UNDERSTANDING TAX PLANNING IN RETIREMENT

^{By Louis Green, CFA®, CFP®, CRPS®}

UNDERSTANDING TAX PLANNING IN RETIREMENT

You may want to have a tax plan that starts with leveraging the difference between tax deferred, taxable, and tax-exempt accounts. You should be aware of the various strategies you can use to reduce your taxes. Finally, you should understand the power of tax advantaged accounts and how to manage the distributions from those accounts. Here, we will discuss each of these topics.

Marginal Tax Rates

Understanding tax implications in retirement starts with paying attention to your marginal tax rate. Your marginal tax rate is important because many of the strategies you can use are based on the difference between your current and future tax rates.

Marginal Tax Rates for 2025¹

Rate	Married, Filing Jointly	Single
10%	$0 - $23,850	$0 - $11,925
12%	$23,851 - $96,950	$11,926 - $48,475
22%	$96,951 - $206,700	$48,476 - $103,350
24%	$206,701 - $394,600	$103,351 - $197,300
32%	$394,601 - $501,050	$197,301 - $250,525
35%	$501,051 - $751,600	$250,526 - $626,350
37%	Over $751,601	Over $626,351

^{It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are}

^{subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.}

How will your income be taxed? The following is a list of the most common forms of income and how they are taxed.²

Source	Tax
Social Security	Up to 85% of benefits taxed based on provisional income
Pensions	Ordinary income
Taxable Bond Interest	Ordinary income
Municipal Bond	Exempt from federal tax. Might be exempt from state tax
Stocks, Bonds, ETF’s (gains)	Long term: 0%, 15% 20%. Short term: Ordinary income
Dividends	Qualified: Long-term gain. Non-qualified: Ordinary income
IRAs and 401(k)s	Ordinary income. Withdrawals before 59½ may be subject to a tax penalty
Roth IRAs & Roth 401(k)s	Qualified withdrawals are tax-free

Tax-Deferred vs. Tax-Free vs. Taxable Accounts

You may own or consider owning a combination of individual retirement accounts, employer-sponsored retirement accounts, and/or personal investment accounts. You should be aware how each of these accounts are taxed and/or the tax benefits you receive from each of these accounts.

Tax-Deferred Accounts

Tax-deferred accounts, for example, are not taxed until you withdraw funds. Examples of tax-deferred accounts are Traditional IRAs, 401(k)s, and 403(b)s. These accounts typically provide a tax deduction on the contribution you make. The distributions, however, are taxable as ordinary income and subject to a penalty if you take a non-qualified distribution.

Tax-Free Accounts

Tax-free accounts include Roth IRAs and Roth 401(k)s. While contributions to these accounts do not provide an initial tax benefit, qualified withdrawals are not taxed and there are no required minimum distributions.

However, you should consider the long-term benefits of using a tax-deferred account versus a tax-free account, primarily based on your current and future tax brackets. If you expect to be in a higher tax bracket in retirement, consider making  Roth IRA and Roth 401(k) accounts a priority. If you expect to be in a lower tax bracket in retirement, consider using traditional retirement accounts over Roth accounts. You can also allocate part of your retirement funds to each strategy. Work with an advisor and/or tax professional if you need help deciding which type of account is best for you.

529 to Roth IRA Rollover

If you have an overfunded 529 plan, consider rolling part or all of it to a Roth IRA. You can roll an overfunded 529 plan into your Roth IRA, your spouse’s IRA, or to your child’s Roth IRA. You can also name multiple beneficiaries. Be mindful of all the rules required to roll over a 529 plan to a Roth IRA.³

Health Savings Account

Another tax-free account to consider is the health savings account (HSA). Health savings accounts provide a triple tax benefit. Contributions are tax-deductible, earnings grow tax-free, and eligible distributions are tax-exempt.

Taxable Investment Accounts

A taxable investment account does not provide a taxable deduction when it is funded. However, there are certain investments you can purchase and strategies you can pursue to potentially reduce the taxes you pay in a taxable investment account.  Next, we will discuss a few tax strategies for you to consider in your taxable accounts.

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1 https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

2 https://www.kiplinger.com/taxes/how-retirement-income-is-taxed#:~:text=How%20some%20income%20in%20retirement,you%20made%20after%2Dtax%20contributions.

3 https://www.savvywealth.com/blog-posts/2024-planning-opportunities-from-secure-act-2-0-for-ford-motor-employees-and-retirees?utm_content=304478038&utm_medium=social&utm_source=linkedin&hss_channel=lcp-80447154