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.