The Retiree’s Tax Planning Guide: How to Keep More of Your Money

Ask a group of retirees what surprised them most about retirement, and you’ll often hear the same thing: “I didn’t realize how much I’d still be paying in taxes.”

It’s true. Even with no paycheck, your retirement income isn’t free from the IRS. Withdrawals from your 401(k) plan, part of your Social Security benefits, and even your Medicare premiums are all tied to tax rules. Fortunately, with the right planning, you can manage how much you owe — and when.

In this guide, we’ll break down how retirement income is taxed and explore how to make the most of your financial situation. That way, your savings can support the retirement lifestyle you’ve worked hard to build.

How Is Retirement Income Taxed?

A dollar is a dollar, right? Not when it comes to retirement. Where your income comes from, and how it’s taxed, directly impacts the longevity of your savings.

Let’s explore the main sources and their tax implications. 

Taxable Accounts

Your taxable accounts, which include brokerage and savings accounts, are generally the most accessible, since contributions were made with after-tax dollars. That said, as the name implies, they don’t offer tax benefits.

Dividends, interest, and realized gains are taxed annually. For investments held longer than a year, a long-term capital gains tax applies when you sell. These are favorable rates (0%, 15%, or 20%). For investments held less than a year, gains are subject to ordinary income tax (up to 37% for high earners). 

Tax-Deferred Accounts

Traditional IRAs, 401(k) accounts, and similar plans let you save pre-tax, lowering your taxable income while you’re working. But the IRS eventually collects its share: every withdrawal in retirement is taxed as ordinary income. That means large withdrawals could bump you into a higher tax bracket and affect other areas of your financial life, like Medicare premiums.

Roth Accounts

Roth IRAs and Roth 401(k)s work differently. Contributions are made with after-tax dollars, but once you meet the rules (age 59½ and the account’s been open at least five years), all withdrawals are completely tax-free. Plus, they aren’t subject to required minimum distributions (RMDs). 

As you can imagine, this makes Roth accounts very versatile for retirement planning, since they can help manage your taxable income (and, in turn, tax bill) year to year.

Social Security Benefits

Depending on your income, up to 85% of your Social Security benefits may be taxable. The IRS uses a formula called “provisional income” to determine how much is taxed. This is essentially your adjusted gross income plus half of your Social Security benefits and certain nontaxable interest.

For retirees with multiple income streams, this can come as an unwelcome surprise.

Pensions and Annuities 

Outside of the government, pensions are a rarity these days, but certain companies still offer them (3M is one example). 

If you are eligible for a pension, those payments are generally taxed as ordinary income. The same is true for most annuities, though the details depend on how they were funded. They can provide valuable stability in retirement, but you still have to account for taxes when budgeting your income.

What Order Should You Sequence Withdrawals?

For many retirees, the instinct is to start pulling from tax-deferred accounts like a 401(k) or IRA and let everything else ride. But the order of withdrawals matters almost as much as the amount. This is where a strategic withdrawal plan comes in.

The idea is to coordinate withdrawals across your taxable, tax-deferred, and Roth accounts in a way that balances your income needs with your tax bill.

1. Start with taxable accounts. Drawing from brokerage accounts first allows tax-deferred assets to keep compounding. Plus, you may benefit from long-term capital gains rates (0%, 15%, or 20%) instead of higher ordinary income tax rates.
2. Blend in tax-deferred accounts. As you move closer to RMD age, it often makes sense to gradually tap IRAs or traditional 401(k)s to prevent a sudden spike in taxable income later. Spreading withdrawals helps keep you from being forced into a higher bracket once RMDs begin.
3. Save Roth accounts for last. Because Roth IRAs grow tax-free and have no RMDs, they often serve as a “reserve tank” — funds you can access when needed, or pass along to heirs more efficiently.

Strategic withdrawals not only lower your liability in a given tax year but also help reduce your lifetime tax liability. For example, pulling a little more from your IRA in your early 60s could mean paying slightly higher taxes today — but it might save you from being pushed into a much higher bracket in your 70s when RMDs kick in.

A thoughtful sequence helps your money last longer and gives you flexibility to adapt to changing tax laws, healthcare costs, and lifestyle needs.

How Do Roth Conversions Work?

Sometimes, paying taxes sooner can actually save you money in the long run. That’s the logic behind a Roth conversion.

A Roth conversion means moving money from a Traditional IRA or 401(k) into a Roth IRA. You’ll pay ordinary income tax on the converted amount in the year you do it, but once those dollars are in a Roth, future growth and withdrawals are completely tax-free.

So, how does it work? 

Example: The Tax Trade-off of a Roth Conversion

You’re a retiree with $120,000 in taxable income this year and a $150,000 Traditional IRA you’d like to convert to a Roth. The timing of your conversion will dictate how much you owe in taxes.

Option 1: Convert $50,000 per year over three years

Year one, your taxable income increases to $170,000 ($120,000 + $50,000). You remain in the 24% federal tax bracket (which in 2025 applies to single filers with taxable income up to $191,950). The $50,000 conversion adds about $12,000 in federal tax liability for the year (24% of $50,000).

Repeat that strategy over three years, and you’ve moved the entire $150,000 into a Roth with $36,000 in added federal taxes, while keeping your income within the same bracket.

Option 2: Convert the full $150,000 at once

Your taxable income jumps to $270,000 ($120,000 + $150,000). This pushes part of the conversion into the 32% federal bracket, which starts at $191,951 for single filers in 2025. 

Here’s the breakdown of the $150,000 conversion:

$71,950 taxed at 24% = $17,268

$78,050 taxed at 32% = $24,976

Total additional tax = $42,244

Converting all at once costs you roughly $6,000 more in federal taxes compared to spreading it out. While both options get your IRA into a Roth, spreading conversions across multiple years often helps avoid higher income brackets and leaves you with more money working for you in the long run.

Is Social Security Taxable?

For many retirees, Social Security is a cornerstone of retirement income — but it comes with a twist: it’s not always tax-free.

The IRS uses something called provisional income to determine whether your benefits are taxable. This includes your adjusted gross income (AGI), half of your Social Security benefits, and certain nontaxable income, like municipal bond interest.

Based on that formula:

• If your provisional income is below $25,000 (single) or $32,000 (married filing jointly), your benefits are tax-free.
• Between $25,000–$34,000 (single) or $32,000–$44,000 (married), up to 50% of your benefits may be taxed.
• Above $34,000 (single) or $44,000 (married), up to 85% of your benefits may be taxed.

It’s worth noting that Minnesota is one of the states that still taxes Social Security benefits for retirees above certain income thresholds — a factor that may influence where some Minnesotans choose to retire.

With diligent planning, you can limit how much of your Social Security is exposed to taxes. Coordinating withdrawals across taxable, tax-advantaged, and Roth accounts can help manage your annual taxable income and keep you from crossing into higher thresholds.

Delaying benefits while strategically drawing down other accounts can reduce lifetime taxes and provide more financial flexibility later.

Managing Required Minimum Distributions

When you’ve spent decades saving in tax-deferred accounts like a 401(k) or Traditional IRA, the IRS eventually comes knocking. Hence, required minimum distributions.

Starting at age 73 (rising to 75 in 2033 under SECURE 2.0), you must begin withdrawing a portion of your tax-deferred retirement accounts each year. The amount is based on your account balance and life expectancy, using IRS tables. And every dollar you withdraw is taxed as ordinary income.

This can create a few challenges:

• Higher tax brackets. Large RMDs can push you into a higher bracket, increasing your federal income tax bill.
• Medicare premiums. Because Medicare premiums (IRMAA) are tied to income, big withdrawals can bump up your healthcare costs.
• Loss of control. Once RMDs begin, you lose flexibility — the IRS sets the withdrawal minimum whether you need the money or not.

On the flip side, there are tax strategies to ease the tax burden:

• Roth conversions. Moving retirement funds from a Traditional IRA or 401(k) into a Roth account before RMD age reduces future RMDs (because they aren’t subject to this rule) and creates tax-free income later. 
• Qualified Charitable Distributions (QCDs). If you’re charitably inclined, you can direct up to $108,000 per year (2025 limit) from an IRA to a qualified nonprofit. This satisfies the RMD and keeps the distribution from increasing your taxable income.
• Withdrawal sequencing. Thoughtful planning, such as tapping taxable accounts earlier, can smooth out income over time and avoid a sharp spike once RMDs kick in.

It’s a complicated picture with a very simple solution: plan ahead (and consider working with a tax professional). Waiting until RMDs begin typically leaves you with fewer options. 

Healthcare, Deductions, and Hidden Tax Traps

Taxes are everywhere in retirement. If you aren’t careful, healthcare expenses and hidden rules in the tax code can quietly add thousands to your annual tax payments and eat into your retirement savings.

Medicare Premiums (IRMAA)

Your Medicare Part B and Part D premiums are tied to your income. If your modified adjusted gross income (MAGI) is more than $106,000 for single tax filers (or $212,000 for married tax filers), you’ll pay Income-Related Monthly Adjustment Amounts (IRMAA) — surcharges that can add hundreds (even thousands) of dollars per year. 

All that to say, big IRA withdrawals or capital gains can unintentionally push you into unwanted IRMAA territory. 

Medical Expenses as Deductions

The standard deduction is typically the default for most tax payers. However, if you itemize deductions, unreimbursed medical expenses above 7.5% of your adjusted gross income are deductible. 

If you’re facing significant healthcare or long-term care costs, this can provide meaningful tax relief — but only if planned for in advance.

State and Local Taxes (SALT)

Don’t overlook property taxes, local taxes, and state income taxes. Even in “low-tax” states, these costs can erode your budget. A retiree moving to a state without income tax (like New Hampshire, for instance) could still face high property taxes or insurance premiums.

The Hidden Trap of Provisional Income

As we covered earlier, Social Security benefits become taxable once your income exceeds certain thresholds. Many retirees are surprised when a seemingly small withdrawal from an IRA causes a larger share of their benefits to be taxed.

Keep More of Your Money in Your Accounts

Alas, taxes are an inevitability. From Social Security and RMDs to Roth conversions and healthcare costs, every decision about when and how you draw income can influence your tax situation.

That’s why it’s important to coordinate withdrawals across accounts, time conversions, and be mindful of Medicare and state tax rules. It’s a lot to juggle, which is why many near-retirees and retirees choose to work with a financial advisor to design a tax-efficient investment strategy. 

Taxes may be inevitable in retirement, but overpaying doesn’t have to be. If you’d like help understanding how tax planning fits into your broader retirement strategy, the Pine Grove team is here to help. Reach out to start a personalized conversation about building a more tax-efficient, sustainable retirement plan.