Taxes That You Will Need to Pay in Retirement and Strategies to Reduce Taxes

Slide 1: Title: Your Retirement Tax Landscape.

To understand why tax planning is so important, we need to look at the 'Retirement Tax Landscape.' It's not just about one source of income; it's about how different types of income are taxed.

As you can see from the graphic, your retirement income can come from multiple sources, and each one is taxed differently.

You have withdrawals from your traditional IRAs and 401ks. These are taxed as ordinary income, just like a paycheck you received while working.

Then you have capital gains from selling stocks, bonds, or other investments. These may be taxed at a lower rate, but they still add to your income.

And here's a big one that surprises a lot of people: up to 85% of your Social Security benefits can be taxed. The amount that is taxed depends on your total “combined income,” which includes all your other taxable income.

Retirement income is taxed differently.  Managing this complex web of income requires planning.

Slide 2: Title: The Withdrawal Order.

This is an important tax strategy in retirement. The goal is to control your taxable income each year by being smart about where you take your money from.

First, start with your taxable accounts, like a brokerage account. You’ve already paid taxes on the money you invested, so you'll only pay capital gains tax on the profits.

Next, you can draw from your tax-deferred accounts—your Traditional IRAs and 401(k)s. Every dollar you take out of this account is usually taxable as ordinary income. This is where your RMDs will come from. Take out what you need and what is required.

Finally, save your tax-free accounts—your Roth IRAs—for last. Because all withdrawals are tax-free, this is the perfect source of income to draw from when you want to avoid adding to your taxable income for the year. Since this money is so valuable and will never be taxed again, you want to preserve it for as long as possible."

By controlling your income and taking it from the right account at the right time, you may be able to control your tax bracket. The goal is to keep your income low enough to avoid triggering higher tax brackets and to prevent or minimize the taxation of your Social Security benefits.

Slide 3: Title: Tax-Saving Strategies.

Beyond the withdrawal order, there are other powerful tools you can use to lower your taxes.

First is 'Tax-Loss Harvesting.' This is a strategy where you sell investments in your brokerage accounts that have lost value to 'harvest' those losses. You can then use those losses to offset any capital gains you've realized. If you have more losses than gains, you can even use up to $3,000 of those losses each year to reduce your ordinary income.

The second is a 'Qualified Charitable Distribution,' or QCD. If you are 70 and a half or older, you can instruct your IRA administrator to send a distribution directly from your IRA to a qualified charity. This distribution counts towards your Required Minimum Distribution (RMD), and it is not included in your taxable income.

These are a couple of excellent tools for saving on taxes. A QCD is particularly powerful if you are charitably inclined and are taking RMDs, because it allows you to satisfy that requirement without increasing your taxable income, which can save you money in the long run. This may be helpful when trying to keep your Medicare Part B/D expenses down.

Slide 4:  The Domino Effect of Income

In retirement, small changes in your annual income can create powerful ripple effects throughout your financial life. For example:

1.    Social Security Taxation: Your income level directly determines the percentage of your Social Security benefits that the IRS will tax.

2.    Medicare's Income-Related Monthly Adjustment Amount (IRMAA): This is critical. Medicare Part B and D premiums are based on your income from two years ago. If your income crosses a specific dollar threshold, you could be pushed into a much higher premium bracket. We're talking about a difference of hundreds of dollars a month, all because of one dollar too much taxable income. In a future lesson, IRMAA will be discussed in more detail.

In retirement, a small, proactive adjustment to your income can save you money, while one careless move can cost you far more than you realize in premiums and taxes."

Slide 5: Social Security and federal income tax

Now that we know your income controls your Social Security taxation. How exactly does the IRS calculate this?

They use something called the 'Combined Income Formula.' You don't need to memorize it, but you do need to understand what goes into it, because this is where the planning happens.

The formula is essentially:

• Your Adjusted Gross Income (AGI)—this is your income such as wages, capital gains, interest and dividends, retirement distributions, pensions, etc.

• PLUS any Tax-Exempt Interest—think municipal bonds. Even though it's tax-exempt, the IRS counts it here!

• PLUS One-Half of Your Total Social Security Benefits.

Slide 6: The Social Security Tax Cliffs

Based on your combined income this is where tax planning can help. There are 'cliffs' for the taxation of your Social Security benefits. Using examples from the 2025 thresholds. Using the “Combined Income Formula” that we discussed in the previous slide.

For an individual filer:

Up to $25,000 in combined income —no federal tax on your Social Security benefits.

• Once you cross that first line > $25,000, up to 50% of your benefits can be taxed.

• Cross $34,000? You hit the maximum—up to 85% of your benefits may be taxed.

The situation is similar for Married Couples Filing Jointly, but the thresholds are higher:

• You are safe from federal tax up to $32,000 in combined income.

• The 50% tax bracket is between $32,000 and $44,000.

• And above $44,000, you hit the top 85% tax rate.

These thresholds do not adjust for inflation, which means more of your benefits are taxed over time. This is why you should control your taxable income—because pushing your combined income just $1 over a line can immediately expose an additional 35% of your Social Security benefit to taxation. That's a very expensive dollar!"

Slide 7: Title: Tax Planning is a Year-Round Event.

If there's one thing I want you to take away from this presentation, it's this:

You can't just think about taxes in April.

Effective tax planning isn't an annual chore; it's a year-round process. Every financial decision you make—whether it's selling an investment, making a charitable contribution, or deciding which account to withdraw from—has a tax consequence.

By being proactive and thinking about taxes throughout the year, you can make smarter financial decisions that can make a huge difference in your retirement.

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