Tax planning in retirement doesn’t always get the same attention as tax planning during your working years, which is unfortunate because for many people, there’s potential to lower your lifetime tax bill by tens or even hundreds of thousands of dollars through proactive planning. In this episode, we discuss the three key tax planning windows in retirement and share some tips and suggestions for what you can do during each window to minimize your retirement tax bill. From Roth IRA conversions to strategic withdrawals from your retirement accounts to qualified charitable distributions, and more.
Outline of this episode
- Getting organized and gathering what’s needed [1:44]
- The key tax planning windows in retirement [2:19]
- A 20-30 year tax plan to lower your lifetime tax bill [5:01]
- Roth IRA conversions and their benefits [7:42]
- The first planning window: retirement to age 65 [8:46]
- The second planning window: Medicare eligibility to age 72 [14:04]
- The final planning window: RMD at age 72 and beyond [18:21]
Tax planning from the time you retire until you turn 65
The window from retirement until age 65 is the optimal period to be proactive with tax planning. The best strategy is often using your taxable accounts to fund your lifestyle, then using Roth IRA conversions to fill up additional tax brackets in order to reach your target marginal tax bracket each year.
Each year you can look at your estimated taxable income, decide which tax bracket you want to fill up to, then use that gap or available space to take advantage of making Roth IRA conversions. Another great part about retirement until age 65 is it can be the most enjoyable phase while you’re healthy and have the energy to do anything you may have been putting off. So hopefully the tax planning strategies don’t dampen that excitement.
How to plan once you become eligible for Medicare
When planning between age 65 and 72 you’ll want to follow the same basic strategy in these years as you did in the previous window from retirement to 65. Be aware of the additional changes that begin at 72 when RMDs come into play. Opportunities for strategic decisions around Medicare, Social Security, and qualified charitable distributions also happen during this window. Hopefully, you’re still enjoying retirement during this phase and you can be happy knowing the government is finally giving you something back through subsidized health insurance and by starting to pay you Social Security benefits.
The final phase of tax planning at age 72
If you’re proactive during phases one and two, much of the tax planning you did should set you up to now be more on autopilot, at least from a tax perspective. The biggest considerations now are thinking about how to handle things like your specific goals when it comes to charitable intentions and generational planning for your heirs after you’re gone.
When it comes to tax planning and managing your finances in general, understanding the big picture and some of the various key windows allows you to be intentional and maximize all the opportunities available to you. We know it’s more common to think about your life in terms of the working years and retirement, but from a tax planning perspective, hopefully, you are now able to see why it makes sense to break it down further than that.
Resources & People Mentioned
- Download our guide: The Key Tax Planning Windows in Retirement
- Blog post: How to Save Taxes in Retirement