The Big Picture: How Tax Planning Can Maximize Your Retirement Income

The Foundation: Understanding Your Three Tax “Buckets”

The first step in tax planning is knowing how your different savings accounts are treated by the IRS. Think of your retirement savings as being held in three distinct buckets:

1. The Tax-Deferred Bucket

(Traditional IRAs, 401(k)s, 403(b)s, Pensions)
Money in this bucket was contributed pre-tax, meaning you got a tax deduction when you put it in. It has grown “tax-deferred” for years. Every dollar you withdraw from this bucket in retirement is taxed as ordinary income.

2. The Tax-Free Bucket

(Roth IRAs, Roth 401(k)s, Health Savings Accounts (HSAs))
This bucket was funded with after-tax money. The incredible benefit is that all qualified withdrawals you make in retirement are 100% tax-free. This is your most powerful tool for controlling your taxable income.

3. The Taxable Bucket

(Standard Brokerage Accounts, Savings Accounts, CDs)
This bucket faces taxes annually. You pay taxes on interest and dividends each year. When you sell an asset like a stock or mutual fund, you pay capital gains tax on the profit.

The Core Strategy: Tax-Efficient Withdrawal Sequencing

The order in which you draw from these buckets is a cornerstone of retirement tax planning. While every situation is unique, a common tax-efficient strategy is to withdraw funds in this order:

1. Tap your Taxable bucket first. This allows your tax-advantaged accounts to continue growing for as long as possible.
2. Then, tap your Tax-Deferred bucket. You will pay income tax on these withdrawals.
3. Tap your Tax-Free (Roth) bucket last. Save this powerful tax-free money for later in retirement, for large expenses, or as a tax-free inheritance for your heirs.

Proactive Planning Moves to Supercharge Your Income

Beyond withdrawal order, several proactive strategies can save you tens of thousands in taxes over your lifetime.

Consider Roth Conversions in Your “Gap Years”

The “gap years”—the time between when you retire and when you start taking Social Security and Required Minimum Distributions (RMDs)—are a golden opportunity. Your income is likely at its lowest point. This is the perfect time to execute a Roth conversion: moving money from your tax-deferred bucket to your tax-free Roth bucket. You’ll pay income tax on the converted amount now, but you do it while in a lower tax bracket, and that money can then grow tax-free forever.

Optimize Your Social Security and Medicare Strategy

Your claiming decision for Social Security has a direct tax impact. Delaying benefits can increase your monthly payout and give you more low-income “gap years” for Roth conversions. Furthermore, your Medicare Part B premiums are based on your Modified Adjusted Gross Income (MAGI) from two years prior. By strategically managing your income through smart withdrawals and conversions, you can potentially avoid higher Medicare premiums (known as IRMAA).

Leverage Qualified Charitable Distributions (QCDs)

If you are age 70½ or older and charitably inclined, a Qualified Charitable Distribution (QCD) is a fantastic tool. You can donate up to $100,000 per year directly from your Traditional IRA to a qualified charity. The distribution is not included in your taxable income, and it counts toward your RMD for the year. This is far more powerful than donating cash and taking an itemized deduction.