Taxes and retirement: A guide to managing your income

Retirement marks the culmination of years of hard work and careful financial retirement planning and investments. As you look forward to this new chapter, understanding and preparing for taxes on your retirement income will help ensure you can enjoy your time with confidence. This comprehensive guide will provide an overview of the key tax-related considerations during retirement planning and offers practical strategies to protect your savings and minimize tax liabilities. 

Understanding taxation on retirement income

If you’re like most people who have been planning for retirement, you will probably draw income from both Social Security and either an Individual Retirement Account (IRA) or other retirement account, along with any other savings and investments. 

Each of the different types of retirement accounts have different tax benefits and liabilities. Tax-deferred accounts like 401(k), 403(b), and traditional IRAs offer pre-tax contributions, but withdrawals are taxed during retirement. On the flip side, Roth IRAs, generally allow tax-free withdrawals, but contributions are made after taxes. 

Traditional bank accounts, brokerage accounts, and Health Savings Accounts (HSAs) each also come with their own tax implications and potential advantages. Your financial professional can address your individual needs, as well as explain capital gains taxes and how they may or may not apply.

Depending on your current income and overall retirement spending plan, it’s possible that your tax bracket may change when you retire. A financial professional can help you evaluate your current tax bracket and anticipate potential changes. They can also walk you through the taxation aspects of Social Security benefits, pension, investments, and other income streams and help you consider the best ways to diversify to maximize your savings and minimize your tax liability.

Strategies to minimize taxes on retirement income

Before retirement, one of the most advantageous steps you can take is to make sure your investment strategy is as tax-efficient as possible. A tax-efficient strategy is one that involves using varied vehicles to balance risk and return. Some general steps you should consider include:

  • Understand how to use catch-up contributions, if needed, if you’re 50 or older.
  • As you get closer to retirement, consider a Roth conversion as part of your retirement planning- this allows you to convert savings from your tax-deferred accounts to a Roth IRA which allows tax-exempt withdrawals. You should always work with a financial professional to make sure you fully understand the rules and process of conversion.
  • Your Social Security benefits: deciding when to claim your benefits is an important first step. Understanding how your benefits will be taxed will likely require guidance from your financial professional. The taxes you pay on Social Security benefits are determined by the amount and composition of your total income. Diversifying income across different asset classes serves as both a risk management strategy and a tax-efficient approach.
  • Portfolio composition and re-balancing: different investment vehicles have varied tax consequences and your financial professional can help ensure your portfolio is balanced based on your existing needs, risk tolerance and retirement timeline.
  • Estate planning strategies: a financial professional, working with your estate planning attorney, can help you evaluate the current estate tax threshold and plan for potential changes that may affect your legacy. Leveraging trusts, engaging in strategic gifting, and incorporating charitable contributions into your estate planning are effective ways to minimize estate tax liabilities. The inclusion of charitable contributions adds an extra layer of tax efficiency to your overall estate planning strategy.
  • Location: since different states have different tax laws some people consider moving to those states with a lower tax burden or cost of living.

To navigate this complex landscape, seeking professional guidance from qualified financial professionals is crucial. Working with experts ensures that your strategies are tailored to your unique financial situation. Regularly updating your knowledge on tax policies and adapting your strategies to align with potentially changing tax regulations is essential for long-term success. Remaining flexible and adapting to changes in both personal circumstances and tax policies ensures the continued effectiveness of your tax planning strategies.

You’ve spent so much time and energy planning for this next stage of life. Now is the time to prepare to navigate the tax landscape your retirement with careful consideration and proactive strategizing. At this point you should have a foundational comprehension of the taxation of various income sources and the basics of tax-efficient strategies and understand the importance of staying informed about changes in tax laws. 

As you embark on this new chapter, remember that proactive tax planning is the key to safeguarding the savings you've worked for so long. Your retirement should be a time of financial peace, and with the guidance of an experienced financial professional, you can make the most of this well-deserved phase of life. Reach out today. 

This informational and educational article does not offer or constitute, and should not be relied upon as tax, legal or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and legal professionals. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services.

Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (NY, NY), Equitable Financial Life Insurance Company of America, an AZ stock company with an administrative office in Charlotte, NC, and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN). 

GE-6284126.1 (01/2024) (Exp. 01/2026)