Taxes in Retirement: Strategies and Risks

Benjamin Franklin “Death and taxes are the only two certainties in life”

Retirement may reduce your earned income, but it doesn’t necessarily reduce your tax bill.

In fact, retirement can introduce a different set of tax challenges. Pension income, Social Security benefits, traditional IRA and 401(k) withdrawals, required minimum distributions, investment income, and Medicare’s income-related premiums (IRMAA surcharges) can all affect how much of your retirement income you ultimately keep. The goal is to have a plan for taxes in retirement.

Six Unique Taxes in Retirement: You May Not Expect

Many people enter retirement without fully understanding what taxes and expenses they will face during their retirement years. Many falsely assume that, since their employment income is in the rear-view mirror, their taxes will also be a thing of the past. This may not be the reality for many people. Other taxes may still apply that they may not be aware of, such as:

1. Taxes on pension benefit payments
2. Taxes on Social Security benefit payments
3. Taxes on distributions from traditional IRAs and 401(k)s
4. Taxes on distributions from other employer-sponsored tax-deferred accounts
5. Taxes on RMDs (Required Minimum Distributions) from tax-deferred accounts, which are generally taxable
6. Medicare IRMAA surcharges (this is not a tax, but rather an additional Medicare premium)

Six Familiar Taxes in Retirement: These Taxes May Remain

Yes, you may be spared taxes on your employment income in retirement. But retirement does not necessarily eliminate your other taxes. This is because income from the previously listed sources may push you into a higher tax bracket when added to the following taxable sources:

1. Taxes on investment income
2. Taxes on dividends
3. Taxes on interest, including interest from bank accounts and bonds
4. Taxes on capital gains
5. Taxes on rental income
6. Taxes on business income

Explanation of Unique Taxes in Retirement

Most pension distributions are fully taxable. However, some pensions have a lump-sum option that allows the owner to roll over a lump sum to an IRA on a tax-free basis. Frequently, from a retirement-planning perspective, this option is not a good choice because the pension payment could be reduced or terminated. This is particularly true for state, local, and federal pensions where pension payments are large relative to the pension lump sum.

For other pensions, however, it may be wise to review your pension choices more fully, as other options could result in higher payouts. See the section on “pension choices” on this website.

If a pension is rolled over to a traditional IRA, it could subsequently be rolled over in smaller amounts over several years into a Roth IRA. The resulting Roth IRA could provide tax-free withdrawals if applicable IRS rules are met. See the section on “Roth Rules” on this website.

Except when an exemption applies or your income is below a threshold, you will generally need to pay taxes on distributions from your IRA, 401(k), and other employer-sponsored tax-deferred accounts. See the section on “IRA and 401k rollovers” on this website.

You may have paid Social Security payroll taxes throughout your working years, but that does not necessarily make your future Social Security benefits tax-free. Depending on your income and filing status, up to 85% of your Social Security benefits may be included in federal taxable income. See the section on “Social Security“ on this website for details.

Depending on your circumstances, your employer-sponsored health insurance may require you to enroll in Medicare Part A and Part B once you turn age 65. You may also be enrolled in Part A and Part B if you are privately insured and over age 65.

Part A is generally free if you have been employed and paying Medicare taxes in the U.S. for 10 years. See our Medicare tutorial webpage for details.

Part B has a monthly premium that changes each year and normally increases. In 2026, the standard monthly Part B premium is $202.90, according to the Centers for Medicare & Medicaid Services.

The IRMAA (Income-Related Monthly Adjustment Amount) supplemental Part B premium, sometimes called a surcharge, depends on multiple income thresholds. In 2026, for married couples filing jointly with modified adjusted gross income of $750,000, the total Part B monthly premium, including IRMAA, would be $689.90 per person, according to the Centers for Medicare & Medicaid Services, which also provides the annually changing income thresholds.

That would equal an annual total of $8,278.80 per person. In 2026, a couple where both spouses are paying the maximum IRMAA would pay a total of $16,557.60 per year.

The scary part is how quickly IRMAA can increase. The annual increase from 2025 to 2026 was more than 9%. If IRMAA historically grows faster than your Social Security benefits, it could become a significant portion of your Social Security income in the future if you have a high retirement income.

This is not only speculation; it is simply math. See the section on “Medicare“ on this website.

IRMAA surcharges can also affect your Medicare Part D premiums. Part D premiums are typically much smaller than Part B premiums. See the section on “Medicare“ on this website.

Although IRMAA is not a tax, it can feel like a tax because we have little control over it. Medicare premiums and IRMAA are determined under federal law and through administrative processes. It is worth considering that Medicare premiums and IRMAA amounts can change from year to year without Congress passing a new law specifically establishing each year’s premium amount. That fact affects the certainty of your retirement plan.

Required Minimum Distributions (RMDs) generally must begin at a prescribed age based on your year of birth and other applicable rules. For example, for people born after 1960, these distributions generally begin at age 75.

For many traditional retirement accounts, RMD amounts are calculated using the account balance at the end of the preceding year and an IRS life-expectancy factor. Generally, taxable RMDs are included in ordinary income and will therefore be taxed accordingly.

RMDs could generally have the effect of increasing your tax bracket, increasing your IRMAA, and increasing the portion of your Social Security benefits subject to taxation.

See our RMD calculator on this website. See our RMD Strategies page on this website. See our video about RMDs. Also see the RMD table below.

Additional Expenses You May Face in Retirement

Retirement spending can influence your taxes in retirement. Some expenses may decline after leaving the workforce, but other expenses can increase.

Some expenses may drop in retirement, such as travel to work, work clothing, FICA taxes, and union dues. However, many other expenses may increase in retirement. Other lifestyle expenses can create additional cash-flow needs. These additional expenses could include:

1. Travel, Entertainment, and Hobbies: Delayed desire fulfillment can dramatically increase expenditures.
2. Healthcare: These expenses generally increase with age, and employer-sponsored insurance may no longer be available.
3. Housing: Many newly retired people upgrade, move, or remodel their homes during the first year or two.
4. Utilities: Spending more time at home can increase your utility bills.
5. Spoiling Your Grandchildren: Gifts to family often increase in retirement.

If those expenses are funded with distributions from traditional IRAs, 401(k)s, or other tax-deferred accounts, the withdrawals may increase taxable income. Consequently, both the amount of money you need to spend in retirement and the account from which you withdraw the money can affect your taxes in retirement.

The point is that most retirement planners, including ourselves, previously advised clients to defer taxes until their retirement years. This was based on the belief that expenses and taxes would be lower in retirement due to the reduction in employment income.

Previously, tax deferral was our retirement-planning mantra. But as conditions have changed, we believe that we and many other advisors now recognize that tax-deferred accounts, such as traditional IRAs and traditional 401(k)s, may sometimes be suboptimal.

Essentially, from a retirement-planning perspective, we believe that saving taxes over your lifetime may be more important than saving this year’s tax payment.

Thus, it is important to consider how much tax liability you are building by continuing to contribute to traditional IRAs, traditional 401(k)s, and other tax-deferred accounts.

The Role of Tax Deferral in Retirement Planning

Think of tax-deferred retirement savings as a future tax liability.

When you contribute to a traditional IRA or traditional 401(k), you generally receive a tax benefit today in exchange for potentially paying ordinary income tax on taxable distributions in the future. The account itself belongs to you; however, part of its future value may ultimately be paid in taxes.

For planning purposes, it can therefore be useful to think of a traditional retirement account as having two economic components: the amount you ultimately keep after taxes and the amount that may eventually be paid to federal or state taxing authorities.

Quoting Ed Slott, CPA, widely recognized as “America’s IRA Expert,” is a nationally renowned author, and public speaker. Ed Slott shares this concept—known as his core “always rule”—across various interviews, podcasts, and his retirement planning books “Always pay taxes at the lowest rate, even if it means paying taxes before they are due.” (https://www.retirementsolutionsfinancial.com/blog/ed-slotts-3-ira-rules-every-retiree-must-know)

Most people dislike taking on debt. However, many people in a 401(k) plan add a form of tax liability (debt) every pay period. Every contribution to a traditional IRA or 401(k) can increase your future tax liability (debt) in the form of deferred taxes. Let’s talk about shedding this tax liability.

Quoting Ed Slott, CPA, again: “Your IRA is an IOU to the IRS.”

Slott has repeatedly warned that traditional IRAs can be viewed as being similar to joint accounts with the government. When you withdraw the money, Uncle Sam takes his share based on the applicable tax rates at the time.

Quoting Ed Slott, CPA, once again: “Your IRA isn’t a nest egg — it’s a tax-deferred debt. And the longer it sits untouched, the bigger that IOU can grow.

Organizing and Classifying your Taxes in Retirement

Many people have their retirement accounts spread out among many different institutions. This may include various IRA and Roth IRA accounts, plus older 401(k) accounts that they never rolled over to an IRA.

For retirement-planning purposes, it is important to categorize, classify, and tally your different “tax types” of investments. This means making a list of the values of all assets, including:

• Non-retirement assets, or non-tax-deferred assets: Any liquid assets not held in IRAs, 401(k)s, or other tax-deferred accounts.
• Tax-deferred accounts: Including IRAs, 401(k)s, and other tax-deferred accounts. This is typically the largest component for many families.
• Tax-free accounts: Such as Roth IRAs, Roth 401(k)s, and certain types of cash-value life insurance.

Once you have completed this tax classification of your assets, you gain a better understanding of your exposure to the risk of higher tax rates in the coming retirement years.

In our experience, approximately 70% of our clients have the bulk of their assets in tax-deferred IRA and 401(k)-type accounts. Most pre-retirees have made a huge bet on the value of tax-deferred savings.

Tax deferral works best if your tax rates or tax bracket are lower in retirement. But are lower taxes in retirement a realistic assumption?

Once you have made a decision to pursue a Roth conversion, please don’t simply call your HR department or your broker and ask them to convert the account. Many aspects need to be considered, including tax-bracket creep, IRMAA surcharges, taxes on Social Security benefits, and, most importantly, where the money will come from to pay the Roth conversion taxes.

The risk isn’t having a traditional IRA. The risk is having too much of your retirement nest egg concentrated in traditional IRAs, 401(k)s, and other employer-sponsored tax-deferred plans

In the following graphs, discussions, and video, we will present a simplified view of how these retirement investments could work in real life.

Growth and Share of a Tax-Deferred IRA/401(k)

The account belongs to you, as you control the investments and other aspects of the account. But its after-tax value is uncertain.

A traditional IRA or 401(k) may carry a future income-tax liability, so the amount you ultimately retain can depend on future withdrawals, tax rates, and your tax situation.

From a retirement-planning perspective, it may be best to consider that tax-deferred traditional IRAs and 401(k)s do not economically belong entirely to you. These are tax-deferred accounts with potential tax liabilities that grow along with the investments.

Ownership percentages depend on future taxes. Without the drag of current-year taxation, these accounts can grow larger faster.

Our experience with pre-retirees is that people normally look only at the total value of their retirement accounts. Seldom do they consider how much of that account belongs to them versus various taxing authorities, such as the IRS.

Understanding your taxes in retirement is critical for a successful retirement.

The graph above demonstrates this shared ownership. The division of the shares depends on the tax rates and your tax bracket when you withdraw the money.

The above graph assumes a $1,000-per-month contribution, a 6% annual rate of growth, and a 35% tax rate at withdrawal. The graph is for illustration only and is not a projection. Actual results depend on tax rates, taxable income, deductions, account basis, state taxes, withdrawal timing, and other factors.

Important concepts to understand include:

1. It is not all your money! You share the economic value of the account with the government, which has a tax claim on taxable distributions.
2. By bifurcating the money into two shares and two colors, the graph above provides a visual guide to the separate parts. Your share is in blue, and the government share is in red.
3. The share split between you and the taxing authorities depends on future tax rates, your future tax bracket, and whether you could be subject to early-withdrawal penalties before age 59½.
4. The share split represented in the graph is not stable and has the risk of changing dramatically depending on future taxes. This makes retirement planning more uncertain and adds tax-rate risk.
5. Both your share of the money and the government’s share are growing and compounding at the same rate.
6. Having both shares together in a single account does not result in any additional compounding.
7. Although you may dislike personal debt, every time you contribute to a tax-deferred account, IRA, or 401(k), you are potentially increasing your future tax liability to the IRS. Do you like debt?
8. Many people are concerned about leaving a legacy to their heirs. Leaving traditional tax-deferred accounts, IRAs, or 401(k)s to your heirs can also leave them with a future tax liability. Is this what you want to do?
9. You are paying management fees on both your money and the money that may ultimately belong to the government.
10. How do you feel about personally paying management fees to grow money that may not ultimately belong to you—that portion of the money that may belong to a taxing authority?

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Growth and Share of a Tax-Deferred IRA/401k With Higher Taxes

The share split between you and government taxing authorities could change if tax rates change. In an increasing-tax-rate environment, this can result in your share (blue in the graph above) becoming smaller and the government’s share (red in the graph above) becoming larger.

Again, the graphs are for illustration only. Nobody can know for certain what future tax rates will be. But we can identify some of the potential causes and effects of future tax-rate changes:

1. Growing federal spending caused by pandemics, wars, and other factors can add pressure to increase taxes.
2. Growing federal debt is caused by tax collections being far lower than expenditures. The total U.S. debt in September 2026, according to the U.S. Debt Clock, is over $40 trillion, or approximately $117,279 per capita. This may add pressure for Congress to increase taxes.
3. The growing annual U.S. federal budget deficit totaled approximately $2.0 trillion in the first 11 months of fiscal year 2025, according to estimates from the Congressional Budget Office. This may add pressure for Congress to balance the budget, potentially in part by increasing taxes.

Federal debt and projected budget deficits are factors that some retirement planners consider when evaluating the possibility of future changes to tax policy. However, no one can reliably predict future federal tax rates, and higher government debt does not necessarily mean that tax rates will increase in any particular year.

Your after-tax share of a tax-deferred account is reduced if your personal tax rate increases.

Retirement planning is more uncertain and potentially riskier if you must make assumptions about both investment growth rates and future tax rates. Both of these unknown future risks are present with traditional tax-deferred accounts.

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A Roth Conversion Can Remove Future Income Tax Liability

A Roth conversion with the conversion taxes paid using money from inside the traditional tax-deferred account may not be the best solution. But if you don’t have assets that are not tax-deferred, it may be your only option for funding the taxes associated with a Roth conversion.

As an example, if a $100,000 IRA is converted to a Roth IRA and $30,000 of tax is paid from the IRA itself, only $70,000 gets into the Roth IRA account.

However, from a retirement-planning perspective, we believe that it may still be worthwhile to complete a Roth conversion because it can provide the following benefits:

1. Future income-tax liability is removed if IRS Roth account withdrawal rules are followed. In the graph above, the red money, also known as the government share, is generally eliminated.
2. As the money previously earmarked to potentially belong to the government is now generally removed, you will no longer be paying management fees on that portion of the money. The red money previously representing the government’s share is gone and is now colored gray.
3. The money previously earmarked to potentially belong to the owner after taxes is no longer subject to future income-tax increases. It now firmly belongs to the owner rather than depending on future tax rates. The increasing-tax-rate concern and risk for this portion of the owner’s retirement plan has been resolved. In the graph above, the blue money is now green permanently. This Roth money generally grows tax-free.
4. Roth IRAs and Roth 401(k)s can offer significant estate-planning advantages because qualified distributions are generally tax-free. Beneficiaries may still be subject to inherited-account distribution rules, and very large estates may also raise separate estate-tax considerations.

Roth distribution rules are described in the “Roth Rules” section of this website

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A Roth Conversion Better Optimized, Resulting in Higher Roth Balance

From a retirement-planning perspective, it is typically more advantageous to pay the taxes for a Roth conversion from an outside account that is not tax-deferred.

Let’s return to our previous example. If a $100,000 IRA is converted to a Roth IRA and $30,000 of tax is paid from the IRA itself, only $70,000 gets into the Roth IRA account.

But instead of paying the taxes from the IRA, if the $30,000 tax is paid from outside funds, the full $100,000 can enter the Roth account.

In addition to the previously listed Roth conversion benefits, if the taxes caused by the Roth conversion are paid from an account that is not tax-deferred, these additional advantages may be possible:

1. More money remains in the Roth account because no money from the account is used to pay taxes. You have a larger base for future tax-free growth.
2. If money used to pay conversion taxes comes from the same account, that money is generally treated by the IRS as a distribution and may be subject to taxes and, in some circumstances, an additional 10% tax if the owner is under age 59½.

From a retirement-planning perspective, we believe that using outside, non-tax-deferred money to pay taxes associated with a Roth conversion can be one of the best investments you can make. But this depends on your future personal tax rates and many other issues, including:

• Expected RMDs
• Medicare IRMAA
• Social Security taxation
• Your liquidity
• Investment opportunity cost
• Estate objectives
• Whether the outside funds would otherwise be invested
• Applicable Roth withdrawal rules

In some circumstances, paying the conversion tax from non-retirement funds can allow more money to remain inside the Roth IRA and potentially receive future tax-free growth. Whether this is advantageous depends on the taxpayer’s circumstances and should be evaluated as part of an overall retirement-tax plan.

We advise our clients that this can be an opportunity to effectively add money to their Roth accounts.

Tax Diversification Can Give Retirees More Flexibility

Just as you need investment diversification, you also need retirement-account “tax diversification.” A mix of different types of tax-advantaged accounts could improve your chances of a successful retirement.

Traditional retirement accounts can provide valuable tax deductions and tax-deferred growth. Roth accounts can provide tax-free qualified withdrawals. Taxable accounts can provide additional flexibility.

The optimal combination depends on the individual’s tax bracket, retirement income, spending needs, estate objectives, and expected future circumstances.

The risk isn’t having a traditional IRA. The risk is having too much of your retirement wealth concentrated in one tax category without understanding the future tax consequences.

The risk isn’t having a traditional IRA. The risk is having too much of your retirement wealth concentrated in one tax category without understanding the future tax consequences. The risk is not having a plan to understand and prepare for taxes in retirement.

Frequently Asked Questions: Taxes in Retirement

1. Does retirement mean I will pay less in taxes?

Not necessarily. While you may no longer have wages from employment, you may have several other sources of taxable income, including pension payments, Social Security benefits, traditional IRA and 401(k) withdrawals, required minimum distributions (RMDs), investment income, rental income, and business income.

Your retirement tax bill depends on your overall income, filing status, deductions, tax rates, account types, and how and when you take withdrawals.

2. What are some taxes or retirement-related costs I may not expect?

Retirees may encounter several sources of taxation or tax-related expenses, including:

• Taxes on pension distributions
• Federal income taxes on a portion of Social Security benefits
• Taxes on traditional IRA and 401(k) withdrawals
• Taxes on distributions from other tax-deferred employer plans
• Taxes resulting from required minimum distributions
• Medicare IRMAA surcharges, which are income-related Medicare premiums rather than taxes

These costs can interact with one another. For example, a large IRA withdrawal could increase taxable income, potentially cause more Social Security benefits to become taxable, and potentially increase Medicare premiums.

3. Are Social Security benefits taxable?

They can be. Depending on your income and filing status, up to 85% of your Social Security benefits may be included in federal taxable income.

This does not mean that 85% of your benefit is taxed at an 85% tax rate. Rather, up to 85% of the benefit may be included when determining taxable income.

Therefore, the timing and amount of withdrawals from other retirement accounts can affect the taxation of your Social Security benefits.

4. Are traditional IRA and 401(k) withdrawals taxable?

Generally, withdrawals from traditional IRAs and traditional 401(k)s are taxable as ordinary income to the extent the distribution represents previously untaxed amounts.

This is one reason it can be useful to think of a traditional retirement account as having a potential future tax liability attached to it.

5. What is an RMD?

RMD stands for Required Minimum Distribution. An RMD is a minimum amount that generally must be withdrawn each year from certain tax-deferred retirement accounts once you reach the applicable starting age.

For many individuals, the applicable RMD starting age depends on their year of birth. Under current rules, individuals born after 1960 generally have an RMD starting age of 75.

RMDs are generally included in taxable income, except to the extent an exception or special rule applies.

6. Why can RMDs create a tax problem?

RMDs can create taxable income even when you do not need the money for living expenses.

A large RMD may increase your taxable income and potentially:

• Push you into a higher marginal tax bracket
• Cause more of your Social Security benefits to be taxable
• Increase Medicare IRMAA premiums
• Increase the amount of income subject to taxation in future years

For this reason, RMD planning can be an important part of retirement tax planning.

7. What is Medicare IRMAA?

IRMAA stands for Income-Related Monthly Adjustment Amount. It is an additional Medicare premium charged to certain higher-income Medicare beneficiaries.

IRMAA is not a tax. It is an income-related Medicare premium.

However, from a retirement-planning perspective, it can feel similar to a tax because a higher income can result in higher Medicare premiums.

IRMAA can affect both Medicare Part B and Part D premiums, and the applicable income thresholds and premium amounts can change over time.

8. Can taking money from my IRA increase my Medicare premiums?

Yes, potentially.

Because IRMAA is based on income, a large taxable distribution from a traditional IRA or 401(k) can increase your modified adjusted gross income and potentially cause higher Medicare premiums.

This is one reason a withdrawal decision should not always be evaluated solely by looking at the income-tax rate on the withdrawal.

9. Can my investment income increase my retirement tax bill?

Yes. Retirement does not eliminate taxes associated with investments.

Depending on the investment and your circumstances, you may continue to have:

• Interest income
• Dividend income
• Capital gains
• Rental income
• Business income

These sources can interact with your other retirement income and affect your overall tax situation.

10. What does “tax diversification” mean?

Tax diversification means maintaining retirement assets in different tax categories rather than concentrating the majority of your retirement wealth in one type of account.

For planning purposes, assets can generally be organized into three broad categories:

• Taxable/non-retirement assets: Such as bank accounts, brokerage accounts, and other assets outside retirement plans
• Tax-deferred assets: Such as traditional IRAs and traditional 401(k)s
• Tax-free/tax-advantaged Roth assets: Such as Roth IRAs and Roth 401(k)s, subject to applicable rules

Having multiple tax categories can provide greater flexibility when deciding where to obtain retirement income.

11. Why is having too much money in traditional IRAs or 401(k)s potentially a problem?

Traditional retirement accounts can be excellent retirement-saving vehicles. The concern is not necessarily having a traditional IRA or 401(k).

The concern is having too much of your retirement wealth concentrated in tax-deferred accounts without considering the future tax consequences.

A large tax-deferred balance can create substantial future taxable distributions, including RMDs. Future tax rates, your future income, Social Security taxation, and Medicare premiums can all affect how much of that account you ultimately keep.

12. What does it mean to think of a traditional IRA as a “future tax liability”?

When you contribute to a traditional IRA or 401(k), you may receive a tax benefit today in exchange for potentially paying income taxes when the money is withdrawn in the future.

Therefore, the account’s stated balance is not necessarily the same as the amount you will ultimately have available to spend.

For retirement-planning purposes, it can be useful to consider the account as having two economic components:

1. The amount you may ultimately keep after taxes
2. The amount that may ultimately be paid to taxing authorities

The actual amounts depend on your future tax circumstances.

13. Does the government actually own part of my IRA?

No. Your traditional IRA belongs to you, and you control the account and its investments, subject to applicable retirement-account rules.

The concept of a “government share” is a planning illustration. Because previously untaxed traditional IRA and 401(k) distributions can generally be subject to income tax, some portion of the account’s future value may ultimately be paid in taxes.

The actual future tax amount cannot be known with certainty because it depends on future tax rates, income, deductions, distributions, account basis, and other factors.

14. Why do future tax rates matter to retirement planning?

Your retirement plan may last for decades. During that time, tax laws and tax rates can change.

If your retirement income is heavily dependent on traditional tax-deferred accounts, higher future tax rates could reduce the amount you ultimately keep from those accounts.

However, no one can reliably predict future tax rates. Therefore, tax planning should consider uncertainty rather than assume that tax rates will definitely rise or fall.

15. What is a Roth conversion?

A Roth conversion generally involves moving money from a traditional IRA or other eligible tax-deferred retirement account into a Roth IRA.

The amount converted is generally included in taxable income for the year of the conversion, subject to applicable rules and exceptions.

After the conversion, qualified Roth IRA distributions can generally be tax-free.

16. Why would someone voluntarily pay taxes today through a Roth conversion?

The basic idea is to potentially pay taxes at today’s rates rather than leave the entire tax liability to an uncertain future.

A Roth conversion may provide benefits such as:

• Reducing future taxable traditional IRA balances
• Potentially reducing future RMDs
• Creating a source of potentially tax-free qualified retirement income
• Increasing tax diversification
• Potentially reducing future exposure to higher tax rates
• Providing potential estate-planning benefits

However, a Roth conversion is not automatically beneficial. The amount converted, timing, current tax bracket, future tax circumstances, Medicare IRMAA, Social Security taxation, and available funds to pay the tax should all be considered.

17. Should I convert my entire traditional IRA to a Roth IRA?

Not necessarily.

A full conversion could create a very large taxable event and potentially push you into higher tax brackets or increase other income-related costs.

A series of smaller conversions over multiple years may sometimes be more appropriate.

The objective is not necessarily to convert as much as possible. The objective is to determine whether converting an appropriate amount at an appropriate time improves your overall retirement-tax plan.

18. Is it better to pay Roth conversion taxes from outside funds?

Often, it can be advantageous to pay the conversion tax from funds outside the traditional retirement account, assuming doing so makes sense for your overall financial situation.

For example, suppose you convert $100,000 and owe $30,000 of tax.

If the $30,000 tax is withheld from the retirement account, approximately $70,000 may remain to enter the Roth account.

If you have sufficient non-retirement funds and pay the $30,000 tax from those funds instead, the full $100,000 can potentially enter the Roth IRA.

This gives the Roth account a larger starting balance for potential future tax-free growth.

However, using outside funds is not always the right choice. Liquidity, investment opportunities, tax rates, age, estate objectives, and other factors should be considered.

19. Can paying conversion taxes from my IRA create additional problems?

Potentially.

If retirement-account money is used to pay the conversion tax rather than being converted to Roth, that amount may be treated as a distribution. Depending on your age and circumstances, an additional tax or penalty may apply.

The rules can be complex, so Roth conversions should be planned carefully rather than treated as a simple account-to-account transaction.

20. What expenses might increase after I retire?

Some work-related expenses may decline, such as commuting costs, work clothing, payroll taxes, and certain employment-related expenses.

However, other expenses may increase, including:

• Travel and entertainment
• Hobbies
• Healthcare
• Housing improvements or relocation
• Utilities
• Gifts to children and grandchildren

Retirement spending can therefore be different from pre-retirement spending.

21. Why does my source of retirement income matter?

The amount you spend is only part of the equation. Where the money comes from can also affect your taxes.

For example, spending money from a traditional IRA may create taxable income. Spending from a Roth IRA, assuming the distribution is qualified, may generally not create federal income tax.

Taxable investment accounts may have yet another tax treatment.

Having different types of accounts can therefore give you more choices about how to fund your retirement spending.

22. What is the biggest risk with tax-deferred retirement accounts?

The risk is not simply having a traditional IRA or 401(k).

The greater concern may be having an excessive concentration of retirement wealth in tax-deferred accounts without a strategy for managing the future tax liability.

A large traditional retirement account can produce substantial taxable withdrawals and RMDs later in life.

23. Does tax diversification matter as much as investment diversification?

Tax diversification and investment diversification address different risks.

Investment diversification generally seeks to reduce concentration in particular investments or asset classes.

Tax diversification seeks to reduce concentration in a particular tax treatment.

For example, having some taxable assets, traditional tax-deferred assets, and Roth assets may provide more flexibility than having nearly all retirement wealth in one tax category.

24. Can Roth accounts provide estate-planning advantages?

They can.

Qualified Roth IRA distributions are generally tax-free, which can make Roth assets attractive for estate planning.

However, beneficiaries of inherited Roth accounts are still subject to applicable inherited-retirement-account rules, and large estates can involve separate estate-tax considerations.

Roth planning should therefore be coordinated with your broader estate plan.

25. Should I wait until retirement to start thinking about retirement taxes?

Generally, no.

Tax planning can be particularly valuable before retirement because you may have years to make decisions about account contributions, Roth conversions, withdrawals, Social Security timing, and the management of taxable and tax-deferred assets.

Once retirement begins, some planning opportunities may become more limited.

26. What should I do before making a Roth conversion?

Do not look only at the amount of tax generated by the conversion.

Consider how the conversion could affect:

• Your marginal and effective tax rates
• Future RMDs
• Medicare IRMAA
• Social Security taxation
• Available cash and liquidity
• Investment opportunity costs
• Estate objectives
• Future retirement spending
• Roth withdrawal rules
• State income taxes
• Your expected future tax situation

A Roth conversion should be evaluated as part of a comprehensive retirement-tax strategy.

27. Is Roth conversion always a good idea if I believe taxes will increase?

No.

A belief that tax rates may increase is only one factor.

A conversion can create a substantial current tax bill, and the benefit depends on comparing the tax cost today with the potential future benefits.

The decision should be based on your individual circumstances rather than simply assuming that future tax rates will be higher.

28. How can I determine my retirement tax exposure?

Start by creating an inventory of your financial assets and classifying each account by its tax treatment.

At a minimum, identify:

• Taxable/non-retirement assets
• Traditional IRAs
• Traditional 401(k)s and other employer plans
• Roth IRAs
• Roth 401(k)s
• Other potentially tax-advantaged assets

Then consider your expected Social Security, pension, investment, rental, business, and other income.

This can provide a clearer picture of how much of your retirement wealth may be exposed to future income taxes.

29. What is the main takeaway from this retirement-tax strategy?

The main takeaway is that retirement tax planning should not be an afterthought.

Retirement income can come from many sources, and the tax treatment of each source can be different. RMDs, Social Security taxation, Medicare IRMAA, investment income, and future tax rates can all influence how much of your retirement savings you ultimately get to spend.

The goal is not necessarily to eliminate taxes. The goal is to develop a strategy that helps manage your lifetime tax burden, retirement income, flexibility, and financial goals.

30. Where should I start if I am concerned about my retirement tax exposure?

Start by understanding what you own, how each account is taxed, and what your expected retirement income will look like.

Then evaluate whether your retirement assets are appropriately diversified among taxable, tax-deferred, and Roth accounts.

A personalized analysis can help identify potential issues such as future RMDs, tax-bracket increases, Social Security taxation, Medicare IRMAA exposure, and Roth conversion opportunities.

Want to understand your retirement tax exposure? Schedule your FREE, No-Strings-Attached Consultation.