Tax Planning for
Retirees

Tax planning for retirees can help you protect your retirement income, manage your tax bill, and make the most of what you've worked so hard to build. We help retirees make informed tax decisions today while planning for the years ahead.

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Retired couple at sunset for tax planning for retirees.

Why Year-Round Tax Planning Matters in Retirement

Retirement brings new opportunities—and new tax considerations. Proactive planning can help you minimize taxes on your retirement income, manage required distributions, and preserve more of your savings for the life you've planned.

Key Areas of Tax Planning for Retirees

Retirement can bring new tax considerations as income shifts from wages to Social Security, retirement accounts, investments, pensions, and other sources.

Retirement income does not all receive the same tax treatment. Understanding where your income comes from—and how each source is taxed—can be an important part of managing your overall tax picture in retirement.

Withdrawals from traditional IRAs, 401(k)s, and other tax-deferred retirement accounts are generally taxable as ordinary income to the extent they consist of previously untaxed amounts. Pension income may also be fully or partially taxable depending on how the plan was funded. Qualified Roth distributions, on the other hand, can generally be received tax-free when applicable requirements are met.

Common considerations include:

Identifying which retirement income sources are taxable, partially taxable, or potentially tax-free.
Understanding how withdrawals from tax-deferred accounts can affect taxable income.
Keeping records of any after-tax basis in traditional IRAs or retirement plans.
Coordinating withdrawals from different types of accounts rather than viewing each account separately.
Considering how additional taxable income may affect other areas of your tax return.

The order and timing of retirement withdrawals can matter. Looking at your different income sources together can help identify potential tax consequences before distributions are made.

Social Security benefits can become an important source of retirement income, but many retirees are surprised to learn that a portion of those benefits may be subject to federal income tax.

Whether Social Security benefits are taxable depends in part on your other income. The calculation considers one-half of your Social Security benefits along with other income, including certain tax-exempt interest. As income increases, a larger portion of your Social Security benefits may become taxable under federal rules.

Common planning considerations include:

Understanding how IRA and retirement-plan withdrawals can affect the taxation of Social Security.
Considering the potential effect of Roth conversions on taxable income.
Reviewing investment income, pensions, wages, and other income received during retirement.
Planning larger distributions or financial transactions before they occur.
Reviewing tax withholding or estimated payments as income changes.

Importantly, having up to 85% of Social Security benefits included in taxable income does not mean the benefits are taxed at an 85% tax rate. It refers to the portion of benefits that may be included when calculating taxable income.

Looking at Social Security alongside your other retirement income can provide a clearer picture of your potential tax liability.

Social Security cards and tax forms for retiree tax planning

Tax-deferred retirement accounts generally cannot remain untouched indefinitely. Required minimum distributions, commonly called RMDs, determine when certain retirement account owners must begin taking minimum annual withdrawals.

Under current federal rules, many retirement account owners generally begin RMDs at age 73. The rules can vary based on birth year, account type, employment status, and whether the account was inherited. Roth IRAs generally do not require RMDs during the original owner's lifetime, although beneficiaries can be subject to distribution requirements.

Important considerations include:

Identifying which retirement accounts are subject to RMD rules.
Calculating required distributions using the appropriate account balances and IRS life-expectancy tables.
Understanding how RMD income may affect your overall taxable income.
Coordinating distributions when multiple retirement accounts are involved.
Planning ahead rather than waiting until the end of the year to address an RMD.
Understanding the separate rules that can apply to inherited retirement accounts.

An RMD is more than an annual withdrawal requirement. Because distributions from tax-deferred accounts are generally taxable to the extent they contain previously untaxed funds, RMDs can influence other parts of a retiree's tax picture.

IRA and Roth notes for tax planning for retirees.

A Roth conversion moves money from a traditional tax-deferred retirement account into a Roth account. The amount converted that has not previously been taxed is generally included in taxable income for the year of the conversion.

That creates an important tradeoff: paying tax today in exchange for the potential benefits of tax-free qualified Roth distributions in the future. Roth IRAs also generally have no lifetime RMD requirement for the original owner.

Factors to consider before a Roth conversion include:

Your current marginal tax bracket compared with what you anticipate in future years.
The amount of taxable income already expected for the year.
Future required minimum distributions.
The potential effect of additional income on Social Security taxation and other income-based calculations.
Whether taxes on the conversion can be paid from funds outside the retirement account.
Your long-term goals for the Roth account and potential beneficiaries.

A Roth conversion does not have to be an all-or-nothing decision. Partial conversions may allow retirees to manage how much additional taxable income is recognized in a particular year.

Because a conversion can have consequences beyond the retirement account itself, it is important to evaluate the broader tax picture before deciding how much—and when—to convert.

Investment income often becomes a larger part of the tax picture after retirement. Interest, dividends, capital gains, mutual fund distributions, and the sale of investments can all affect taxable income, but they may be taxed differently.

Capital gains are generally created when an investment is sold for more than its tax basis. The tax treatment can depend on how long the asset was held, the amount of the gain, and the taxpayer's overall income. Dividends may also receive different tax treatment depending on whether they qualify for preferential tax rates.

Retirees may want to consider:

Reviewing unrealized gains before selling appreciated investments.
Understanding the tax basis of stocks, mutual funds, and other assets.
Distinguishing short-term from long-term capital gains.
Considering the timing of investment sales and other taxable income.
Reviewing capital losses that may offset capital gains.
Coordinating investment decisions with retirement-account distributions and other income.

Investment decisions should not be driven by taxes alone. However, understanding the tax consequences before making a significant sale can help prevent an investment decision from creating an unexpected tax result.

Tax planning can be especially useful when a retiree expects an unusually high- or low-income year.

Health care can become one of the more significant expenses in retirement, making it important to understand where medical costs intersect with tax planning.

Certain unreimbursed medical expenses may qualify as itemized deductions when applicable requirements and income thresholds are met. Potential expenses can include medical and dental care, certain insurance premiums, prescription medications, and other qualifying costs.

Tax planning considerations may include:

Keeping records of potentially deductible medical expenses throughout the year.
Understanding which health insurance premiums may qualify as medical expenses.
Reviewing the tax treatment of qualified long-term care expenses and insurance premiums.
Considering how retirement-account withdrawals and other income can affect income-based health care costs.
Coordinating Health Savings Account distributions, when applicable, with qualified medical expenses.
Evaluating large medical expenses as part of the overall year's tax picture.

Medical expenses do not automatically create a tax deduction, and the rules can vary depending on the type of expense and the taxpayer's circumstances.

For retirees, health care planning and tax planning often overlap. Reviewing both together can help determine whether significant medical expenses create tax considerations that might otherwise be overlooked.

Estate planning involves more than deciding who receives your property. Different assets can carry very different tax consequences for the people who eventually inherit them.

Traditional retirement accounts, Roth accounts, taxable investment accounts, real estate, and other assets can each be treated differently for income and estate tax purposes. Beneficiary designations can also determine how certain assets transfer, regardless of instructions contained in a will.

Important tax considerations include:

Reviewing beneficiary designations on IRAs and retirement plans.
Understanding the distribution rules that may apply to inherited retirement accounts.
Considering the potential tax characteristics of different assets left to heirs.
Maintaining accurate tax-basis and ownership records.
Coordinating charitable intentions with retirement and estate planning.
Reviewing plans after major family, financial, or tax-law changes.

Tax planning should complement—not replace—legal estate planning. Wills, trusts, powers of attorney, and other legal documents should be prepared and reviewed with an appropriate estate-planning attorney.

For retirees, coordination among tax, financial, and legal professionals can be particularly valuable. Looking at the tax characteristics of assets during your lifetime can help you make more informed decisions about the legacy you intend to leave.

Retirement can create new opportunities to coordinate charitable giving with tax planning. The tax result of a gift can depend on what you give, how you give it, your age, and the type of account or asset involved.

For retirees who are charitably inclined, it can be useful to evaluate giving strategies before automatically writing a check.

Common considerations include:

Donating appreciated assets rather than selling them first and donating the proceeds.
Understanding whether charitable contributions will provide an itemized deduction.
Coordinating larger charitable gifts with unusually high-income years.
Considering qualified charitable distributions (QCDs) from eligible IRA accounts when requirements are met.
Keeping the required documentation and charitable acknowledgments.
Reviewing how charitable giving fits with estate and beneficiary planning.

A qualified charitable distribution can be particularly relevant for eligible IRA owners. Under current federal rules, a QCD generally involves a distribution made directly from an eligible IRA to a qualifying charitable organization, subject to specific requirements.

The most tax-efficient giving method depends on individual circumstances. Planning charitable gifts alongside retirement distributions, investments, and other income can help retirees support organizations they care about while understanding the tax consequences of their generosity.

Real estate can remain an important part of a retiree's financial life, whether it involves a primary residence, vacation home, rental property, or other investment real estate.

Different transactions can produce very different tax results. Selling a longtime residence, converting a property from personal to rental use, selling an investment property, or transferring real estate as part of an estate plan may each involve separate tax rules.

Common considerations include:

Understanding the potential tax consequences of selling a primary residence.
Maintaining records of improvements that may affect a property's adjusted tax basis.
Tracking rental income and deductible property expenses when applicable.
Distinguishing repairs from improvements that may need to be capitalized.
Considering depreciation and its potential tax consequences when rental property is sold.
Coordinating real estate decisions with retirement income and estate planning.

Long-held real estate can have substantial appreciation, which makes accurate basis records particularly important.

Before selling, gifting, converting, or transferring a significant property, retirees may benefit from understanding the tax consequences in advance. Real estate decisions can affect taxable income, capital gains, cash flow, and legacy planning, making them an important part of a broader retirement tax strategy.

Retirement can change both where your income comes from and how that income is taxed. Asking the right questions before making financial decisions can help uncover tax considerations that may not be obvious at first.

Questions worth discussing may include:

How much of my retirement income will be taxable?
Could additional income cause more of my Social Security benefits to become taxable?
When will required minimum distributions begin for my accounts?
Would a Roth conversion make sense during a lower-income year?
What are the tax consequences before I sell an investment or property?
Could charitable giving be coordinated with my retirement distributions?
How might my current decisions affect the assets eventually inherited by my family?
Is enough tax being withheld from pensions, Social Security, and retirement distributions?
Are there opportunities I should consider before the end of the year?

There is rarely one tax strategy that applies to every retiree. The answer can depend on income, account types, age, filing status, investments, family circumstances, and long-term financial goals.

Reviewing these questions periodically can help turn tax preparation from a once-a-year reporting exercise into a more proactive planning process.

The final months of the year can provide an important opportunity to review your tax situation while there may still be time to make adjustments.

By year-end, retirees often have a clearer picture of Social Security benefits, pension income, retirement-account distributions, investment income, capital gains, charitable gifts, and other financial activity for the year.

A year-end review may include:

Confirming that required minimum distributions have been addressed.
Reviewing federal and state tax withholding and estimated tax payments.
Evaluating planned IRA or retirement-account withdrawals.
Considering whether a Roth conversion should be completed before year-end.
Reviewing realized and unrealized investment gains and losses.
Evaluating charitable contributions and qualified charitable distributions when applicable.
Gathering records for significant medical expenses or other potential deductions.
Identifying major financial changes expected in the following year.

Year-end planning is most useful when there is still time to act. Waiting until a tax return is being prepared may reveal what happened, but some planning opportunities may already have passed.

A proactive review before December 31 can help retirees understand where they stand and make informed decisions before the tax year closes.