How to Minimize Taxes on Retirement Withdrawals

The sequence in which you tap different account types directly determines how much you pay in taxes over your entire retirement. Financial planners typically recommend withdrawing from taxable brokerage accounts first, then tax-deferred accounts like traditional IRAs and 401(k)s, and finally Roth accounts.

One exception: if you retire before age 59½, you might need to tap tax-deferred accounts using the rule of substantially equal periodic payments (SEPP) under IRS Section 72(t) to avoid the 10% early withdrawal penalty. Always verify current penalty exceptions with IRS Publication 590-B.

Convert just enough each year to "fill up" your current tax bracket without pushing into the next. For example, if you're married filing jointly in 2024 and in the 12% bracket, you might convert amounts that keep your total taxable income below the top of that bracket (approximately $94,300 for 2024, though this threshold adjusts annually—check the IRS tax tables).

Required minimum distributions (RMDs) force you to withdraw a percentage of your traditional IRA, 401(k), 403(b) and other tax-deferred accounts each year starting at age 73 (as of the SECURE 2.0 Act). The RMD is calculated by dividing your prior year-end account balance by an IRS life expectancy factor, and the entire withdrawal is taxed as ordinary income.

Social Security benefits become taxable when your combined income—adjusted gross income plus nontaxable interest plus half your Social Security—exceeds $25,000 for single filers or $32,000 for married couples filing jointly. Up to 85% of your benefits can be taxed at your ordinary income rate.

This strategy works especially well if you retire at 62-65. Use taxable and tax-deferred withdrawals to cover expenses, execute Roth conversions, and keep total income low enough that future Social Security isn't heavily taxed.

Asset location means holding tax-inefficient investments (bonds, REITs, actively managed funds that generate ordinary income or short-term gains) inside tax-deferred accounts, and tax-efficient investments (index funds, individual stocks, municipal bonds) in taxable accounts. In retirement, this lets you withdraw from taxable accounts with minimal tax while high-yield assets grow tax-deferred.

Nine states have no income tax—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming and New Hampshire (which only taxes dividends and interest, phased out as of 2024)—so traditional IRA and 401(k) withdrawals are not taxed at the state level. Most other states tax retirement plan withdrawals as ordinary income, though some offer partial exemptions.

Medicare Part B and Part D premiums increase when your modified adjusted gross income (MAGI) exceeds certain thresholds, a system called income-related monthly adjustment amounts. For 2024, the first IRMAA tier begins at MAGI above $103,000 (single) or $206,000 (married filing jointly), based on your tax return from two years prior.

Large IRA withdrawals, Roth conversions, or capital gains can push you over an IRMAA threshold unexpectedly. To minimize this risk, spread Roth conversions and asset sales across multiple years to stay below the cliff; time elective withdrawals in non-Medicare years (before 65) when possible; and use qualified charitable distributions to satisfy RMDs without increasing MAGI after age 70½.

Can I withdraw from my Roth IRA tax-free before age 59½?

What is the penalty for missing a required minimum distribution?

The penalty for failing to take your full RMD by the deadline is 25% of the amount you should have withdrawn but didn't, reduced to 10% if you correct the mistake within two years. Prior to the SECURE 2.0 Act, the penalty was 50%.

Do Roth 401(k) accounts have required minimum distributions?

Roth 401(k)s were subject to RMDs at age 73, but the SECURE 2.0 Act eliminated RMDs for Roth 401(k)s starting in 2024. Alternatively, you can roll a Roth 401(k) into a Roth IRA at any time, which has never had RMDs during the owner's lifetime.

How much can I save in taxes by doing charitable donations from my IRA?

Is it better to pay taxes now or later in retirement?

Pay taxes now (Roth contributions or conversions) if you expect to be in a higher tax bracket in retirement, or if current tax rates are historically low. Pay taxes later (traditional contributions) if you're in a high bracket now and expect lower income—and therefore a lower bracket—in retirement.

Can I still contribute to an IRA after I start taking Social Security?

Yes, as long as you or your spouse have earned income (wages, self-employment income), you can contribute to a traditional or Roth IRA. Social Security benefits do not count as earned income for IRA contribution purposes.