Taxes in Retirement: Navigating the Maze for Financial Success

by Jonathan Wallace
retirement taxes

Retirement is the much-awaited phase of life where we kick back, relax, and enjoy the fruits of our labor. However, the complexities of taxation don’t retire with us.

Your tax situation can evolve, impacting your financial well-being. Understanding the intricacies of taxes in retirement is pivotal to ensuring that your golden years are financially sound.

Unraveling the Tax Web

As you embark on this journey, it’s crucial to fathom the tax implications of tapping into your retirement accounts. David Koh, Managing Director and Senior Investment Strategist at Chief Investment Office, Merrill and Bank of America Private Bank, suggests, “You should start thinking about the tax effects of tapping your retirement accounts as you approach retirement.”

The Tax Landscape

Your withdrawals might not be as straightforward as you assume. Are they tax-free? If not, will they be taxed at your federal ordinary income tax rate or the federal long-term capital gains rate?

Consider these key points as you collaborate with your financial advisor and tax professional:

  1. Identify Income Sources:
    • Annuities
    • Pensions
    • 401(k)s and IRAs
    • Social Security

John P. Schultz, CPA and tax committee chair, emphasizes understanding how these accounts are taxed in retirement, as it’s vital for planning your withdrawal strategy.

  1. Retirement Tax Rates by Income Source:
    • Roth IRA or Roth 401(k) qualified distributions are tax-free.
    • Traditional IRA, 401(k), pension, short-term capital gains, bond income, and non-qualified dividends are taxed at your ordinary income rate.
    • Social Security income can be taxed at your ordinary income rate up to 85%.
    • Long-term investment gains, including qualified dividends, are taxed at the long-term capital gains rate.

Crafting a Thoughtful Withdrawal Strategy

Debra Greenberg, Director at Bank of America, advises, “For some people, it will make sense to consider tapping taxable accounts first, then tax-deferred and finally tax-free.” However, she cautions that this approach might not fit everyone.

Consider the following factors in crafting your strategy:

  1. Asset Types Matter:
    • Long-term assets outside of IRAs may incur lower long-term capital gains taxes.
    • Active investors might need to balance gains with tax implications.
    • Consider converting traditional IRAs to Roth IRAs for tax-free qualified distributions.
  2. Watch Out for RMDs:
    • Required Minimum Distributions (RMDs) start at age 73 (age 75 after 2032).
    • Missing RMDs may result in additional taxes.

Avoiding Tax Bracket Surprises

“Bracket creep” can catch you off guard, especially with events like inheritances or large distributions. Even minor changes in income can impact taxes, affecting cash flow and other benefits like Social Security.

John P. Schultz warns, “When you’re in retirement, even a small change in your income can have an impact on what you pay in taxes.” Funding various retirement accounts during your working years provides flexibility in managing taxable income.

Adapting to Life Changes

Greenberg highlights that life events such as taking Social Security, changing work status, or relocating can alter your tax situation. Regular check-ins with your advisor and tax professional are essential, especially considering potential changes in tax laws.

In the intricate world of retirement taxes, adaptability is key. There’s no one-size-fits-all approach. Regular consultations with your financial team ensure you navigate this complex terrain successfully. Remember, you don’t have to make these decisions alone.

tax computation


  1. When should I start considering the tax implications of my retirement accounts?
    • It’s advisable to start thinking about it as you approach retirement. Consult with your financial advisor for personalized advice.
  2. What are the tax implications of Roth IRAs and Roth 401(k)s?
    • Qualified distributions from Roth accounts are tax-free, offering a tax-efficient option in retirement.
  3. How can I avoid unexpected tax bracket changes in retirement?
    • Carefully plan your withdrawal strategy and consult with financial professionals to avoid unexpected bracket creep.
  4. What role do Required Minimum Distributions (RMDs) play in retirement taxes?
    • RMDs, starting at age 73, can significantly impact your taxable income. Ensure compliance to avoid additional taxes.
  5. Why is adaptability crucial in managing taxes during retirement?
    • Life changes and evolving tax laws require a flexible approach. Regular check-ins with advisors help you adapt to these changes effectively.

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