Here's How Retirement Changes Your Taxes

An older couple go over financial paperwork at a table and with a laptop. — (Image credit: Getty Images)

Tax season is here. Employers had until January 31 to distribute W-2 forms to employees. It’s a pretty routine system for working Americans, but how does the process change once you enter retirement?

Unlike your working years, your income streams are a bit different in retirement. In this phase of life, you’re likely going to be living off of a combination of Social Security benefits, retirement account savings such as a 401(k) or IRA, and maybe even an annuity or pension. Regardless of where your income is coming from, managing taxes on those funds is crucial to preserving your savings while maximizing your funds. Fortunately, there are several different strategies to help you reduce or eliminate taxes in your golden years.

Utilizing tax-advantaged accounts is one of the most efficient ways to manage taxes in retirement. If you have a Roth IRA, any withdrawals made after age 59½ and a five-year holding period, are tax-free. In other words, any growth in your investments can be taken out without incurring taxes, potentially reducing your taxable income significantly.

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Traditional IRAs work a bit differently. Although distributions from these accounts can be taxed as part of your annual income, you can manage when and how much you withdraw to minimize the tax bill. One example is to consider taking out less from these accounts during the years you’re expecting to fall into a lower tax bracket. It’s important to note, though, that required minimum distributions (RMDs) must be taken from these accounts once you reach age 73, and those are considered taxable income.

Delaying Social Security benefits is another option. If you wait until age 70 to claim your benefits, you can increase your monthly check significantly. Waiting until this age to claim Social Security may also help you avoid higher taxation on those benefits during your go-go years when you might be reliant on other sources of income.

If you have investments outside of your retirement accounts, you’re no stranger to the capital gains tax. This tax is due after an investment is sold. For the 2025 tax year, long-term capital gains tax rates can vary from 0%, 15% to 20% of the profit depending on your individual income.

However, holding investments for more than a year will allow you to benefit from lower, long-term capital gains rates when compared to short-term rates.

If you have investments that are underperforming, you may even want to consider tax-loss harvesting. This method allows you to sell investments that have lost value to offset gains made from other investments, therefore reducing your taxable income.

What if you're nearing or just entering retirement?

While these strategies are helpful for folks entering or nearing retirement, you don’t have to wait that long to figure out how you’re going to manage taxes once you retire.

As you are planning for retirement, it might be a good idea to invest in a tax-free plan such as a Roth IRA. Funds in this account are made from post-tax contributions, which are contributions that are paid from an employee’s paycheck after it’s been taxed. Funds in a Roth IRA grow tax-free, but it’s important to note that the contributions made to these accounts are not tax-deductible. This carries several different advantages.

For example, these plans have no RMDs, and your withdrawals will be tax-free as long as certain requirements are met. And since you pay taxes upfront on the money you contribute, there’s no penalty if you withdraw those earnings.

This kind of plan may be a good option for people who expect their retirement tax bracket to be the same or higher than their current bracket. By paying taxes on those contributions upfront, you get the benefit of being taxed at a lower rate, which puts more money in your pocket in the long run.

Taking a tax-advantaged approach when planning for retirement is key if you want to keep more of your money in your pocket. And with proper planning, you can implement some of these strategies even if you’re decades away from retirement. With the new year well underway, this is a great opportunity to invest in your future — especially if you’re planning on retiring later this year.

The views and opinions expressed herein are those of Joel Russo and do not necessarily reflect the views of CoreCap Investments, LLC or CoreCap Advisor, LLC, its affiliates, or its employees. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Joel Russo is a New Jersey native and has been in the financial services industry for more than 35 years. He is dedicated to helping his clients reap the rewards of a well-planned retirement. Unlike many financial professionals, Joel specializes in the retirement market, "the over-50 crowd” and has dedicated his practice to educating this community with workshops on topics relating to income from the right sources, taxes in retirement, RMD pitfalls and legacy planning.