8 Retirement Tax Strategies Your CPA Won't Tell You
Tax preparation looks back to calculate what you owe for the previous year, but tax planning looks forward to help lower your lifetime tax bill. Retirees with pensions especially need tax planning to strategically manage pensions, account withdrawals and investments.
Tax preparation and tax planning are not the same thing. For retirees with pensions, the difference could be worth tens of thousands of dollars over the course of their retirement.
When you think about working with a CPA, you probably think about your tax return. And that makes sense — tax professionals help calculate what you owe, identify available deductions and credits and make sure your return is filed correctly.
But there is a big difference between preparing your taxes and planning your taxes. Tax preparation looks backward. Tax planning looks forward (I wrote a book on this called I Hate Taxes — request a free copy here).
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That distinction becomes particularly important for retirees with pensions, substantial savings and multiple sources of retirement income. A pension can provide valuable lifetime income, but it also creates a tax-planning challenge that many retirees don't anticipate: Your retirement income could be higher than it was during some of your working years.
As the founder and CEO of Peak Retirement Planning and a CFP® Professional, I recommend that retirees look beyond their federal income tax bracket and consider how decisions affect Social Security taxation, Medicare premiums, capital gains, Roth accounts and estate planning.
Here are eight retirement tax strategies worth discussing with your financial planning team.
1. Don't automatically dismiss Roth conversions
A Roth conversion involves moving money from a traditional IRA or other tax-deferred account into a Roth IRA and paying income taxes on the converted amount today.
In exchange, qualified Roth withdrawals in retirement are generally tax-free, and Roth IRAs aren't subject to lifetime required minimum distributions (RMDs) for the original owner.
The conventional wisdom around taxes is often simple: Defer taxes as long as possible. But that isn't necessarily the best strategy for every retiree.
Consider someone who has a pension, Social Security and several million dollars in traditional retirement accounts. Their future taxable income could be substantial, as RMDs will eventually force money out of tax-deferred accounts, and pension and Social Security income continues arriving regardless of whether the retiree needs additional cash.
This can create a very different tax picture than the one they had while working. A Roth conversion could make sense when the tax cost today is lower than the expected lifetime tax cost of leaving the money in a traditional account.
However, the calculation should include more than the federal income tax bracket. Social Security taxation, Medicare's income-related monthly adjustment amount (IRMAA), state taxes, future RMDs and estate planning goals all affect the result.
The goal isn't necessarily to pay the lowest tax rate this year; it's to pay the lowest lifetime tax bill.
2. Put charitable giving on your tax-planning calendar
If charitable giving is part of your retirement plan, don't wait until tax season to think about it. Beginning in 2026, a new above-the-line charitable deduction allows eligible taxpayers who take the standard deduction to deduct up to $1,000 of qualifying charitable contributions for single filers and $2,000 for married couples filing jointly.
This creates another planning opportunity for retirees who don't itemize deductions.
But retirees with larger retirement accounts have another important tool: Qualified charitable distributions (QCDs). Once you reach age 70½, a QCD allows you to make a charitable contribution directly from an IRA.
The distribution may satisfy part or all of an RMD, subject to applicable limits, while generally keeping the transferred amount out of adjusted gross income.
That distinction matters. For a retiree with a pension, keeping taxable income under control could have ripple effects beyond the income tax return, as it can influence Medicare premiums and the taxation of Social Security.
Charitable retirees therefore shouldn't simply ask, "How much can I deduct?" They should ask, "Which account should the charitable gift come from, and when should I make it?"
3. Stop treating tax preparation as tax planning
Your CPA might prepare an excellent tax return, but that doesn't necessarily mean you're receiving comprehensive retirement tax planning.
Tax preparation is largely reactive — the tax year has ended, your income and transactions are known, and your professional calculates the resulting liability.
Tax planning is proactive. It asks questions such as:
- Should you make a Roth conversion this year?
- How much should you convert?
- Which account should fund your next withdrawal?
- How will an RMD affect your tax bracket?
- Could a large capital gain increase your Medicare premiums?
- Should you delay Social Security?
- How will your tax strategy change after one spouse dies?
- Where should assets be held for tax efficiency?
These decisions often need to happen months or years before the tax return is prepared.
Retirees shouldn't necessarily expect one professional to handle every aspect of the process. Instead, the CPA and financial adviser should communicate so that investment and tax decisions work together rather than operating in silos.
That collaboration can be especially valuable for retirees with pensions, because the interaction between guaranteed income, retirement accounts and government benefits can add a lot of complexity to your plan.
4. Build tax diversification into your retirement portfolio
Most investors understand investment diversification: Don't put all your money in one stock or one asset class.
The same concept applies to taxes. Retirees may potentially benefit from having assets spread among three different tax "buckets":
- Tax-deferred. Traditional IRAs, 401(k)s, 403(b)s and similar accounts
- Tax-free. Roth IRAs and other qualifying Roth assets
- Taxable. Brokerage and other non-retirement accounts
Having everything in tax-deferred accounts could create a problem later. When you need money, you have limited flexibility — withdrawals generally create taxable income, and RMDs will eventually force distributions whether you need the money or not. A Roth account provides another option.
Suppose tax rates are relatively high in a particular year. You could draw more heavily from Roth assets, assuming the withdrawals are qualified, rather than adding more taxable income.
In another year, when your taxable income is lower, drawing from a traditional IRA could be more attractive.
Tax diversification gives retirees choices, and in a retirement that could last 20 or 30 years, flexibility has real value.
5. Pay attention to the "three-legged stool" of retirement income
Pension retirees often have three major sources of income:
- A pension
- Social Security
- Withdrawals from retirement accounts
Individually, each might be beneficial, but together they can create a surprisingly large stream of taxable income. A retiree with a $70,000 pension, $50,000 of Social Security and significant IRA withdrawals could have considerably more taxable income than they expected when they first retired. The consequences extend beyond ordinary income taxes.
This increased income could cause up to 85% of Social Security benefits to be taxable and can also push long-term capital gains into higher brackets, eliminating opportunities to realize gains at the 0% rate.
Medicare Part B and Part D premiums increase through IRMAA, when income exceeds certain thresholds. That means an additional dollar of taxable income isn't necessarily just another dollar subject to income tax. It could also contribute to higher Medicare premiums.
For pension holders, this is one reason tax planning needs to look beyond the tax return.
6. Don't overlook the tax implications of pension decisions
Choosing between pension options is primarily an income-planning decision, but taxes deserve a seat at the table.
For example, someone might be deciding between a monthly pension benefit and a lump-sum distribution. The choice involves numerous factors, including longevity, investment risk, survivor benefits, liquidity and spending needs.
Taxes are only one piece of that decision, but they influence the long-term outcome. Survivor benefits deserve particular attention, as while you may be able to file jointly now and enjoy the more favorable tax brackets, one spouse passing away could result in a severe increase in your tax and IRMAA situation. Not to mention the potential to lose a Social Security benefit.
That combination creates what is commonly called the widow's penalty. A pension strategy that looks perfectly reasonable while both spouses are alive could create a very different tax picture for the surviving spouse.
In some situations, Roth conversions during the couple's joint-filing years could help reduce the future tax burden. The key is to model the decision before making an irrevocable pension election.
7. Make your investment strategy tax-efficient, not just return-efficient
Retirement investing isn't only about selecting investments that you believe will perform well. It's also about deciding where those investments should live.
For example, highly appreciated assets held in a taxable brokerage account create capital gains when sold. Meanwhile, mutual funds often distribute taxable capital gains even when you didn't sell the fund yourself, creating "phantom gains."
Those distributions might make tax planning more difficult because you don't necessarily control when the taxable income occurs. Tax-loss harvesting is another strategy worth considering. Selling an investment that has declined in value generates a capital loss that offsets capital gains, subject to applicable tax rules.
The proceeds could then potentially be reinvested in another investment while maintaining a similar overall portfolio strategy, provided you follow the wash-sale rules.
Asset location matters, too. Growth-oriented investments could be particularly attractive inside a Roth account because future qualified growth can be tax-free.
More conservative investments could potentially fit better in traditional accounts, while certain investments in taxable accounts often benefit from favorable capital gains treatment.
The best location depends on the entire portfolio, not simply the investment itself.
8. Don't let your pension create a retirement tax trap
Here's the overarching issue pension holders need to understand: A guaranteed income stream could make retirement taxes more complicated, not less.
Many retirees have relatively little taxable income, so they remain within the standard deduction or lower tax brackets. Pensioners with significant savings can have a different experience.
Their pension continues producing income. Social Security then becomes partially or largely taxable. Their retirement accounts continue growing. Eventually, RMDs begin. If they don't need those RMDs for living expenses, they often reinvest the money in a taxable account, creating another layer of potential capital gains and taxable investment income.
The result is a cycle in which one source of income affects another. That's why retirees with pensions and substantial assets should look at taxes as a long-term planning issue rather than an annual filing exercise.
The objective isn't to eliminate taxes. Instead, the goal is to coordinate the different pieces of a retirement plan so that you aren't unnecessarily creating taxable income, Medicare surcharges or avoidable tax bills later in life.
The bottom line
Retirement tax planning isn't about finding one magic strategy; it's about understanding how today's decisions affect the next 10, 20 or even 30 years.
- A Roth conversion could be beneficial in one situation and counterproductive in another
- A charitable gift could comprise cash, appreciated investments or an IRA, with different tax consequences
- A pension election could affect the surviving spouse's future tax burden
- And the way investments are allocated among taxable, tax-deferred and Roth accounts may influence how much flexibility you have later
Perhaps most importantly, tax preparation and tax planning should not be confused. Your tax return tells you what happened. A comprehensive retirement tax plan asks what you can do about what happens next.
For retirees with pensions and significant savings, that distinction could be one of the most valuable parts of their retirement strategy.
Now, for those who have a financial planner who says, "I am not a tax professional, go talk to your tax preparer": It may be time to find a new adviser. We believe retirees should work with what we call a "one-stop shop," where the CPA and financial planners work in the same office to ensure the above strategies get implemented.
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- Why a Roth Conversion Is Wrong for Most People But Often Right for Pension Holders
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- 10 Retirement Fixes You Can Implement Today to Strengthen Your Financial Plan
- When Is a Roth Conversion a Bad Idea? 6 Situations Retirees Should Consider Carefully
