Retirement Tax Planning
When it comes to taxes in retirement, one thing is certain—Uncle Sam will want his share. Thoughtful retirement tax planning helps you maximize your income and keep more of what you’ve earned over a lifetime. Tax-wise strategies can help you stretch your nest egg further and boost your peace of mind.
Yet, while taxes themselves are a certainty, many retirees feel uncertain about their own tax bills. Are you paying more than you should? How might those taxes impact your retirement income streams and overall security?
The good news: With careful planning—including the proper use of annuities and IRAs—you may be able to lower your tax bill after you stop working.
The order in which you tap your retirement assets can make a significant difference. A well-structured withdrawal plan can even extend the life of your portfolio by several years<.
Action: Review your tax strategy at least annually. Adjust your withdrawals, Roth conversions, or annuity use as laws and your needs change.
Why Retirement Tax Planning Matters
A 2010 Lincoln Financial Group study found that high-income retired households (ages 62–75, incomes $100,000+) spent about one-third of their income on taxes—their single largest expense. And according to a 2018 Nationwide Financial Group survey, even retirees with a decade of experience remain uncertain about their tax situation and planning needs.
Without an intentional tax strategy, you may spend more than necessary—and reduce the longevity of your retirement income.
Types of Retirement Accounts & Tax Treatment
| Account Type | Example | Tax Status | Key Details |
|---|---|---|---|
| Taxable | Brokerage, savings, investment accounts | Taxed annually on earnings | Dividends, interest, and capital gains are taxed each year |
| Tax-Deferred | Traditional IRA, 401(k), annuities | Taxed on withdrawal | Contributions grow tax-deferred; taxes owed on distributions |
| Tax-Free | Roth IRA, Roth 401(k) | Withdrawals are tax-free (if qualified) | Tax-free growth and withdrawals, if requirements are met |
Which Account Should You Withdraw From First?
Traditional advice often says to withdraw from taxable accounts first, then tax-deferred, then Roth. But the right approach isn’t always so simple. Your personal circumstances—such as healthcare costs, charitable giving, and your overall tax bracket—can all affect the optimal order.
For example, large medical deductions can reduce taxable income for high healthcare spenders, making taxable or tax-deferred withdrawals more attractive in those years. Meanwhile, charitable contributions can create deductions to offset withdrawals as well.
Withdrawal Strategies: Front-Loading vs. Back-Loading
| Strategy | When to Use | Pros | Cons |
|---|---|---|---|
| Front-Loading | Paying more tax early (e.g., Roth conversions, large early withdrawals) |
|
|
| Back-Loading | Minimize taxes early, defer more to later years |
|
|
Using Annuities and Roth Conversions
For many retirees, a combination of annuities and Roth conversions can play a key role in tax planning. For example, gradually converting tax-deferred accounts to Roth IRAs over several years may result in a lower overall tax bill and more flexibility in later retirement. Pairing these strategies with annuities can help smooth out taxable income and offer guaranteed payouts.
Front-Loading Strategy in Action
Imagine a couple with $1 million in pre-tax retirement accounts and $500,000 in taxable investments. By converting a portion of their pre-tax assets to a Roth IRA over 10 years, they may pay around $200,000 in taxes now—but create long-term tax-free income for themselves and their heirs. Once those assets are in a Roth, future withdrawals (and inheritances) may be free of federal income tax, under current IRS rules.
Back-Loading Strategy in Action
Alternatively, minimizing distributions and other income in early retirement can let a larger portion of your assets grow. Using a Single Premium Immediate Annuity (SPIA), for example, could provide a steady income for 5–10 years. The annuity exclusion ratio may reduce taxable income from those payments, especially if using a non-qualified SPIA. With careful planning, you may be able to stay below certain tax thresholds—like those affecting Social Security benefits—during these years.
The NUA Rule: Special Treatment for Company Stock
If you own company stock inside your 401(k), you may benefit from the Net Unrealized Appreciation (NUA) rule. This allows you to transfer company stock from your 401(k) at retirement and pay lower long-term capital gains taxes on its growth, rather than ordinary income tax. Specific rules and timeframes apply, so be sure to consult a qualified tax advisor before taking action.
Key Tax Planning Questions to Consider
- What’s your mix of taxable, tax-deferred, and tax-free accounts?
- Do you expect to face higher or lower taxes in the future?
- Have you considered Roth conversions or tax-advantaged annuity options?
- Are you using withdrawal strategies that match your goals?
- How might charitable giving or healthcare deductions affect your plan?
- Are you prepared for possible changes in tax law?
Summary and Next Steps
There’s no universal “best” strategy for retirement tax planning. The right approach depends on your goals, lifestyle, and resources. The key is to revisit your plan regularly and make tax-smart choices as laws and your circumstances change. Foxcove Financial can help you explore annuity and withdrawal options within current IRS rules. For questions about your personal tax situation, be sure to consult your CPA.
Looking for Guidance?
If you’re ready to take the next step in planning your retirement with confidence, Foxcove Financial is here to help. We’ll walk you through your options, answer your questions, and help you evaluate solutions that align with your long-term goals. We specialize in insured strategies designed to protect and grow your retirement income. Call us at 609.807.8502 or schedule an appointment.