You can indeed implement a variety of strategies to make retirement more affordable such as downsizing your home, delaying Social Security benefits, or even working part time. Another fine option? Minimizing your tax bill to avoid padding government pockets. This article discusses how to do just that.

Know what your “after-tax” retirement savings looks like

Before we discuss specific strategies, it’s critical to understand how much of your retirement savings you’ll actually get to keep after taxes. If you’re contributing to a tax-deferred account like a 401(k) or IRA, you’ll owe taxes on money withdrawn later (e.g., if you’ve built up $500,000 in your 401(k) and your income tax rate is 32%, your 401(k) is really worth about $340,000 after taxes). This is just one example showing why it’s so important to nail down your after-tax retirement savings before you retire, which can make a big difference when it comes to your plans.

Maximize Roth IRAs

When you put money into a Roth IRA, you’re using after-tax dollars to do so (having already paid taxes on that income). The big advantage here? Your investments can grow tax-free; you can make withdrawals without worrying about taxes when you retire, provided you owned the account for at least five years. Many people also invest in Roth IRAs specifically to avoid required minimum distributions (RMDs)—withdrawals required by the IRS once you hit a specific age (73, as of 2023)—since there are no RMD requirements for the original account holder. Your money can therefore continue growing tax-free indefinitely, giving you more flexibility and control over your retirement savings.

Consider Roth IRA conversions

One option, especially if most of your retirement funds are tied up in tax-deferred accounts, is to consider a Roth IRA conversion: the process of moving money from a traditional IRA, SEP, or SIMPLE IRA into a Roth IRA. The main perk of doing so is better tax diversification for retirement account withdrawals (helping you save more money in the long run), but remember that the amount moved counts as taxable income for that same year and can thus bump up your tax bill.

Roth conversion example

Consider a couple, both people 59 years old, with the wife already retired and the husband planning to retire next year at age 60. Assume they will collect SS benefits at their full retirement age (FRA) and have a liquid net worth of about $1.8 million (with a home worth $600k and no mortgage). Current expenses are ~$11k a month—expected to fall to ~$8,100 a month in retirement—and almost all liquid assets are in pre-tax retirement accounts and subject to ordinary income tax upon withdrawal as well as future RMDs.

Pre-conversion

Based on the current scenario and assumptions, we can see their portfolio assets will allow them to draw down until each is 92 years old. This also assumes an expected rate of return based on their existing asset allocation, estimated at ~7% based on the level of risk their investments carry.

Post-conversion

This scenario illustrates the couple performing a Roth conversion for two pre-tax accounts, totaling about $1.4 million in portfolio value, over a 10-year conversion period.

As you can see, their overall net worth and portfolio value initially decline due to taxes on these conversion amounts. A net increase in portfolio value begins in 2034, however, when Roth conversions cease. In this scenario, we’re assuming a lower expected rate of return due to the clients' older age and lower risk tolerance of 4.87%; despite this, the strategy adds about $1.84 million in net worth to their portfolio over time and allows them to live comfortably beyond age 92 without fearing depleted funds.*

While a Roth conversion doesn’t make sense for everyone, considering it as an option is recommended especially for those with a lot of retirement money tied up in tax-deferred accounts.

Plan for Medicare surcharges

Did you know Medicare charges extra fees to higher-income beneficiaries? It’s true; the more you earn, the more you’ll pay for Medicare Part B and D premiums. These additional charges are referred to as “IRMAA” (income-related monthly adjustment amount) and can add hundreds of dollars to monthly costs and thus catch retirees off guard, but there’s atwist: Medicare surcharges aren’t based on current income and are instead calculated using tax returns from two years prior. For example, your 2026 income determines your IRMAA in 2028, your 2027 income affects your IRMAA in 2029, and so on.

Live in a tax-friendly state

When it comes to choosing the best tax-friendly state for retirement, a one-size-fits-all answer doesn’t exist; your ideal state depends on your financial situation including where your retirement income comes from, how much you’ve saved, and what you want to leave behind for loved ones. The state you choose—and your filing status—can have a big impact on your tax bill in retirement, so it’s smart to do your homework before making a move.

For example, those with Social Security as their primary source of income in retirement may want to steer clear of states that tax these benefits—every dollar matters when you’re on a fixed income. Such states include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont, so living elsewhere can help you stretch your retirement income even further.

Don’t forget to consider other state and local taxes that can eat into your retirement savings such as taxes on IRA and 401(k) withdrawals and property/sales tax. Your filing status—whether you’re single or married—also affects your state tax bracket and how much you’ll owe. Every state has its own rules, so be sure to compare tax rates and brackets when deciding where to retire to keep more money in your pocket each year.

Implement a tax-efficient withdrawal strategy

Knowing how much money you can afford to withdraw is a good start, but you’ll also need to know how and when to withdraw from each type of account (e.g., taxable, tax-deferred, and/or tax-free). Doing so can help minimize the amount of taxes you’ll pay out in a given year.

If you pull money from your traditional IRA first, for example, you’ll pay regular income taxes on each dollar withdrawn—whereas you may only be taxed on capital gains and thus stay in a lower tax bracket for a few more years if you pull from your taxable account instead. A Roth IRA can keep growing tax-free, meanwhile, and you can use those funds later on in retirement if you find yourself in a higher tax bracket. Create a personalized withdrawal plan to avoid paying extra taxes, stretch your retirement income, and make your savings last longer.

Keep in mind qualified charitable distributions (QCD)

A qualified charitable distribution (QCD) lets you channel money directly from your IRA to a charity with no detours nor extra steps, with those age 70½ or older able to transfer up to $100,000 each year from a traditional IRA to a qualified charity. Not only does this count toward some or all of your required minimum distributions (RMDs), but the real win happens with respect to your taxes. Unlike standard RMD withdrawals, QCDs don’t get added to your taxable income—so you can sidestep a higher tax bracket altogether—and perhaps still qualify for certain tax credits and deductions or even dodge higher Medicare surcharges or extra Social Security taxes. Using QCDs to keep your taxable income lower can indeed make a real difference when it comes to your retirement finances.

Consider tax-free investments

Municipal bonds—often called “munis”—are issued by cities, states, and other government agencies to pay for big projects such as highways, schools, and airports. The real perk of investing in them is the corresponding tax break since the interest earned is usually exempt from federal taxes; you might even dodge state taxes too if you buy bonds from your own state! This tax-exempt interest can help lower your overall tax bill in retirement, making municipal bonds a smart choice for tax-conscious investors.

Treasury bonds are another solid option if you’re looking for safe, tax-friendly investments. Backed by the U.S. government, they pay a fixed interest rate and typically mature in 10 to 30 years. One big advantage? Their interest is exempt from state and local taxes. That means you can enjoy steady income and potentially reduce your total tax liability, making them a great addition to your retirement portfolio.

Take advantage of tax laws

You can take advantage of the current tax code for your investments and pay less in taxes during retirement, with several ways to do so including:

Holding on to your investments longer

When you're planning for withdrawals in retirement, don't forget about capital gains: profits made when selling investments for more than you paid. These fall into two categories: short-term and long-term. While short-term gains come from investments you’ve held for a year or less (and are taxed at your regular income tax rate), long-term gains come from assets held longer than a year at much lower tax rates (typically between 0% and 20%, depending on your income). Try to hold onto your investments for more than a year if you can, this simple move helping you keep more of your retirement money and pay less in taxes overall.

Using investment losses to offset investment gains

Another smart way to lower your taxes in retirement is by using tax-loss harvesting, a strategy that involves selling investments that have lost value to help cancel out taxes owed on investments that made money. This approach helps you manage your investments, reduce your tax bill, and stretch your retirement income further.

Familiarize yourself with health savings accounts

A health savings account, or HSA, is another worthy investment to consider as you navigate taxes in retirement. HSAs allow you to set aside money for medical expenses on a pre-tax basis (via payroll deductions or using after-tax money and then claiming contributions as a tax deduction during tax time). You can then use these funds to cover deductibles, copays, and other qualified medical expenses.

Several benefits are associated with HSA investments, the largest being the absence of a deadline to use your funds—any money left in your account at the end of each year simply rolls over and remains in the account indefinitely until it is used. Money in the account also generally grows tax-deferred and won’t require you to pay taxes on the same, provided you spend on qualified health costs.

Pay off your mortgage

Housing costs—which include mortgage, rent, property taxes, insurance, maintenance, and repairs—represents the largest expense for retirees. More specifically, the average retiree household pays an average of $18,872 per year ($1,573 per month) on housing expenses, comprising over 36% of annual expenditures. Paying off your mortgage can help save on taxes by potentially reducing the amount you'll need to withdraw from traditional IRAs or other retirement accounts subject to taxes.

In sum: tax-saving steps in retirement

Average retiree household expenses (for households led by someone age 65+) add up to over $61,432 per year, according to the Bureau of Labor Statistics, and will only increase over time. Since every dollar matters, you'll want to make sure you minimize what you pay in taxes accordingly.

Have questions about planning for your retirement? Schedule a free consultation with one of our CFP® professionals to get them answered.

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The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.

Retirement Planning | Advice | Investment Management

How to Minimize Retirement Income Taxes