Ways to Minimize Your Tax Burden in Retirement

We recently explored some of the best ideas for saving money on taxes while you are still working, but what about when you are entering or in retirement? Retirement marks a significant shift, introducing various life adjustments, notably regarding income replacement and the timing and source of funds withdrawal. For this blog, we will also assume you are under the estate tax limit.

As a reminder from last time, it’s important to know that your investments can be classified into 3 buckets:

1. Tax deferred – includes 401(k) and IRA’s, where you make a contribution before you pay taxes, lowering your taxable income (tax savings today), but you have to pay taxes when you make withdrawals
2. After tax – this includes Roth investments, where you contribute after-tax dollars (pay taxes today), you get tax free growth and do not have to pay taxes on withdrawals
3. Taxable – includes savings or traditional brokerage accounts where you are taxed on dividends and interest payments and capital gains depending on how long you hold your investments

Where to Draw Money?

Many industry pundits tell you to take from taxable, then tax-deferred and then Roth to minimize your tax liability and in most cases, that strategy can make sense. However, there are so many individual circumstances that you have to always see what makes the most sense for your situation. Remember, eventually you will have required minimum distributions from your tax-deferred assets so looking at Roth conversions and where you have assets invested will significantly impact this strategy. 

Roth Conversions

If you could snap your fingers today, you would likely want all your money in Roth accounts. The reason is that you don’t have to pay any more taxes when you make qualified withdrawals. But, like many retirees, most of your retirement savings are likely in a traditional IRA or work sponsored retirement plan.

A Roth conversion is literally moving money from your IRA to your Roth IRA. The downside is you pay taxes today on the conversion amount, but the positive is all qualified withdrawals become tax-free in retirement. There are some intricacies of this depending on your age, but this can help with managing your tax burden, especially with tax rates likely to increase in 2026. It is also a more advantageous way to pass money to non-spouse beneficiaries because they will not have to pay taxes when they make withdrawals.

Asset Location

When you are younger and able to take more risk, having stocks or stock funds in your portfolio makes a lot of sense. But as you enter retirement (hey, you are still young!), not only does your asset allocation become more important, but your asset location can be equally as important. Let us explain.

Asset allocation: your overall mix of stocks, bonds and cash

Asset location: what type of accounts you are holding stocks, bonds and cash

Still confused? Let’s say your “ideal” overall asset allocation is 60% stocks and 40% bonds & cash. Well, just allocating 60/40 across every single account may not necessarily make the most sense for you. Generally, it is better to have a higher allocation to stocks in Roth and taxable accounts and a higher allocation to bonds in IRA’s. Why? You have required distributions from your 401(k) and IRA assets, and so for those accounts we believe you do not need to take as much risk (less fluctuation in account sizes leading to more predictable required distributions). 

Having a higher allocation to stocks in Roth and taxable accounts can provide for more growth opportunities while minimizing the amount of taxes you will have to pay because qualified Roth withdrawals are not taxed, and taxable accounts have favorable capital gains tax rates.

We will go further down this rabbit hole further in another article.

Health Savings Accounts (HSAs)

HSAs offer many advantages not only while you are working, but also in retirement. Because of the significant tax advantages, we typically advocate maxing out this account while you are working, because you will likely need to use it in retirement. When you turn 65, you can withdraw and use your HSA money however you want and are no longer subject to the 20% penalty. But as we know, it is likely you will need to use your HSA to help supplement your health care needs or long-term care planning in retirement, so you should still be careful in how you are using this type of account.

Charitable Giving

"We make a living by what we get. We make a life by what we give." – Winston Churchill

Being able to give is an unbelievably awesome thing to do. There are, however, some more tax-efficient ways to do this. One idea is donating appreciated assets such as stocks or mutual funds directly to charities. This helps to avoid capital gains taxes assuming the stock or fund had gains.

Another idea is making qualified charitable distributions (QCDs) from traditional IRAs which can satisfy your required minimum distributions (RMDs) and provide tax advantages since the distribution is not counted as part of your income. This can potentially help with taxation of Social Security benefits and minimizing exposure to certain Medicare premiums that are based on income levels.

Tax laws can be complex and are always changing, so working with a financial planning firm that can help you navigate this is important. By considering these strategies you can effectively reduce your tax burden and preserve more of your retirement savings for the years ahead.

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors.  We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country.  To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.