Quick Takeaways
- The years between retirement and age 73 offer a valuable opportunity for tax planning
- Required minimum distributions can create higher taxes later if not addressed early
- Strategic Roth conversions can add long-term flexibility and reduce future tax pressure
- A thoughtful withdrawal structure can help protect both income and investments during market downturns
Saving for retirement takes discipline. But what often surprises people is that the withdrawal phase can be just as complex, and far more expensive if it isn’t planned carefully.
Why One-Size-Fits-All Withdrawal Rules Often Miss the Mark
How you take money from your accounts, and when, plays a major role in how long your savings last and how much ends up going to taxes instead of your life.
Retirement accounts generally fall into three categories:
- Taxable accounts (brokerage, savings): You’ve already paid income tax. Withdrawals may trigger capital gains tax on growth.
- Tax-deferred accounts (traditional IRAs, 401(k)s): Withdrawals are taxed as ordinary income. Required Minimum Distributions (RMDs) begin at age 73.
- Tax-free accounts (Roth IRAs): Qualified withdrawals are tax-free. No RMDs during your lifetime.
The conventional approach draws from taxable first to preserve tax-advantaged growth. The downside is that it can allow tax-deferred balances to grow large enough that, once RMDs begin, the required withdrawals push you into higher tax brackets later in retirement.
Once you reach that point, many of the best planning options are already behind you.
Here are 3 strategies you can use to help reduce taxes on retirement withdrawals.
1. Use Your Early Retirement Years to Exert Control Over Your Tax Bracket
Once you reach age 73, required minimum distributions begin, whether you need the income or not. At that point, the IRS largely determines how much taxable income shows up on your return.
Before then, many retirees have more flexibility than they realize.
The years between retirement and age 73 often come with fewer income sources. That creates an opportunity to take intentional withdrawals from tax-deferred accounts while staying within lower tax brackets.
Rather than relying solely on taxable savings during this period, carefully planned IRA withdrawals can help reduce the size of future RMDs and smooth taxes over time. The goal is not to take withdrawals randomly, but to make deliberate choices while you still have control.
2. Create Tax-Free Flexibility with Strategic Roth Conversions
A Roth conversion moves funds from a traditional IRA into a Roth IRA. You pay income tax on the converted amount today, but future growth and qualified withdrawals can be tax-free. Each conversion also reduces the balance that will eventually be subject to required distributions.
This strategy can be especially useful during periods when your taxable income is temporarily lower or when market values are down. Converting smaller amounts over multiple years can help manage the tax impact while building a pool of tax-free assets for the future.
Over time, this added flexibility can help manage retirement income, control tax brackets, and potentially simplify planning for your heirs.
3. Build a Withdrawal Structure That Can Withstand Market Downturns
Sequence of returns risk is what happens when market downturns occur early in retirement while you’re taking withdrawals. Two retirees can have the same average returns but very different outcomes depending on when the declines occur. Selling investments during downturns to fund withdrawals can lock in losses and reduce the portfolio’s ability to recover.
This is where The Bucket Plan® approach comes in. It organizes assets by time horizon so you have dedicated money set aside for when you’ll need it:
- Now bucket: 0–2 years of expenses in easily accessible cash and short-term bonds
- Soon bucket: 2–10 years in income-focused investments
- Later bucket: 10+ years in growth assets
This structure can help provide income during market downturns without forcing the sale of long-term investments at inopportune times. It also creates flexibility to take advantage of tax opportunities that often appear during volatile markets.
Why Retirement Tax Decisions Work Best When Planned Together
These three areas influence each other. Withdrawal timing affects required distributions. Roth conversions influence future tax brackets. Market conditions impact both investment returns and tax planning opportunities.
When these decisions are made independently, it’s easy to miss opportunities or create unnecessary tax costs. Coordinating them as part of a comprehensive plan helps ensure each choice supports the others and aligns with your long-term goals.
If you’re wondering how these strategies apply to your situation, you don’t have to figure it out alone. A coordinated retirement income plan can help bring clarity, confidence, and intention to your next chapter. Book your complimentary call with us to get started.
Frequently Asked Questions About Managing Taxes on Retirement Income
Does a Roth conversion count as an RMD?
No. A Roth conversion does not count as a required minimum distribution. If you are subject to RMDs, you must take the full RMD first before converting additional traditional IRA funds to Roth.
How are required minimum distributions calculated?
RMDs are calculated by dividing your December 31 account balance by a life expectancy factor from the IRS Uniform Lifetime Table. At age 73, that factor is 26.5 and decreases each year.
What happens if I miss taking an RMD?
The IRS may assess a penalty of up to 25% of the amount not withdrawn. If the missed distribution is corrected within two years, the penalty can be reduced to 10%.
Should I always withdraw from taxable accounts first?
Not necessarily. While common, this approach can allow tax-deferred accounts to grow too large, leading to higher required withdrawals later. A coordinated strategy that considers both current and future taxes is often more effective.