How to Reduce Your Taxes in Retirement

Before you can reduce your taxes in retirement, you need to understand how each dollar is taxed. Here's a breakdown of common retirement income sources:

• Traditional IRAs, 401(k)s, pensions, and annuities: Traditional IRA withdrawals are generally taxed as ordinary income. The same applies to 401(k) distributions and most pension payments. These hit your tax return at your ordinary income rate.

• Roth IRA and Roth 401 k: Roth IRA withdrawals are generally tax-free after age 59½, provided the account meets the five-year rule. Roth 401(k) plans now follow similar treatment under SECURE 2.0.

• Social Security: Up to 85% of social security benefits may be taxable at the federal level, calculated through "provisional income" (AGI + tax-exempt interest + half your benefits). You may pay taxes on social security if income exceeds $25,000 for single filers. About 40% of retirees pay taxes on their social security benefits. Social Security benefits are not taxed in some states, including Arkansas.

• Brokerage accounts: Taxable accounts may incur capital gains taxes when sold. Long-term capital gains and qualified dividends face lower capital gains tax rates than ordinary income taxes-0%, 15%, or 20% depending on taxable income.

• Municipal bonds: Investing in municipal bonds may provide tax-exempt income at federal and state levels. Investing in tax-exempt bonds provides tax-free interest at the federal level.

For Bentonville-area retirees, Arkansas fully exempts social security income and military retirement pay from state tax. However, non-exempt retirement income (IRAs, pensions) only gets a $6,000 annual deduction at the state level, with the remainder taxed at rates up to about 3.9%.

Diversifying income sources can help minimize tax liability in retirement. Relying only on pretax income from tax deferred accounts creates large taxable RMDs later, often pushing you into a higher tax bracket. The solution is building three to four "buckets":

• Tax-deferred (Traditional 401(k)/IRA): Reduces current taxable income during working years, but every withdrawal is taxed as ordinary income.

• Roth IRA / Roth 401 k: Roth accounts do not require minimum distributions during the owner's lifetime. RMDs do not apply to Roth IRAs during the owner's lifetime, making them ideal for tax free income in later years.

• Taxable brokerage accounts: Flexible-you control when gains are realized and can use favorable capital gains tax rates.

• HSAs: Triple tax benefits for qualified medical expenses.

Balancing withdrawals across different account types can control adjusted gross income each year. Revolutionary Wealth often helps clients in their early 60s intentionally balance future Roth income, pre-tax retirement accounts, and taxable savings to improve retirement tax outcomes.

Your final working years (roughly ages 59–67) are critical for filling up tax advantaged accounts in a tax-smart way. Here's where to focus:

• 401(k)/403(b)/IRA contributions: Maximize retirement account contributions, including catch-up contributions for those 50+. These retirement account contributions reduce current taxable income directly.

• Roth vs. Traditional: If you expect to be in a lower tax bracket now than in retirement, a roth account contribution locks in today's rate. If you're in peak earning years, traditional contributions trim today's tax bill. An eligible retirement account reduces your federal taxes in the year you contribute.

• Health savings accounts: If you have a high-deductible health plan, max out HSA contributions. Health savings accounts allow tax-free withdrawals for qualified medical expenses-a triple tax break (tax deduction going in, tax free growth, tax free out).

• Business owners: For high-income business owners, coordinated use of defined benefit or cash balance plans can dramatically reduce income taxes today while boosting future retirement income-sometimes sheltering $100,000+ per year in pretax income.

Explore the potential tax benefits; enroll in catch-up and employer sponsored retirement plan options before your final working year to get the most from each eligible retirement account reduces your lifetime tax burden, and consider using financial calculators and tax tools to estimate contributions and long-term impacts.

"Gap years" are the period after you stop full-time work but before RMDs and social security fully kick in-typically ages 62 to 72. This window is where Roth conversions can deliver outsized tax savings opportunities.

Converting traditional IRA funds to Roth IRAs can allow for tax-free withdrawals later. Converting a traditional IRA to a Roth IRA incurs taxes in the conversion year, but Roth conversions can reduce future tax liabilities but incur taxes now-by shrinking the balances subject to RMDs, you pay taxes at today's lower rate instead of tomorrow's higher one.

Key considerations:

• Size each conversion to fill your current tax bracket without tipping into the next. For example, converting $50,000/year over five years often beats a single $250,000 conversion.

• Watch your MAGI and IRMAA exposure-Medicare surcharges use income from two years prior, so a large conversion in 2024 raises your 2026 premiums.

• Model conversions alongside capital gains and other investment income to avoid unintended bracket creep.

Revolutionary Wealth routinely builds multi-year Roth conversion plans for Bentonville and nationwide clients to smooth lifetime income tax, often supported by educational retirement planning videos that explain these strategies in plain language.

The order and source of withdrawals each year can add or subtract tens of thousands in lifetime taxes. Implement a tax-efficient withdrawal order to reduce taxes in retirement:

1. Take RMDs first (once they apply at 73).

2. Withdraw from taxable accounts to benefit from lower capital gains tax rates.

3. Draw from tax-deferred accounts as needed.

4. Use Roth accounts last, preserving tax free growth.

But rigid rules aren't always best. Alternating between taxable and non-taxable withdrawals can help manage tax brackets. Taking proportional withdrawals across all account types can spread out taxable income and keep you in a lower income tax bracket.

Strategic sequencing of withdrawals can prevent a retirement tax torpedo-the scenario where a spike in ordinary income suddenly makes most of your social security taxable, pushes you into a higher bracket, and triggers Medicare surcharges simultaneously.

Use Roth IRA withdrawals in years with unexpected expenses to avoid stacking more ordinary income on top of an already-high tax year. Roth IRA withdrawals are generally tax-free after age 59½, making them the ideal pressure valve.

Required minimum distributions start at age 73 for most retirement accounts. RMDs start at age 73, calculated by dividing your prior year-end account balance by an IRS life expectancy factor (e.g., a $1,000,000 balance at 73 divided by 26.5 produces an RMD of roughly $37,736).

You must withdraw RMDs by December 31 each year after age 73. RMDs are taxed as ordinary income in the year withdrawn. Large RMDs can push you into a higher tax bracket, increase taxation of social security, and trigger higher Medicare premiums.

Failure to take RMDs incurs a 50% penalty on the amount owed-SECURE 2.0 reduced this to 25% (and 10% if corrected within two years), but the stakes remain high. If you're in your early 60s, model future RMDs now and consider partial Roth conversions or earlier withdrawals to shrink the balances that generate those mandatory distributions.

For a deeper dive on managing RMDs and annuities, see our dedicated guide.

Healthcare is one of the largest retirement expenses. Health savings accounts allow tax-free withdrawals for medical expenses, making them one of the most powerful tools for managing your tax burden in retirement.

• Build before 65: If you have a high-deductible health plan, max contributions annually. HSA funds grow tax free and can be withdrawn for qualified medical expenses at any age.

• Use after 65: Pay Medicare premiums, out-of-pocket costs, and long-term care expenses from HSA funds-all tax free.

• Reimburse past expenses: If you paid medical expenses out-of-pocket in prior years and kept receipts, you can reimburse yourself from the HSA later, creating flexible tax free income.

Bunching major medical expenses or long-term care premiums in specific years can help you exceed the standard deduction and create a meaningful tax deduction, further lowering your tax bill.

For charitably inclined retirees, charitable deduction strategies can directly reduce your tax burden and satisfy RMD requirements simultaneously.

Qualified charitable distributions can reduce taxable income after age 70½. Qualified Charitable Distributions can satisfy RMDs without tax penalties-the distribution goes directly from your IRA custodian to a qualified 501(c)(3) charity, counts toward your RMD, and stays out of your adjusted gross income entirely. For 2025, the QCD limit is $108,000 per person; in 2026 it rises to $111,000.

Key rules:

• QCDs must go directly from the IRA to the charity-they cannot pass through your hands first.

• QCDs do not generate a separate charitable deduction (the exclusion from income is the tax break).

For higher-net-worth retirees, donor-advised funds funded in a high-income year can front-load deductions and smooth your tax situation across multiple years. Revolutionary Wealth frequently helps clients pair QCDs with RMD planning so giving directly reduces taxable retirement income each year.

Where you hold investments matters as much as what you hold for managing taxes. Asset location basics:

• Hold bonds and REITs in IRAs to shelter interest income from ordinary income taxes.

• Keep growth stocks and equity index funds in taxable or Roth accounts to benefit from lower capital gains tax rates or eventual step-up in basis for heirs.

Tax loss harvesting in taxable accounts means selling investments at a loss to offset realized gains and up to $3,000 of ordinary income per tax year. Watch the wash-sale rule: you cannot buy a substantially identical security within 30 days and still claim the loss. Choose a similar (but not identical) replacement to stay invested while capturing tax benefits.

Investments held at fair market value in taxable accounts can receive a step-up in basis at death, eliminating capital gains for heirs-a significant legacy planning advantage. Investing involves risk, and no strategy eliminates it, but coordinating asset location with your overall tax situation can meaningfully lower taxes over a full retirement.

Housing decisions impact property taxes and your overall tax burden, but they also shape your long-term financial lifestyle and planning choices. Paying property taxes early in certain years may increase itemized deductions, depending on IRS rules and your other deductions. Downsizing or paying off a mortgage can reduce both property taxes and monthly cash needs.

Relocating to a tax-friendly state can lower overall tax liability in retirement. Arkansas is already favorable for social security (fully exempt) and has a modest top income tax rate (~3.9%), but other states offer no income tax at all. Weigh state taxes against healthcare access, family proximity, and lifestyle. If you're selling a home, coordinate the sale timing with other income events (Roth conversions, business exits) so governments fund social services from your taxes without you paying more than necessary.

The timing of social security benefits and Medicare enrollment can significantly shape your retirement income taxes.

Delaying Social Security benefits until age 70 can increase monthly benefits and manage tax impact. Postponing creates gap years ideal for Roth conversions at a lower tax bracket. But once benefits begin, additional income (RMDs, conversions, capital gains) can increase the portion of social security that is taxable.

Medicare IRMAA surcharges use modified adjusted gross income from two years prior. In 2026, the first IRMAA threshold is $109,000 (single) / $218,000 (MFJ). A large one-time income spike-like a big Roth conversion or business sale-can raise healthcare costs for years. Build a multi-year calendar layering your social security start date, RMDs at 73, and planned conversions to keep income within targeted ranges and avoid crossing IRMAA thresholds.

As retirement accounts, income sources, and tax laws grow more complex, DIY tax planning becomes risky. Common triggers for a professional review include:

• Within 5–10 years of retirement age

• Business sale or exit

• Widowhood or divorce

• Large inheritance

• Approaching age 73

A fiduciary financial professional-ideally a registered investment adviser-coordinates retirement income planning, investment advice, and tax strategies under current IRS rules. A qualified tax advisor or tax professional can model your specific tax situation across federal and state obligations, much like the Revolutionary Wealth advisory team.

Revolutionary Wealth, based in Bentonville, Arkansas, specializes in helping pre-retirees and retirees manage taxes on over $600 million in assets and advice annually through personalized retirement and wealth management. Bring your last two tax returns, Social Security estimates, and retirement account statements to any initial planning conversation. This article is for informational purposes only and does not constitute investment advice, tax advice, or a recommendation. Consult your own tax advisor for guidance on your tax treatment and tax implications.