Retirement Tax Planning

Retirement tax planning is not a one-time exercise. It is an ongoing conversation that evolves with ever-changing tax laws, market conditions, goals and life’s inevitable curveballs. The reality is that taxes can take a big bite out of your savings if you are not careful. The key is to think ahead and consider the full retirement period.

At Tanglewood, we use detailed modeling and collaborative planning to help clients optimize these interconnected areas tax efficiently:

• Coordinating retirement income sources
• Protecting against tax bracket creep
• Medicare surcharges
• Optimizing Social Security
• Required Distributions

Strategies That Help Coordinate Your Income

Think of your retirement dollars like a team of players. You have taxable accounts (e.g., regular brokerage accounts) that generate taxable income each year, tax-deferred accounts (e.g., Traditional IRAs and 401(k)s) where investment income is not taxable unless paid out as withdrawals, and tax-free accounts (e.g., Roth IRAs, Health Savings accounts) where neither the investment income nor withdrawals are taxable. These are the “tax buckets” discussed in the first article of this series, The Working Years. A smart plan mixes withdrawals from these different accounts each year based upon a long-term plan of lifetime tax minimization.

The foundation of strong retirement tax planning is income coordination. It helps smooth taxable income year to year, potentially lowering your overall lifetime tax burden while preserving eligibility for favorable tax treatment in other areas.

Common planning strategies include:

• Roth Conversions in lower-income years to reduce future Required Minimum Distributions (RMDs) and create tax-free growth.
• Tax bracket management by “filling” lower tax brackets intentionally.
• Bunching income or deductions where beneficial.
• Timing withdrawals from taxable brokerage accounts before tapping tax-deferred accounts.
• Shifting taxable income among family members

Federal Tax Brackets in Retirement

The sources of income in retirement often look quite different from working years, with a mix of pensions, Social Security, investment returns, and retirement plan distributions. The federal tax brackets are progressive, so increases in taxable income push you into higher tax rates. This becomes problematic as many retirement assets are subject to rules that require taxable distributions that increase over time whether the account holder needs the income or not.

The primary goal throughout retirement is to try to equalize or average your lifetime income and stay within more favorable brackets, minimizing the amount of taxes you pay over your lifetime.

Any retiree (especially one with a large IRA) that has a year with very low tax liability is likely a missed planning opportunity.

A strategy we frequently employ, is strategic Roth Conversions during “gap years” between when you first retire and your Required Minimum Distribution (RMD) age. This is when you move (convert) some money from a Traditional IRA to a Roth IRA. The idea here is to pay taxes at a low rate now and average down the lifetime tax rate. Later, the money in the Roth IRA—and all its growth—can come out tax-free.

Finally with respect to income tax brackets, an important consideration is the tax impact of a surviving spouse moving from a married filing joint tax filer to a single tax filer. Often times, there is little change to taxable income after a spouse passes, but deductions are lower and tax brackets are much more compressed.

Social Security and How It Fits In

Social Security benefits are a cornerstone for many retirees, yet up to 85% of benefits are taxable depending on your combined income. Combined income includes typical forms of income (e.g., wages, interest, dividends, pension payments, retirement plan distributions), plus nontaxable interest and 50% of Social Security benefits.

Social Security filing decisions—such as delaying benefits for higher monthly amounts or coordinating spousal strategies—interact directly with your overall tax picture. Some of the important questions include:

• How will other retirement income affect the taxation of your benefits?
• Would coordinating withdrawals help minimize the taxable portion of Social Security?
• How do survivor benefits or spousal strategies fit into a broader plan?

For example, taking large withdrawals from an IRA before your RMD age could make more of your Social Security benefits taxable. By planning the size and timing of those withdrawals, or using money from more tax efficient accounts first, you may be able to keep more of your Social Security tax-free.

Medicare and IRMAA

Medicare helps pay for health care, but high-income retirees pay extra premiums called Income-Related Monthly Adjustment Amounts (IRMAA), specifically for Parts B and D.

It is based on your Modified Adjusted Gross Income (MAGI) which is essentially the sum of all your taxable and tax-free income. This additional premium is based upon a look back period of two-years. So your 2027 premium will be a function of 2025 income and your current 2026 income will adjust your 2028 Medicare premiums.

The possibility of incurring IRMAA can create a strong incentive to keep your MAGI in check. Strategies like careful Roth Conversions, using Qualified Charitable Distributions (QCDs) for required withdrawals, or timing other income are ways to potentially help you reduce the impact of IRMAA.

QCDs are especially helpful. If you are age 70½ or older, and do not rely on your RMD for living expenses, in 2026 an individual can distribute up to $111,000 from their IRA directly to a qualified charity (up to $222,000 if married filing jointly provided each spouse distributed $111,000 from their own IRA). If done correctly, the QCD counts toward your RMD but does not raise your taxable income or trigger higher Medicare costs.

Retirement Account Distributions

RMDs begin at your applicable RMD age (73 to 75 depending on the year you were born) and must be taken from most tax-deferred accounts. However, viewing RMDs merely as a compliance task misses the opportunity to integrate them into a broader tax strategy.

By aligning RMDs with your overall cash flow needs, tax situation, charitable intentions, and how you leave money to your heirs, you can have a more favorable lifetime tax planning outcome. The result is often greater confidence and more resources available for the life you want to live.

For many people, the act of creating and implementing an estate plan is sometimes not easy and straightforward. For a lucky few, it is. Regardless of which camp you are in, getting it done is a big accomplishment to acknowledge—just remember to not let it grow stale. So, consider it a sign to review your estate plan if any of the following resonates with you:

It’s been awhile since you talked to the people (e.g., executor, trustee, agent) that you assigned important roles to in your estate plan. Have they moved far away? Has anyone passed away? Do they still want to serve? Are they capable of serving? Do they have a copy of your estate planning documents?

Your estate planning attorney has retired or is deceased. Do they have a successor? Have you talked to them? Do you know what happened to your client files? Do you have your signed original estate planning documents?

Your formerly minor children are now adults living their own lives. Are they financially responsible? Are you thinking about disinheriting or favoring a beneficiary? Are any of them on government assistance? Are you wondering if using a professional (corporate) trustee is right for your situation?

Charitable giving is of higher importance to you today. Are you unsure how much you can give without adversely impacting how much you want to go to your beneficiaries? Do you find yourself asking if it is better to give money while you are alive vs. after your death? What is the right giving strategy for you?

Your wealth has grown larger and more complex. Are you worried your existing estate plan is not appropriately structured to fulfill your wishes? Are you now concerned about gift, estate, and generation-skipping taxes?

Context can be helpful to others (e.g., beneficiary, executor, and trustees) to know why you structured your estate plan the way you did. In order to share your values and how you want them to think about your assets after your death, have you considered writing letters to the trustee (who will control and distribute the assets) and to your beneficiaries (who will receive them)? Although these types of letters carry no legal weight, they can provide a powerful message to their recipients.

If you find yourself wanting to review your estate plan, be sure to reach out to your Wealth Advisor to get together and discuss what, if any, changes or additions may be appropriate for your situation.

High home prices, high interest rates, low inventory, and tough competition have made many prospective buyers feel that home ownership is out of reach entirely or they can no longer afford the home they want.

This environment has prompted new ways of approaching a potential purchase and led to more conversations with clients about helping a child buy a home. There are several potential ways parents can help but only after addressing the first and most important question:”Do we have enough to help at all?” (As Keith discussed on the previous page, our Capital Sufficiency pillar is an excellent tool that can be used to find the answer.) Once that critical question is addressed, consider the following:

Outright Gift

If you are comfortable gifting money, you could give enough cash to your adult child to buy the home outright, assist with the down payment, or help with making mortgage payments. Depending on how large the gift is and how it is structured, you may need to file a gift tax return. You may also be asked to confirm that it is a gift and not a loan so as not to interfere with mortgage underwriting.

Intrafamily Loan / Landlord

In lieu of an outright gift, you could become the “family bank” and loan the money to your adult child. This works best when financing the entire purchase. As an alternative, you could buy the house and then rent it to your adult child. In both cases it is important that you properly document any loan or rental agreement and associated tax reporting on income.

Be On The Hook

If your adult child is struggling to meet mortgage loan underwriting requirements (e.g., they are self-employed), you could co-sign the mortgage or co-borrow. The co-signer is on the mortgage to guarantee the loan for the borrower. The co-borrower has equal responsibility to pay the mortgage.

Gift or Sell the Family Home

If you find yourself in a position of wanting to downsize and your adult child wants the family home, you could sell it or gift it to them. In both cases, it is wise to hire a real estate appraiser to determine and document the fair market value of the home, as well as hire an attorney to prepare and file any required paperwork to properly document the transfer of ownership.

Each of these has its unique advantages and disadvantages along with the potential impact on your taxes (income, gift, and estate), family dynamics, liability, financial independence, and estate planning.

Helping an adult child is an admirable goal and a big financial decision to make. We encourage you to contact your Wealth Advisor if it is something you are considering.

Disclosures

Social Security has three main benefit programs. The most well-known is the Retirement Benefit for individuals who worked and paid into Social Security. Even if you did not work under Social Security, you may still be eligible for benefits as a Spouse, Ex-Spouse, or Survivor.

Spousal Benefit

If you are married and never worked under Social Security, at your full retirement age you would be eligible to receive up to one-half of your spouse’s full Retirement Benefit amount, or even a reduced benefit as early as age 62. To the extent you have any work history, you would receive the higher of the two.

Ex-Spousal Benefit

In general, if you are divorced and never worked under Social Security, you may be eligible to receive Retirement Benefits based on your ex-spouse’s work history if: you were married at least 10 years, you never remarried, and you are age 62 or older. If one-half of your ex-spouse’s Retirement Benefit is higher than yours, you would receive the higher of the two.

Survivors Benefit

If you are a widow(er) and have children under age 18 (or age 19 in secondary school), you and each of your children may be eligible for survivor benefits. Your age and whether you have qualifying children at the time of your spouse’s death determines the amount of Survivor Benefit you can receive, which ranges between 71.5% and 100% of your spouse’s full Retirement Benefit at the time of death. Each qualifying child can receive up to 75% of the deceased parent’s full Retirement Benefit.

There is a limit on the combined monthly benefit amount a family can receive. It is typically equal to 150% and 180% of the deceased parent’s full Retirement Benefit at the time of their death. If the total amount payable to all eligible family members is greater than the limit, the monthly benefit amount is reduced proportionately.

If you are a widow(er) with no children and never worked under Social Security, you may be eligible to receive reduced Survivor Benefits as early as age 60 vs. the early retirement age of 62. Remarrying after you turn 60 has no effect on survivor benefits.

The Bottom Line

Your Social Security statement outlines your benefits based solely on your work history. At the end of the day what type and amount of benefit you receive ultimately depends on your specific situation and how you qualify.

If you are a Texas homeowner, you are likely familiar with the term “homestead exemption.” However, there may be a wrinkle you are unfamiliar with.

When you turn age 65, you can fill out an application with your appraisal district to qualify for the over-65 homestead exemption. This is an additional $10,000 homestead exemption from school district taxes (on top of the $40,000 exemption from school district taxes for all homeowners).

The year you qualify for the over-65 homestead exemption is called the “freeze year.” The freeze year is an important concept because it establishes your “tax ceiling.” The benefit of the tax ceiling is that it caps your future school district taxes to the amount you pay in the year you qualified for the over-65 homestead exemption. This means your school district taxes may not go above the tax ceiling amount, unless you make changes to your home that your appraisal district deems to be an improvement (e.g., adding a new room or second story).

We have been asked, what happens to my tax ceiling if I move; do my property tax values reset? The good news is you can take your tax ceiling ratio with you. For example, if your home is appraised at $1,200,000 today but was valued ten years ago at $600,000 when your school district taxes were frozen at age 65, you currently have a tax ceiling ratio of 50%. If you decide to move to a new home in the same or other district, you can apply your 50% tax ceiling ratio to your new home. Your school district taxes will be 50% less than what they would be without the tax ceiling ratio applied.

The bottom line: If you are age 65 or older and are moving within Texas, make sure you take your tax ceiling ratio with you. It is a simple process. You or your title company requests a Tax Ceiling Certificate from your former appraisal district and then file it with your new appraisal district when you apply for a residence homestead on your new home.