Retirement income comes from many sources—Social Security, retirement account withdrawals, pensions, rental income—and each is taxed differently. A smart withdrawal strategy can save tens of thousands of dollars in taxes over your retirement. This guide explains how to minimize taxes by understanding which accounts to tap first, how to coordinate Social Security and RMDs, and when Roth conversions make sense.
Key Takeaway
Withdrawing from the right accounts at the right time can reduce your lifetime tax bill by 15-30%. The order matters: taxable accounts first, tax-deferred accounts second, and Roth accounts last—but there are important exceptions.
Understanding How Different Income Sources Are Taxed
Not all retirement income is taxed the same way:
Fully Taxable Income
- Traditional IRA/401k withdrawals: Taxed as ordinary income at your marginal tax rate
- Pension payments: Fully taxable (unless you made after-tax contributions)
- Required Minimum Distributions (RMDs): Must start at age 73 (born 1951-1959) or 75 (born 1960+), taxed as ordinary income
Partially Taxable Income
- Social Security benefits: 0%, 50%, or 85% of benefits are taxable depending on your "combined income"
- Combined income = AGI + tax-exempt interest + 50% of Social Security
- Single filers: 0% taxable if combined income < $25k, 50% if $25k-$34k, 85% if > $34k
- Married filing jointly: 0% if < $32k, 50% if $32k-$44k, 85% if > $44k
Tax-Free Income
- Roth IRA withdrawals: Completely tax-free if you're 59½+ and account is 5+ years old
- Municipal bond interest: Tax-free at federal level (possibly state too)
- Return of principal from taxable accounts: Only gains are taxed, not your original contributions
Key Takeaway
The tax treatment of your income determines your withdrawal strategy. Minimize ordinary income in years when you're near tax bracket thresholds or Social Security taxation cliffs.
The Standard Withdrawal Sequence (And When to Break It)
The classic withdrawal order is designed to let tax-advantaged accounts grow as long as possible:
Phase 1: Taxable Brokerage Accounts (Age 60-72)
- Why first? Already been taxed on contributions; only capital gains are taxed when you sell
- Tax advantage: Long-term capital gains rates (0%, 15%, 20%) are lower than ordinary income rates
- Strategy: Harvest gains up to the 0% capital gains bracket ($96,700 for married couples in 2025)
Phase 2: Tax-Deferred Accounts (Age 73+)
- Why second? RMDs force you to withdraw anyway, so start tapping before then to spread tax burden
- Tax consideration: Taxed as ordinary income, so plan withdrawals to stay in low brackets
- Strategy: Consider starting withdrawals before RMDs kick in to avoid being pushed into higher brackets later
Phase 3: Roth Accounts (Last Resort)
- Why last? Tax-free withdrawals and no RMDs—the most valuable asset to preserve
- Estate advantage: Inherited Roths remain tax-free for heirs (though must be withdrawn within 10 years)
- Strategy: Use Roth funds to cover unexpected expenses or in high-tax years to avoid bracket creep
Key Takeaway
The "standard sequence" works for many retirees, but you should break it if: (1) you can fill up the 0% or 12% tax bracket with Roth conversions, (2) delaying Social Security benefits, or (3) avoiding IRMAA surcharges on Medicare premiums.
Advanced Strategy: Roth Conversions in Low-Income Years
Roth conversions—moving money from traditional IRAs to Roth IRAs—generate taxable income in the conversion year, but can save massive taxes long-term:
When Roth Conversions Make Sense
- Early retirement (age 60-72): Before RMDs kick in and Social Security starts, you may have low income years where you can convert at 10-12% tax rates
- Market downturns: Convert when account values are temporarily depressed—you'll pay tax on a smaller amount
- Before age 63: IRMAA Medicare surcharges look back 2 years, so high-income conversions at age 63+ can increase Medicare premiums at 65+
How Much to Convert
The optimal strategy is to convert just enough to "fill up" a low tax bracket without spilling into the next one:
- 12% bracket: Convert up to $96,950 (single) or $129,000 (married) in 2025
- 22% bracket: Convert up to $201,050 (single) or $246,300 (married) if you expect higher rates in retirement
Example: $400k in Traditional IRAs at Age 62
- Without conversions: RMDs at age 73 force $15k-$20k+ annual withdrawals, possibly pushing you into 22-24% brackets
- With conversions: Convert $30k/year from age 62-72 at 12% rate, reducing future RMDs and keeping you in 12% bracket permanently
- Tax savings: Paying 12% now vs. 22% later = 10% savings on $300k = $30,000
Key Takeaway
Roth conversions are a "pay now to save later" strategy. They work best when you have at least 10 years for the Roth account to grow tax-free, and when you expect to be in the same or higher tax bracket during RMDs.
Coordinating Social Security and Withdrawals
When you claim Social Security dramatically affects your tax situation:
Delay Social Security, Spend Retirement Accounts
- Age 62-70 strategy: Withdraw from IRAs/401ks to cover expenses while delaying Social Security
- Benefits:
- Social Security grows 8%/year from FRA to age 70
- Reduces traditional IRA balances before RMDs start, lowering future required withdrawals
- Creates low-income years perfect for Roth conversions
- Trade-off: You'll deplete IRAs faster, but end up with higher guaranteed income (Social Security) later
Avoiding the Social Security Tax Torpedo
The "tax torpedo" occurs when each additional dollar of income causes $0.85 of Social Security to become taxable—creating an effective marginal rate of 40-50%:
- The trap: If you're in the 22% bracket and 85% of each extra dollar causes SS taxation, your effective rate is 22% + (0.85 × 22%) = 40.7%
- How to avoid:
- Use Roth withdrawals instead of IRA withdrawals when income is near SS taxation thresholds
- Harvest capital gains before Social Security starts (when taxed at 0-15% instead of 40%+)
- Consider delaying Social Security if you have large traditional IRA balances
Key Takeaway
The interaction between Social Security and other income creates hidden tax traps. Plan your withdrawal sequence around your Social Security claiming strategy to minimize combined taxation.
Managing IRMAA Surcharges on Medicare Premiums
Medicare Income-Related Monthly Adjustment Amounts (IRMAA) can add $2,000-$6,000+/year to your Medicare premiums if your income exceeds certain thresholds:
2025 IRMAA Thresholds (2023 Income)
| Income (Single) | Income (Married) | Part B Surcharge | Part D Surcharge |
|---|---|---|---|
| < $106,000 | < $212,000 | $0 | $0 |
| $106,000-$133,000 | $212,000-$266,000 | $244/month | $13/month |
| $133,000-$167,000 | $266,000-$334,000 | $489/month | $34/month |
| $167,000-$200,000 | $334,000-$400,000 | $733/month | $55/month |
Strategies to Avoid IRMAA
- Complete Roth conversions before age 63: IRMAA looks back 2 years, so high income at 63 affects premiums at 65
- Manage withdrawals near cliff edges: An extra $1,000 over the $106k threshold costs $3,000+ in IRMAA surcharges
- Use Roth withdrawals in high-income years: Don't count toward IRMAA calculations
- Harvest losses to offset gains: Capital loss harvesting can keep you under thresholds
State Tax Considerations
Don't forget state taxes when planning withdrawals:
- No state income tax: AK, FL, NV, SD, TN, TX, WA, WY—all retirement income is state tax-free
- Don't tax Social Security: 38 states don't tax SS benefits (even if federally taxable)
- Don't tax retirement account withdrawals: A few states (IL, MS, PA) exempt IRA/401k distributions
- Relocation timing: Moving from high-tax to no-tax state before taking large IRA distributions or Roth conversions can save 5-10% in state taxes
Using Bullseye to Model Tax-Efficient Withdrawals
Bullseye helps you project the tax impact of different withdrawal strategies:
- Year-by-year tax projections: See your federal and state tax burden each year based on your specific income sources (Social Security, RMDs, rental income, etc.)
- Test Social Security timing: Use Scenarios to compare claiming at 62 vs. 67 vs. 70 and see the tax impact of each strategy
- Model IRMAA surcharges: Bullseye calculates Medicare IRMAA charges based on your income, helping you avoid costly premium surcharges
- RMD calculations: Automatically calculates Required Minimum Distributions from traditional retirement accounts starting at age 73/75
- Compare withdrawal sequences: Test different scenarios (e.g., "spend taxable accounts first" vs. "do Roth conversions early") to see which minimizes lifetime taxes
Limitation: Bullseye doesn't automatically recommend optimal Roth conversion amounts—you'll need to test different conversion scenarios manually to find the sweet spot that fills low tax brackets without triggering IRMAA.
Common Mistakes to Avoid
- Claiming Social Security too early: Taking benefits at 62 while spending Roth funds—backwards! Use IRAs first, delay SS to age 70
- Ignoring Roth conversions: Waiting until RMDs force large taxable withdrawals instead of converting at low rates in early retirement
- Not planning for IRMAA: Taking a large IRA distribution at age 63 that triggers $6k/year in Medicare surcharges at 65
- Forgetting state taxes: Moving to Florida after taking large IRA withdrawals in California (9%+ tax saved if reversed)
- All-or-nothing thinking: You don't have to fully drain one account type before touching another—blend withdrawals strategically
Summary: Your Tax-Minimization Checklist
- Map your income sources: Identify what's fully taxable, partially taxable, and tax-free
- Fill low brackets early: Consider Roth conversions in the 10-12% brackets before RMDs force higher rates
- Coordinate Social Security timing: Delay benefits while spending traditional IRAs to reduce future RMDs
- Watch IRMAA cliffs: Complete high-income moves (large Roth conversions, home sales) before age 63
- Use Roth funds tactically: Save for high-tax years or unexpected expenses to avoid bracket creep
- Consider state tax relocation: Moving before large distributions can save thousands in state taxes
- Model multiple scenarios: Use retirement planning tools to compare strategies before committing
Key Takeaway
Tax planning in retirement is about sequence, not just amounts. Withdraw from the right accounts at the right time, coordinate with Social Security claiming, and use Roth conversions strategically to keep your lifetime tax bill as low as possible.