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Key Tax Planning Strategies to Consider Prior to Retirement


What are the key tax planning strategies you should consider prior to retirement?  

Tax planning is one of the most crucial yet underappreciated (and under-reviewed) aspect of your retirement plan. Why? Well, first of all, taxes are hard. This decision affects that income number which affects that tax rate and has this implication to your tax return and that impact on your financial plan.

You get the gist. Tax planning requires a holistic approach to your overall financial life. 

More, most financial advisors aren't actually able to discuss taxes and tax planning with their clients due to compliance reasons. This is most common for non-independent financial advisors who work for the big brand names you see on television. Instead, they refer their investment clients to their CPAs (who often refer the question back to the financial advisor in a never-ending cycle of frustration).

Yet, there is often massive and quantifiable value to be uncovered via a tax-conscious approach to your retirement plan. 

In fact, ignoring taxes altogether in retirement is a great way to leave dollars on the table, reduce lifetime spending, and increase the risk that you will outlive your money (instead of the other way around).To that end, we urge you to have your financial plan reviewed by a holistic financial planner with an expertise in guiding retirees through a tax-conscious retirement. To help get you started on the path toward a tax-savvy retirement, here's a list of some impactful retirement tax planning strategies to consider as you near retirement: 

Create a Tax-Conscious Withdrawal Strategy

Your withdrawal strategy defines how much money you will take per month from your retirement accounts to fund your expenses in retirement. For individuals who have done the hard work of creating tax-diversification (See blog post here), one of the most important decisions to make is to decide which retirement account to take withdrawals from in any given year. 

 Be tax savvy when deciding which investment account to take withdrawals from in retirement. 


For example, withdrawals from a Roth IRA are not taxed. Withdrawals from a Traditional IRA or other similar 'deferred' account are taxed at your personal income tax rate. Withdrawals from taxable accounts may or may not have taxable implications depending on which asset you sell and whether you realize capital gains upon selling. More, short-term ang long-term capital gains are taxed differently.

Having a plan for which account to withdraw from and when is an incredibly important aspect of any solid retirement plan. 

Consider Roth Conversions Both Prior To and During Retirement

Roth Conversions can be an incredible tool for lowering your long-term tax bill when used wisely and proactively. The idea is simple, contribute to deferred-style accounts in your high-earning years, when your marginal tax rate is likely at its highest point (barring changes to the tax code). Then, in lower income years, or years with zero taxable income, convert your Traditional or deferred accounts over to a Roth IRA and pay taxes on the conversion at a lower marginal rate.

Importantly, once the money is in the Roth IRA, any growth, income, or withdrawals are all tax-free. 

Roth conversions can be done prior to retirement or in retirement and, for many individuals, are an incredibly effective tool for lowering your lifetime tax bill. Roth IRAs are not subjected to the same Required Minimum Distribution rules as deferred-accounts. More, Roth IRAs are incredible accounts for legacy goals because when a Roth IRA is inherited by your heirs, the inheritor does not have to pay taxes on any withdrawals. 


Qualified Charitable Distributions (QCD's) 

QCD’s are for individuals age 70 ½ and older who are mandated to take required minimum distributions (RMD) from their IRAs or other qualified accounts.  Basically, instead of donating cash to a charity, the donor can have their RMD be paid directly to the charity of choice. Notably, though the RMD age has been changed to 72, you may still process a QCD as of age 70 ½.   

QCD's are a fantastic way to implement tax-efficient charitable giving in retirement

Qualified Charitable Distributions have two core benefits: 

  • Reduce Taxable Income (AGI): The RMD is not included in the individual’s adjusted gross income (AGI) for the year.  IRA withdrawals are normally taxed as ordinary income, and when mandated via an RMD this can cause unwanted tax complications or negatively affect Social Security benefits or Medicare premiums.  Qualified Charitable Distributions can offset all or a portion of a tax payer’s annual RMD leading to significant tax savings in some cases.
  • Receive a Charitable Deduction and the New, Higher Standard Deduction: Using a qualified charitable distribution maintains a dollar for dollar benefit for charitable giving while allowing the individual to still get the benefit of the higher standard deduction. Since many retirees have paid off their mortgage in full they are likely unable itemize deductions due to the higher standard deduction negating the tax benefits of charitable giving. Using a QCD allows these retirees the opportunity to both get the charitable deduction (via the reduction in income) and still benefit from the higher standard deduction. 

QCDs can have a meaningful impact on after-tax cash flow and are another great strategy to consider in retirement to reduce your annual tax bill. 

Be Proactive with Tax Loss Harvesting 

Tax Loss Harvesting is a great strategy for reducing your taxable income in retirement. Basically, tax loss harvesting is implemented by taking advantage of any unrealized losses in positions in your taxable accounts. You can sell the asset at a loss, immediately rebuy another asset in your account to stay invested, and then use that loss to offset taxable gains elsewhere or up or up to $3,000 of taxable income on your annual tax return. Importantly, losses can be carried forward on your tax return if they are not used up in in the initial year. Watch out for wash sale rules when rebuying 

Tax gain harvesting is another strategy to consider. Similar to the timing of Roth Conversions, you harvest gains (sell winners) in years where your taxable income is lower than it will be in future years. In some scenarios, tax gain harvesting can be a great way to sell assets at a gain, yet still pay no income tax. For example, the long-term capital gains rate is 0% for married filing jointly tax payers on up to $80,801 of income. For individual filers, the capital gains rate is 0% on up to $40,401 of personal income. Incredible! 


Interesting in planning for a tax-conscious retirement with our team of CERTIFIED FINANCIAL PLANNER™ professionals? Schedule a call with our team below and we'll happily give you a second opinion on your retirement plan:  

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