Tailor Your Taxes for Retirement

From withdrawals to conversions, managing taxes in retirement can feel like a balancing act. 

After a long career and decades of paying taxes, it’s easy to assume you’re well prepared for the tax considerations that come with retirement. However, when you take a closer look at post-retirement income sources, the results can sometimes be surprising. Reviewing how different income streams are taxed may reveal considerations that can help inform broader financial planning discussions. 

Taking time to evaluate both fixed and discretionary expenses can also open the door to more productive conversations with your financial advisor about the potential tax implications across your overall portfolio. When it comes to retirement taxation, a thorough and ongoing review can be an important part of long-term planning. 

Still Self-Employed? Know What May Be Deductible 

If you continue working as a solopreneur in retirement, you may be able to deduct certain Medicare premiums. Under current tax rules, Medicare Part B and Part D premiums may be deductible as self-employed health insurance expenses, even if you do not itemize deductions. In some cases, Medicare Advantage and supplemental (Medigap) premiums may also qualify. 

These deductions are generally available only if you are not eligible for a health plan through your business or through a spouse’s employer or business. Because eligibility rules can be nuanced, it’s important to review your specific situation with a qualified tax professional. 

Taxes on Social Security Benefits 

Despite common misconceptions, Social Security benefits may be subject to federal income tax. Depending on your income and filing status, up to 85% of your benefit could be taxable. 

For example, if you file as an individual and your combined income exceeds certain thresholds, a portion of your Social Security benefits may be taxed. Combined income generally includes adjusted gross income, nontaxable interest, and one-half of your Social Security benefits. This calculation takes into account wages (if you’re still working), rental income, and withdrawals from tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Qualified Roth IRA distributions, if certain conditions are met, are generally excluded from this calculation. 

Understanding how different income sources interact can help you avoid unexpected tax outcomes. 

Managing Required Minimum Distributions 

Required minimum distributions (RMDs) can sometimes push retirees into a higher tax bracket than anticipated. Under current law, RMDs generally begin at age 73 for individuals who reached age 72 after 2022. (Different rules may apply based on birth year and specific plan provisions.) 

One potential strategy for certain investors is the use of a qualified charitable distribution (QCD). If you are age 70½ or older, you may be able to transfer up to $108,000 per year (indexed for inflation) directly from a traditional IRA to an eligible charity. Amounts transferred through a QCD are generally excluded from taxable income and may count toward satisfying your RMD. However, these amounts cannot also be claimed as charitable deductions. 

As always, eligibility and tax treatment should be reviewed carefully with a tax professional. 

Considering Roth Conversions 

Traditional IRAs and 401(k)s can generally be converted to Roth accounts, which may offer tax advantages for some investors depending on individual circumstances. A Roth conversion requires paying income taxes on the converted amount in the year of the conversion; however, if certain conditions are met, future qualified withdrawals may be income tax free. 

Determining whether a conversion makes sense depends on several factors, including current and potential future tax rates, anticipated retirement income, estate planning considerations, and the timing of withdrawals. Because these variables can change over time, Roth conversions are often evaluated as part of a broader, long-term planning discussion rather than a one-time decision. 

For those interested in learning more, our recent podcast episode on Roth conversions explores how this strategy works, common scenarios where it may be considered, and key factors investors should understand before moving forward. Listening to educational resources like this, alongside conversations with your financial advisor and tax professional, can help you assess whether a Roth conversion aligns with your overall retirement strategy. 

Reviewing Withdrawal Strategies 

You may often hear about the “4% rule” as a guideline for retirement withdrawals. However, it is just a guideline. It is not a recommendation and may not be appropriate for all investors. Market conditions, inflation, personal spending needs, and tax considerations can all affect how much you may want or need to withdraw each year. 

Periodically reviewing your withdrawal strategy can help you manage cash flow while remaining mindful of potential tax consequences. Adjustments over time may help you better manage your income bracket and preserve flexibility. 

A Continuing Opportunity to Review 

Tax considerations are sometimes overlooked after years of focusing on saving and investing. Whether you are approaching retirement or already retired, periodically reviewing how taxes affect your income and portfolio can be an important part of long-term planning and may help support your broader financial goals. 

For those interested in continuing the conversation, our podcast episode on timing Social Security explores how claiming decisions can influence lifetime benefits, tax exposure, and overall retirement income. The discussion highlights common factors retirees consider when evaluating when to begin benefits and how those choices may interact with other income sources. 

If you would like to explore how these considerations apply to your own situation, a GDS advisor can help you review your investment approach and discuss how a thoughtful, tax-aware strategy may fit within your overall financial plan. We invite you to contact us to schedule a conversation. 

GDS Wealth Management is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. This material is for general informational purposes only and does not constitute investment, tax, or legal advice. GDS Wealth Management does not provide tax or legal advice. You should consult a qualified professional regarding your specific situation. Investing involves risk, including possible loss of principal.