tax planning

How Proactive Tax Planning Can Rescue Your Retirement

Unless you plan ahead, your retirement savings could be a tax time bomb. Here are some strategies to help defuse it.

If I were to ask how much you’ve saved in your IRA, 401(k) or similar retirement plan, my guess is you could come pretty close to telling me your account’s current balance.

But what if I asked you how much you can expect to pay in taxes on that money throughout your retirement? You would likely have no idea.

And that isn’t unusual. Americans often make the mistake of focusing too narrowly on their account’s investment returns while giving little attention to tax planning.

Many people have no clue how much of the money in their tax-deferred retirement accounts is actually theirs and how much could end up going to Uncle Sam. They either forget the IRS will eventually take its share through income taxes, or they seriously underestimate the significance of that amount.

The scary truth is that heading into retirement without a solid tax plan in place could needlessly cost you tens of thousands of dollars, if not hundreds of thousands. I liken it to heating and cooling your home with the windows wide open: You can do it, but it's going to be expensive.

Tax Preparation vs. Tax Planning

The lesson here is to be informed about what is and isn't tax planning.

Many Americans file their taxes annually with a tax preparation service or CPA. During that process, they may receive some good advice and find a few deductions. But essentially what they’re doing is recording what happened in the past. Saving significant money on taxes throughout retirement requires looking forward, not backward.

Tax preparation and tax planning are not the same thing. Without proper tax planning, your retirement savings could be extremely vulnerable – especially if tax rates rise in the future. 

No one can predict exactly what will happen to taxes in the coming years, but many experts have suggested that for the government to meet its obligations, at some point it will be forced to raise tax rates. Back in 2018, the nonpartisan Congressional Budget Office went so far as to call the federal budget “frightening and almost certainly unsustainable.”

When the CBO issued that grim outlook, our national debt was approaching $22 trillion. Today, it’s at more than $30 trillion, and there’s still no clear plan for repayment.

What can you do to prepare for potential tax headwinds? Here are a few strategies to consider.

Minimize the Taxes on Your Social Security Benefits

Did you know up to 85% of your Social Security benefits could end up being taxed as ordinary income?

Many people aren’t even aware that they might have to pay taxes on their Social Security payments. But if your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits = combined income) is above IRS limits, you may be required to pay at least some tax — up to 50% or even 85% (the IRS has a calculator that can help you determine how much of your Social Security benefits are taxable).

A solid income plan should consider the impact of taxes on your retirement income and provide you with a clear plan of how much to pull from what account and when to minimize the potential tax hit.

Consider the Benefits of a Roth Conversion

If you’ve been putting most of your retirement savings into a tax-deferred investment account, converting all or a large chunk of those funds to a Roth IRA could help reduce the tax bill waiting for you in retirement. Paying taxes at today's historically low rates and converting to a Roth allows for tax-free growth and tax-free retirement income. 

If you and your financial adviser agree that moving to a Roth makes sense, you have until the end of 2025 to take advantage of the tax reductions put in place by the Tax Cuts and Jobs Act of 2017 (you can do a Roth conversion after that time, but the taxes you pay are likely to be higher).

Plan Now for Your Surviving Spouse

When one spouse dies, the survivor’s tax status soon changes to single filer. Going forward, that means he or she will face a lower income threshold for calculating income taxes.

Your retirement plan should include strategies designed to deal with this inevitability, including possibly a life insurance policy (which isn’t taxed when a lump sum payment is made to a spouse). ROTH IRAs could also significantly lessen the tax impact upon the death of the first spouse as there are no required minimum distributions of the inherited ROTH IRA.

Avoid Tax Risk with a Plan

As you develop your retirement plan, keep in mind that you and your heirs will have to pay taxes on every dollar you've saved in what I call “tax-postponement” accounts.

You can put off paying taxes on the money you contribute and earn in a traditional IRA or 401(k), but eventually, those taxes must be paid. 

If you’ve been focusing on saving and investing, but you’re a little fuzzy on the trouble your tax bills might cause in retirement, a qualified financial adviser can help with proactive tax planning.

Remember, it's not how much money you've saved that matters most. Instead, it's how much of that money you get to keep, use and enjoy during a long retirement.

Kim Franke-Folstad contributed to this article.

About the Author

David Lukas, Investment Adviser Representative

Founder, CEO, David Lukas Financial

David Lukas is the founder and CEO of Arkansas-based David Lukas Financial ( He is also the host of “The David Lukas Show'' (, which was named in the Top 100 Financial Shows in the U.S., according to Nielsen Ratings. David is a National Social Security Advisor (NSSA ®) certificate holder.

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 was not compensated in any way.

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