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Tax Planning Strategies for a Tax-Efficient Retirement

A retired couple cooking healthy food and talking about a bottle of red wine. Tax-efficient retirement.

Retirement should be one of the least stressful periods of your life. You deserve to enjoy those years, not spend them pinching pennies and worrying about outliving your money. Having the right tax strategies in place can be a big help in alleviating those fears. Advance planning allows you to look forward to retirement, and a tax-efficient retirement plan offers the potential to hold onto as much of your money as possible. 

Many factors come into play when tax planning for retirement, including the types of retirement plans you have, your current age, your marital status, and your overall financial goals for retirement. There’s no substitute for working with your tax planner to fine-tune the tax strategies for your specific needs. Read on for an overview of three strategies that you and your tax planner might discuss.

Three Strategies for a Tax-Efficient Retirement

  1. Maximize tax diversification.

    Tax diversification is one of the single most impactful strategies you can deploy for planning a financially secure retirement. Different types of retirement plans have different types of tax treatment.  
    • Taxable accounts include your brokerage account and other savings or investment vehicles that provide no real preferential tax treatment. You’ll be taxed on interest and dividends your investments earn and may owe capital gains taxes when you sell any appreciated assets that are held in taxable accounts. Taxable accounts don’t have required minimum distributions, which can make them a useful part of a tax-efficient retirement plan; you can take money out whenever it’s most beneficial to you. 
    • Non-taxable accounts include Roth IRAs, Roth 401(k)s and Health Savings Accounts. Contributions to these types of accounts are made with after-tax dollars. Once you reach a certain age—currently 59 1/2 for Roth accounts and 65 for HSAs—you’re able to take withdrawals tax-free. (Note: HSA funds can only be used tax-free for qualified medical expenses, and non-qualified withdrawals are taxed as ordinary income.)
    • Tax-deferred or tax-advantaged accounts include some of the most popular types of retirement plans: traditional IRAs, traditional 401(k)s and 403(b)s. You contribute pre-tax dollars to these accounts now and pay taxes on withdrawals once you’re in retirement.  

Spreading assets across all of those different types of retirement plans/accounts can give you lots of options when you reach retirement and need to start pulling out money. Your tax planner can help you determine how to allocate your cash across all the account types that are available to you.

2. Create a General Withdrawal Strategy

The challenge with creating well-diversified retirement plans is figuring out how to pull money out of all those different sources in the most tax-advantaged way. There are many ways to approach withdrawal strategies once you reach retirement. 

Tax planners often recommend drawing income from taxable accounts first and leaving Roth accounts alone for as long as possible. The longer you can leave money in those tax-advantaged accounts, the more interest you’ll earn. But that doesn’t mean it’s necessarily a good idea to drain your taxable accounts and then move on to your other income sources. As you near retirement, your tax planner can create projections based on different withdrawal strategies so you can see the real tax implications of each one.

3. Maximize Social Security benefits, life insurance policies, charitable giving, etc.

People tend to focus on traditional retirement savings vehicles like 401(k)s and Roth accounts, but many other pieces can go into creating a tax-efficient retirement strategy. How you time your Social Security benefits can have many tax implications, for example. Depending on your other income sources, your Social Security benefits may be taxed as much as 85%. Delaying your benefits until you reach the maximum age could help you spend down some of your other assets, minimizing your income and potentially reducing the percentage of your monthly benefit that’s taxed. 

Some people buy permanent life insurance policies with an eye toward tax-efficient retirement planning. These policies have a cash value that grows tax-deferred, and the policy owner may be able to pull out some of that cash in retirement without triggering income taxes. Strategic charitable giving may also be used in retirement to reduce your taxable income.

Need help creating plans for a tax-efficient retirement? 

Sachetta’s tax advisors work with clients at all stages of life to create tailored plans for maximizing their money and minimizing their taxes in retirement. Whether you’re nearly retired and need help tweaking your withdrawal timelines or so green that you’re not entirely clear about the different types of retirement plans you can use to save, we’re here to help. We welcome your questions about planning for the most tax-efficient retirement possible. Contact us today.


Steve A

 Stephen P. Ahern, CPA/PFS, CFP®, AEP®, MST provides individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients including key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. Stephen co-founded and served as President of Wealth Management Advisors, LLC for twenty-one years before joining the Sachetta team.