Are You Being Tax-Smart About Your Pension?

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Retiring with a pension can significantly influence your financial landscape during your golden years.

While a dwindling number of Americans have access to a pension (only 20% of people have a pension), having one can set you up well for retirement when paired with your retirement savings and Social Security benefits. This unique position requires tailored planning that is more advanced.

Here's a breakdown of essential insights and strategies for effective pension planning.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The mathematics behind pensions

Consider this: A pension paying $40,000 annually over 25 years can equate to receiving a total of $1 million. This value may not be noted on your net worth report, but it is a huge asset in your retirement plan.

One of the common misconceptions many people hold is that they will be in a lower tax bracket during retirement.

However, income from pensions combined with Social Security and investment withdrawals can result in the same or a higher income during retirement years than anticipated, leading to a higher-than-planned tax bill.

Here is a scenario to consider. Imagine you and your spouse are receiving $40,000 from your pension, $40,000 from Social Security, and $20,000 from a spousal Social Security benefit.

This amounts to $100,000 in guaranteed annual income, which might push you into the same or higher tax bracket than you were in during your working years.

Anticipating tax changes

Current tax rates are historically low, but future changes, notably potential increases, could impact your retirement finances.

High-income earners, particularly those with pensions, might face higher taxes as part of broader fiscal strategies. The government typically tends to tax those with a higher income or net worth more than others.

Although nobody knows what tax rates will be in the future, as I always say, the tax code is written in pencil. Which is why we typically recommend people plan now for whatever direction tax rates could go. We call this tax diversification.

Let’s discuss a strategy to encourage tax diversification many of those with pensions are considering right now, called a Roth conversion.

Strategic moves: The Roth conversion

A Roth conversion can be a valuable strategy to manage future tax liabilities. This involves transferring funds from a tax-deferred account to a Roth IRA, where any growth or future withdrawals are tax-free.

Opting for a Roth conversion allows you to pay taxes at potentially lower rates now and avoids taxes on future gains.

Reasons to consider a Roth conversion:

Mitigate required minimum distributions (RMDs). RMDs force you to withdraw funds annually after reaching a certain age, potentially increasing your taxable income.

A Roth IRA is not subject to these mandatory withdrawals.

Protect against future tax increases. By converting now, you pay taxes on the current value, avoiding potentially higher rates in the future.

Have greater control over retirement income. With a mix of tax-deferred and tax-free accounts, you can better manage your income and tax situation in retirement.

In high-tax years, you could withdraw from the Roth, and in low-tax years, you could withdraw from the tax-deferred accounts.

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Avoid higher Medicare costs. Medicare Part B premiums in retirement are based on your income. The higher your income, the more you pay, but you do not get better coverage.

A lot of people with pensions and retirement savings in tax-deferred vehicles are concerned about this.

Having more in a Roth allows you to lower your future taxable income and make this potentially less likely.

Prepare for the widow’s penalty. This occurs when one spouse passes away and the tax brackets in the year following the death go from married filing jointly to single.

The so-called widow’s penalty can cause the surviving spouse to pay nearly double the amount in taxes. A Roth conversion now could allow you to pay taxes at the married filing jointly rates and take from the Roth, tax-free, when you’re paying at the single rate in the future.

Retirement with a pension offers unique opportunities and challenges. By engaging in informed planning and utilizing strategies like Roth conversions, you can enhance your financial security and enjoy a comfortable retirement.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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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Joe F. Schmitz Jr., CFP®, ChFC®, CKA®, is the founder and CEO of Peak Retirement Planning, Inc., which was named the No. 1 fastest-growing private company in Columbus, Ohio, by Inc. 5000 in 2025. His firm focuses on serving those in the 2% Club by providing the 5 Pillars of Pension Planning. Known as a thought leader in the industry, he is featured in TV news segments and has written three bestselling books: I Hate Taxes (request a free copy), Midwestern Millionaire (request a free copy) and The 2% Club (request a free copy).

Investment Advisory Services and Insurance Services are offered through Peak Retirement Planning, Inc., a Securities and Exchange Commission registered investment adviser able to conduct advisory services where it is registered, exempt or excluded from registration.