax year in which those items occur.
For business owners, retirement may also involve a final year of business income, an entity distribution, the sale of business assets, or a succession transaction. Those decisions deserve advance tax review. Florence Tax LLC's tax planning guidance for business owners discusses why major business decisions should be evaluated before they are finalized.
Early retirement
In some situations, wages decline or stop before Social Security benefits and RMDs begin. Medicare may or may not have started. Taxable income can temporarily decline, creating a potential planning period for some taxpayers.
This is not a guaranteed low-tax window. A pension, rental property, business, investment portfolio, or other income source may keep taxable income high. The only reliable way to evaluate the period is to project the actual facts.
Social Security years
When Social Security begins, benefits become another part of the income calculation. Other income—including IRA withdrawals, pension income, capital gains, Roth conversions, and tax-exempt interest for purposes of the applicable formula—can affect how much of the benefit is taxable under federal law.
For a deeper explanation of the federal calculation, see Is Social Security Taxable? How Federal Taxes on Benefits Work.
RMD years
At the applicable starting age under current law, many tax-deferred retirement accounts require minimum distributions even when the account owner does not need the cash. The applicable starting age depends on the individual's birth year and other circumstances, and Roth accounts can be subject to different rules. Large RMDs can increase ordinary taxable income and may affect Social Security taxation, Medicare IRMAA, capital-gain taxation, and state taxes.
RMDs are not inherently bad, and the applicable starting rules vary by taxpayer and account type. The planning question is whether future mandatory distributions should be modeled before they begin.
For the current RMD starting-age rules and their tax effects, see RMD Taxes: How Required Minimum Distributions Affect Your Tax Bill.
Later retirement
Later years may bring larger RMDs, increased medical expenses, charitable distributions, a change in filing status after a spouse's death, or a move to another state. A decision that appears reasonable for a married couple filing jointly may produce a different result for the surviving spouse filing under a different status.
Build a Retirement Income Map Before Building a Tax Strategy
Before deciding which account to use, identify the income that may already appear on the tax return. A retirement income map can include the following categories.
Earned income
Include wages, bonuses, self-employment income, and business income during the final working years or after retirement.
Tax-deferred accounts
List traditional IRAs, traditional 401(k)s, 403(b)s, and other qualified plans. Note whether any account contains after-tax basis, because basis can affect the tax treatment of a distribution.
Roth and potentially tax-free sources
List Roth IRAs, designated Roth employer accounts, and HSAs. Do not assume every distribution is automatically tax-free. Roth qualification rules and HSA distribution rules still matter.
Social Security
Record estimated benefits and possible start dates, but keep the tax analysis separate from Social Security claiming or investment advice. A tax professional can model how different benefit dates affect the tax return; an appropriate financial professional may be needed for broader retirement-income decisions.
Pension and annuity income
Review the statements and contract terms. Tax treatment may depend on contributions, basis, the form of payment, and the specific arrangement.
Taxable investments
Include interest, dividends, unrealized gains, realized gains, and losses. A taxable account may offer flexibility, but selling an investment can create capital gains and affect adjusted gross income or Medicare-related calculations.
Real estate and business income
Rental income, depreciation, passive losses, and property sales can materially change a retirement projection. A retiree with rental property should not build a plan using only IRA and Social Security information. Florence Tax LLC's tax planning resources for real estate investors provide additional context for evaluating property-related tax issues.
Understand the Three Tax “Buckets”—But Do Not Stop There
A common framework divides assets into three categories:
Taxable: Brokerage accounts, bank accounts, and other assets that may produce interest, dividends, or capital gains.
Tax-deferred: Traditional IRAs and pretax employer retirement accounts, where distributions are generally included in ordinary income unless an exception or basis rule applies.
Roth or potentially tax-free: Roth accounts and certain qualified distributions, subject to applicable requirements.
This framework is useful for organizing information, but it does not determine the best withdrawal strategy by itself. Two dollars from different buckets can affect the tax return differently. A traditional IRA distribution may increase ordinary income. A long-term capital gain may receive preferential treatment. A Roth distribution may be excluded if qualified. A qualified charitable distribution has its own requirements and mechanics.
The correct strategy requires more than selecting a bucket. It requires looking at the entire return and projecting what may happen in future years.
Is There a Best Order for Retirement Withdrawals?
A frequently repeated rule of thumb says to withdraw from taxable accounts first, tax-deferred accounts second, and Roth accounts last. That sequence can be reasonable in some circumstances, but it is not universally optimal.
A different approach may deserve evaluation when the taxpayer wants to:
Fill lower ordinary-income tax brackets
Reduce future RMD exposure
Evaluate partial Roth conversions
Realize capital gains in a lower-income year
Consider Social Security taxation
Account for Medicare IRMAA
Support charitable goals
Prepare for a possible change in filing status
Consider state tax differences
Coordinate tax planning with estate or beneficiary objectives
This is a tax-modeling question, not a universal investment-withdrawal rule. Florence Tax LLC can evaluate the tax implications of different distribution scenarios while leaving investment management and legal advice to the appropriate professionals.
The Retirement “Tax Window”
Some taxpayers experience a period after employment income ends but before Social Security and RMDs add more taxable income. During that period, taxable income may be lower than it was during the working years or may be expected to be later in retirement.
Depending on the facts, questions may include:
Should traditional retirement funds be withdrawn earlier?
Should a Roth conversion be evaluated?
Would realizing capital gains be useful or costly?
Should charitable planning change?
How should Social Security timing be considered alongside taxes?
This period is not automatically favorable. Pension income, business income, rental income, investment income, health insurance considerations, and state taxes may change the result. The point is to identify the period early enough to model it.
Roth Conversions Before and During Retirement
A Roth conversion generally moves pretax retirement funds into a Roth arrangement and creates taxable income in the year of the conversion. It is not tax-free, and it is not automatically beneficial.
A conversion may deserve review when comparing the current marginal tax cost with possible future income, future RMD exposure, survivor filing status, tax diversification, or estate-related goals. Potential costs can include:
Current federal and state income tax
A higher marginal tax rate on part of the conversion
Medicare IRMAA effects in a later determination year
Interactions with Social Security taxation
Effects on capital-gain taxation
Cash needed to pay the tax
The question is not, “Are Roth conversions good?” It is, “How much, if any, should be converted in this particular year after considering the rest of the tax return?”
A conversion should be modeled before it is completed. Roth conversions should be evaluated as part of a multi-year tax projection rather than as a stand-alone transaction. For a deeper discussion of conversion timing, tax brackets, RMDs, Medicare IRMAA, and determining an appropriate conversion amount, see Roth Conversion: When Does It Make Sense and How Much Should You Convert?
Required Minimum Distributions Should Be Planned Before They Begin
Tax-deferred accounts can eventually create mandatory distributions under applicable law. Those distributions may be taxable even when the account owner does not need the money for living expenses.
Future RMDs can potentially:
Increase ordinary taxable income
Cause more Social Security benefits to be taxable
Affect Medicare IRMAA
Consume tax-bracket space that might otherwise be used for capital gains
Reduce control over the timing of income
That does not make RMDs inherently undesirable. It does mean that a large traditional balance should be included in a multi-year projection before RMDs begin. Current age rules and exceptions should be verified for the applicable tax year rather than assumed from a general rule.
For the current RMD starting-age rules and their tax effects, see RMD Taxes: How Required Minimum Distributions Affect Your Tax Bill.
Social Security Is Part of the Tax Plan
Social Security benefits may be partly taxable under federal law based on the taxpayer's filing status, benefit amount, and other income. The calculation considers several income sources, including tax-exempt interest, and should not be confused with simply applying a fixed tax rate to Social Security benefits.
Income that may interact with the calculation can include:
Traditional IRA withdrawals
Roth conversions
Pension income
Interest and dividends
Capital gains
Tax-exempt interest for purposes of the formula
Timing matters. For example, a Roth conversion made before benefits begin may produce a different interaction than a conversion made after benefits have started. The result depends on the taxpayer's income, filing status, benefit amount, and timing.
For a detailed explanation of the calculation, see Is Social Security Taxable? How Federal Taxes on Benefits Work.
Medicare IRMAA: A Tax Decision Can Affect a Non-Tax Cost
Medicare's Income-Related Monthly Adjustment Amount, or IRMAA, can increase Medicare Part B and Part D costs for higher-income beneficiaries. IRMAA generally uses modified adjusted gross income from a tax return from two years earlier, although certain life-changing events can allow Social Security to use more recent information in appropriate circumstances.
A Roth conversion, retirement-account withdrawal, capital gain, business transaction, or other income event may affect that calculation. A transaction can be reasonable from an income-tax perspective and still create an additional Medicare premium consequence.
For this reason, a retirement projection should not stop at “How much federal tax will this create?” It should also ask whether the income may affect future Medicare premiums. IRMAA is not an income tax, and the applicable income year and thresholds should be verified rather than estimated from outdated figures.
For a deeper explanation of the income calculation, lookback period, thresholds, and planning considerations, see Medicare IRMAA: How Income Can Increase Your Medicare Premiums.
Think in Marginal Tax Costs, Not Just Tax Brackets
An additional dollar of income can affect more than the ordinary income-tax bracket. Depending on the circumstances, it may also affect:
The taxable portion of Social Security
Capital-gain taxation
Medicare IRMAA
Net Investment Income Tax
State income tax
There is no universal combined marginal rate that applies to every retiree. The interaction changes with income type, filing status, state, deductions, credits, and timing. A year-by-year projection is more useful than relying on a single bracket label.
Capital Gains in Retirement
Retirees with taxable investment accounts may have flexibility to realize gains or losses, but the decision should be evaluated in context. Potential considerations include long-term capital-gain thresholds, ordinary income, tax-loss harvesting where applicable, the Net Investment Income Tax, IRMAA, and state tax.
A 0% federal long-term capital-gain rate does not necessarily mean that a transaction has no financial consequence. Ordinary taxable income consumes bracket space, thresholds change, state tax may apply, and the additional adjusted gross income may affect Medicare-related calculations.
Selling a particular investment is an investment decision outside the scope of tax preparation. A tax professional can model the consequences of a proposed sale so the client and investment professional can evaluate the decision with better information.
Qualified Charitable Distributions
For eligible IRA owners, a properly executed qualified charitable distribution, or QCD, may allow a qualifying IRA distribution paid directly to an eligible charity to receive special federal tax treatment. When applicable requirements are satisfied, it may also count toward an RMD.
A QCD is not simply an ordinary charitable deduction. Its mechanics differ from taking an IRA distribution personally and later making a charitable contribution. Eligibility, age, account type, direct-payment procedures, annual limits, and current-law requirements must be confirmed before acting. A distribution cannot necessarily be retroactively reclassified as a QCD after the fact.
Retirement Contributions in the Final Working Years
The last working years may still involve decisions about employer plans, traditional versus Roth contributions, catch-up contributions, HSAs, and self-employed retirement plans. Eligibility and contribution limits change, so current figures should be verified for the applicable year.
A contribution type should not be selected solely because it produces a deduction today. The decision may also involve expected income, future RMDs, cash flow, plan rules, and the taxpayer's broader circumstances.
Plan-specific rules can also affect whether certain catch-up contributions must be made on a Roth basis, making it important to review the current year's requirements rather than relying on prior-year assumptions.
Should You Pay Tax Now or Later?
Tax deferral can be valuable, but tax deferral is not the same as permanent tax savings. Before making a decision, ask:
What is the marginal tax cost today?
What income may exist in later years?
Will RMDs reduce future flexibility?
Could the taxpayer eventually file as single?
Could Medicare premiums change?
Could state residency change?
What assets may pass to heirs, and what tax issues might follow?
No one can guarantee future tax rates. Modeling several scenarios is more responsible than assuming taxes will definitely be lower—or higher—later.
The Survivor Tax Issue
Married retirees often plan around a joint return. After one spouse dies, the surviving spouse may eventually file under a different status while retaining substantial retirement income and assets. Tax brackets, RMD exposure, IRMAA thresholds, and capital-gain thresholds may all change.
Survivor planning does not mean that every couple should accelerate income or complete a Roth conversion. It means that a multi-year plan should consider how a strategy may work if only one spouse remains and the tax return changes.
Arizona Retirement Taxes and Moving States
State tax treatment can materially affect retirement planning. For someone living in or moving to Arizona, the review may include:
Arizona treatment of retirement income
Social Security and pension treatment
IRA distributions and capital gains
Residency and domicile
Part-year returns
Income sourced to a former state
Rental or business income connected to another state
For a detailed look at how Arizona treats Social Security, pensions, IRA and retirement-plan distributions, capital gains, and other retirement income, see Arizona Retirement Taxes: What Retirees Need to Know.
Moving to Arizona does not automatically eliminate another state's tax obligations. The relevant facts may include the date of the move, residency, property, business activity, and the source of income. Florence Tax LLC serves clients in Prescott and Yavapai County as well as clients nationwide, and state-specific conclusions should be based on current Arizona and other state authority.
If you're considering relocating to Arizona, see Moving to Arizona for Retirement: Tax Considerations Before You Relocate for a closer look at residency, part-year returns, income sourced to another state, and other tax issues surrounding a move.
Withholding and Estimated Taxes in Retirement
Payroll withholding may disappear when employment ends. Tax payments may instead involve pension withholding, IRA distribution withholding, Social Security withholding where available, or estimated tax payments.
A retirement tax plan should address how the expected liability will be paid, not merely estimate the liability. Safe-harbor rules and payment requirements should be reviewed using current law and the taxpayer's prior-year and current-year facts.
Retirement Tax Planning Examples
Example 1: Retiring at 62
Suppose a couple stops working, has substantial traditional IRA balances, has not begun Social Security, and holds taxable investments. Their projection should compare the baseline result with possible IRA distributions, Roth conversions, and capital-gain realization.
The analysis should also consider health insurance, the timing of Medicare, future Social Security, future RMDs, and the cash available to pay any resulting tax. The facts may support a conversion, a distribution, a gain realization, or no special action. The conclusion should come from the projection rather than from a preset rule.
Example 2: Retiring Near Medicare Enrollment
Assume income falls after retirement, but Medicare enrollment is approaching. A large Roth conversion or investment gain could create an income-tax liability and affect a later IRMAA determination. The relevant comparison is not income tax alone; it is income tax plus the potential Medicare effect, along with cash flow and future-year consequences.
Example 3: Social Security Has Already Started
Suppose a retiree receives Social Security and a pension, takes IRA withdrawals, and has taxable investments. An additional withdrawal or conversion may affect ordinary income, the taxable portion of Social Security, capital-gain taxation, IRMAA, and state tax. The result cannot be determined by applying a fixed percentage to the Social Security benefit.
Example 4: Arizona Retiree With Rental Property
An Arizona resident receiving Social Security and IRA distributions may also own a rental property. Rental income, depreciation, passive losses, and a future property sale should be included in the retirement projection. Looking only at retirement accounts could understate taxable income or overlook a future transaction.
Florence Tax LLC's Retirement Tax Planning Framework
Florence Tax LLC approaches retirement tax planning as a year-round, multi-step process:
Build a multi-year income projection. Include wages, pensions, retirement distributions, Social Security, investment income, business or rental income, and other expected sources.
Map the retirement timeline. Identify retirement, Social Security, Medicare, RMDs, property or business transactions, charitable plans, and possible relocations.
Inventory account tax treatment. Separate taxable, tax-deferred, Roth, HSA, and other accounts while identifying basis and applicable restrictions.
Establish the baseline. Project what may happen if no special planning action is taken.
Identify and model controllable income. Evaluate potential withdrawals, Roth conversions, capital-gain realization, and charitable distributions across multiple years.
Evaluate interaction effects. Review Social Security taxation, capital gains, NIIT, Medicare IRMAA, state taxes, and possible changes in filing status.
Plan tax payments and coordinate advisors. Address withholding and estimated payments while coordinating tax decisions with investment, legal, insurance, and other professionals when appropriate.
Implement and update the plan. Complete time-sensitive actions before the applicable deadline or transaction and revisit the projection as circumstances and tax law change.
Common Retirement Tax Planning Mistakes
Common problems include:
Waiting until after retirement to begin tax planning
Looking only at the current year's tax bill rather than multiple years
Assuming taxable income or tax rates will automatically be lower in retirement
Applying one withdrawal-order rule to every retiree
Waiting until RMDs begin to evaluate a large tax-deferred balance
Completing a Roth conversion without modeling the broader tax consequences
Ignoring Social Security taxation, Medicare IRMAA, capital gains, NIIT, or state taxes
Treating Social Security as simply “85% taxable”
Assuming every Roth distribution is automatically tax-free
Treating a QCD like an ordinary charitable contribution or attempting to fix the transaction after the distribution
Ignoring withholding and estimated-tax requirements after wages stop
Failing to consider future residency changes, survivor filing status, or other major changes before implementing a strategy
Retirement Tax Planning FAQs
What is retirement tax planning?
It is the multi-year coordination of retirement income, account withdrawals, Roth conversions, Social Security, RMDs, capital gains, charitable distributions, Medicare-related income effects, state taxes, and tax payments.
When should I start tax planning for retirement?
Ideally, before retirement—especially when retirement timing, income sources, account distributions, and a possible lower-income period can still be evaluated. There is no universal starting age.
Will my taxes be lower after I retire?
Not necessarily. The result depends on income level, income type, filing status, RMDs, Social Security, investment income, state residency, and other facts.
What retirement income is taxable?
Different sources receive different federal and state treatment. Traditional retirement-plan distributions are generally taxable, while qualified Roth distributions may be excluded. Social Security, pensions, annuities, investments, rental income, and business income each require their own analysis.
Should I withdraw from taxable accounts first?
Not automatically. A multi-year projection may show that using tax-deferred funds, realizing gains, completing a partial Roth conversion, or using a combination of sources better fits the taxpayer's circumstances.
Should I convert my IRA to a Roth before retirement?
Possibly, but the amount and timing require analysis. A conversion creates taxable income and may affect future taxes, Medicare premiums, Social Security taxation, capital gains, and state taxes.
Can a Roth conversion increase Medicare premiums?
Potentially. Conversion income can affect the modified adjusted gross income used for an applicable IRMAA determination.
Can capital gains increase Medicare premiums?
Potentially. Realized gains can increase income used in Medicare-related calculations, even when the federal capital-gain rate appears favorable.
Are there tax advantages to retiring in Arizona?
Arizona's treatment of retirement income and other income sources should be reviewed under current law. The answer may also depend on residency, income sourced to another state, and the type of income involved.
Do I need a retirement tax advisor?
Professional tax planning may be particularly useful when several income sources, Roth conversions, RMDs, Social Security, Medicare, investments, business interests, rental property, charitable goals, or interstate issues interact. The decision to seek assistance depends on the taxpayer's circumstances.
The Best Retirement Tax Decisions Often Happen Before the Income Appears
A weak sequence is:
Take the withdrawal → sell the investment → start Social Security → complete the conversion → prepare the tax return → discover the consequences.
A planning sequence is:
Project income → model the tax effect → evaluate interactions → coordinate advisors → make the decision → update the projection → prepare the return.
Tax preparation explains what happened. Retirement tax planning helps evaluate what could happen before the decision is made.
Preparing for Retirement?
Florence Tax LLC helps pre-retirees and retirees evaluate the tax implications of:
Multi-year retirement projections
Retirement-account distributions
Roth conversions
Future RMDs
Social Security taxation
Capital gains
Medicare IRMAA exposure
Charitable-distribution tax treatment
Arizona and other state tax considerations
Withholding and estimated payments
Based in Prescott, Arizona, Florence Tax LLC works with appropriate clients in Yavapai County and across the United States. Amber Rose Florence is an Enrolled Agent whose practice focuses on taxation. Tax planning can be coordinated with a client's investment, legal, insurance, and other professionals without replacing those professionals' roles.
Request a Retirement Tax Consultation to discuss the tax questions that may matter before retirement or before a significant income-producing decision.
Disclaimer: This article is for general educational and informational purposes only and does not constitute individualized tax, legal, accounting, financial, investment, insurance, Social Security, Medicare, or retirement-planning advice. The tax consequences of retirement decisions depend on income, filing status, account types, age, Social Security benefits, Medicare enrollment, investments, charitable giving, state residency, and other individual facts and circumstances.
Tax laws, retirement-plan rules, contribution limits, required minimum distribution requirements, Social Security taxation rules, Medicare IRMAA thresholds, state tax laws, forms, and administrative guidance may change. Florence Tax LLC does not guarantee that a particular withdrawal, Roth conversion, charitable distribution, retirement date, income strategy, or other action will reduce taxes, Medicare premiums, or produce any specific federal or state tax result.
Tax decisions should be coordinated with appropriate investment, legal, insurance, Social Security, Medicare, and other professionals when those areas are involved. Reading this article or using information provided on this website does not create a professional-client relationship with Florence Tax LLC.
