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How to Save Taxes in Retirement Thumbnail

How to Save Taxes in Retirement

In our previous post, we discussed opportunities to save taxes as an attending physician, primarily by saving money to accounts on a pre-tax basis while you are in what is likely the highest tax bracket of your lifetime. We also highlighted additional opportunities available to business owners and independent contractors, as well as what to do once you exhaust your pre-tax savings space. In this post, the final edition of a three-part series, we move to the final phase of a physician’s life – retirement. This final phase often provides the greatest flexibility when it comes to managing your taxes, so it’s important to understand your options and be strategic. Let’s look at some of the things you can do to save taxes in retirement.

Phase 3 – Retirement

Creating a “Paycheck” From Your Investment Accounts

For most people, the transition to retirement is accompanied by a significant drop in income compared to their peak earning years. When you are no longer receiving a paycheck from an employer or your business, the challenge becomes how to convert your investments (and other income sources like Social Security) into a new type of “paycheck” that will fund your lifestyle in retirement. The good news is that you have flexibility in how to create this paycheck, and therefore you have more control over how much you pay in taxes each year.

More Types of Accounts = More Flexibility

If you were smart with your tax planning in phases one and two, once you reach retirement, you should have a combination of tax-deferred investment accounts (from pre-tax “traditional” contributions), tax-free investment accounts (from after-tax “Roth” contributions), and taxable investments (from money you saved after exhausting all your tax-advantaged saving space). In theory, during your first year of retirement you could withdraw all the money you need for the year from a Roth account and not pay taxes. However, the goal in retirement should not be to minimize your tax bill in just one particular year. Instead, the goal should be to minimize your tax bill over your entire retirement period.

Focus on Your Entire Retirement Tax Bill

Minimizing your overall retirement tax bill requires 1) looking out over the next 20 or 30 years and understanding how the combination of your income sources (like Social Security) and different investment accounts will impact your taxes over time, then 2) being strategic about how you withdraw from your different accounts to pay as little as possible to the government over that entire time period. Typically, the best approach is to “smooth” your tax rate over time. For example, rather than being in the 0% tax bracket for three years then jumping to the 32% tax bracket the rest of retirement, you would probably be better off remaining in the 20% tax bracket each year. Smoothing your tax rate requires you to “fill up” lower tax brackets by recognizing more income (than you would have otherwise) in certain years.  

Consider Roth IRA Conversions

One way to strategically “fill up” lower tax brackets is to make a Roth IRA conversion, which is when you convert money from a traditional IRA account to a Roth IRA account. You pay taxes on the money you convert, but the converted money then grows tax-free and can later be withdrawn without paying taxes. Many doctors end up with large traditional IRAs, which the government requires you to start withdrawing from at age 72. For the typical doctor, their tax bracket in the years between retirement and when these required IRA withdrawals begin will likely be lower than it will be after required withdrawals start. Therefore, Roth IRA conversions provide the opportunity to capitalize on this discrepancy and “smooth” your lifetime tax liability so that you don’t face a huge jump in taxes owed once required withdrawals start.

Other Strategies

Two other strategies that are unique to phase three are 1) the timing of when you claim Social Security, and 2) qualified charitable distributions. Regarding Social Security, by delaying when you start receiving payments, you not only receive a higher lifetime payment (assuming normal life expectancy) but you also have additional room to do Roth IRA conversions in the years between retirement and when required IRA withdrawals begin. Regarding qualified charitable distributions, once you reach age 70 ½ you can choose to donate (up to $100k annually per IRA owner) from your IRA to charity. This provides the twin benefits of supporting a charity while also lowering your tax bill. 


As this three-part series of blog posts shows, tax planning is truly a lifetime process and by doing certain things in phases one (training) and two (post-training), you can set yourself up much better for phase three (retirement). This also illustrates why we recommend focusing on tax planning (seeing the forest) rather than tax preparation (looking at a tree). By maintaining a long-term perspective and trying to minimize your lifetime tax bill (rather than your tax bill in a particular year), you can be strategic about the decisions you make along the way. It’s also helpful to look at your lifetime tax situation in three distinct phases, since each carries unique challenges and opportunities. Though remember to not let the tax tail wag the dog, since you want to ensure that your tax planning strategy fits within your overall financial plan and what you are trying to accomplish. Like many things in financial planning, change is inevitable and tax laws evolve, so you’ll want to have a process for doing regular tax planning reviews. While we all have to pay taxes, there’s no reason to pay the IRS more than what’s required.  

Disclaimer: We are not licensed tax professionals and the content of this post does not constitute the issuance of tax advice. Please consult with a licensed tax professional to understand what is best for your personal situation.


About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.