Tax Efficiency in Retirement
As you approach retirement, one of the most important considerations is how to manage your tax liability. While many retirees expect lower taxes in their later years, the reality can be more complex. The way you generate income in retirement—whether from work, retirement accounts, or Social Security—will play a significant role in determining your tax burden. Understanding the different types of retirement accounts, such as pre-tax investments like traditional IRAs and 401(k)s or after-tax options like Roth IRAs, is crucial for making informed decisions about your retirement strategy.
Will you pay higher taxes in retirement? It’s possible, but it will largely depend on how you generate income. Will it be from working? Will it be from retirement plans? And if it does come from retirement plans, will distributions come from pre-tax or after-tax/Roth accounts? Understanding the types of accounts you have and their tax liability is crucial to retirement income and tax planning. Another factor to consider is the role Social Security will play in your retirement. When do you plan to start to take Social Security benefits? If you have a spouse, when do they plan on taking benefits? It’s critical to answer key Social Security benefits questions so you have a better understanding of how it will affect your taxable income.
What’s a pre-tax investment? Traditional IRAs and 401(k)s are examples of pre-tax investments that are designed to help you save for retirement. You won’t pay any taxes on the contributions you make to these accounts until you start to take distributions. Pre-tax investments are also called tax-deferred investments, as the money you accumulate in these accounts can benefit from tax-deferred growth. For individuals covered by a retirement plan at work, the tax deduction for a traditional IRA contribution in 2025 is phased out for incomes between $126,000 and $146,000 for married couples filing jointly, and between $79,000 and $89,000 for single filers.1 Keep in mind that once you reach age 73, you must begin taking required minimum distributions from a traditional IRA, 401(k), and other defined contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
What’s an after-tax investment? A Roth IRA is the most well-known. When you put money into a Roth IRA, the contribution is made with after-tax dollars. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2025, contributions to a Roth IRA are phased out between $236,000 and $246,000 for married couples filing jointly and between $150,000 and $165,000 for single filers.1 To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be made under certain circumstances, such as in the event of the owner’s death. Additionally, the original Roth IRA owner is not required to take minimum annual withdrawals.
Are you striving for greater tax efficiency? In retirement, it is especially important – and worth a discussion. A few financial adjustments may help you manage your tax liabilities. Talk with one of our professionals to start planning today!
1. IRS.gov, 2025