Intro
Most of us think about taxes once a year and take a reactive stance to it, the same way someone might only go to the doctor when something starts to hurt, instead of going to our regular checkups and trying to catch health issues before they become bigger problems.
The healthiest retirements happen when you treat taxes like you treat your annual physical: you check in, you plan, and you catch issues early before they become expensive problems.
The top tax rate in US history was 94%, in 1944 during World War II. To finance the wars. It remained 90% through the 1950s and early 60s, until it was lowered to 70% in 1964.
The top tax rate today? 37%
What does that mean for you as someone about to retire, or in retirement? It means you live in a historically low tax rate system.
While you are working, you don’t have a lot of influence over the taxability of your W-2, so maybe there wasn’t a strong reason to be very proactive. But all that changes when you transition to retirement. How you draw income from your savings and various accounts has potential to impact a variety of variables in your retirement including:
- Federal and state income taxes
- Social Security taxation (depending on provisional income, 0%, 50% or 85% of your social security income could be taxed
- Required Minimum Distributions (RMDs) force you to start taking money out of your tax deferred IRAs and 401ks
- Medicare surcharges – Income Related Monthly Adjustment Amount (IRMAA) is based on your income you showed two years ago
- Capital Gains – depending on your income, you could be taxed at 0%, 15% or 20% on capital gains
- The subsidies you receive on the healthcare exchange if you are under age 65 and not eligible for Medicare yet
- Charitable tax strategies – certain IRS rules allow you to contribute money from IRAs after 70 ½ without paying taxes
- The taxability of the estate you leave to heirs or churches/charities.
While more variables create more complexity, they also create opportunities. If you understand the fundamentals of the system, you can optimize your own retirement income in a tax efficient manner, thereby reducing the erosion impact of taxes on your retirement portfolio!
The fundamentals of our tax system
Understanding these 2 fundamental concepts will help bring clarity to your taxes in retirement and allow you to take a proactive posture when it comes to managing taxes in your retirement.
- The taxable income formula – how is our taxable income calculated?
- How the marginal tax bracket system works in the US – how are we taxed on that taxable income?
So how is taxable income calculated?
Taxable Income = Adjusted Gross Income – Standard Deduction or Itemized Deductions (the greater of the two)
For most retirees, the 1st variable, Adjusted Gross Income, breaks down to Guaranteed Income + Income from savings/investments
Adjusted Gross Income = Fixed Income + Income from savings/investments
Fixed income is typically comprised of 3 components:
1. Social Security
2. Pension
3. Annuity income
When it comes to taxation on fixed income, there is not a whole lot you can do to influence the taxability of it, it’s very much like your W-2 while you were working, it’s a fixed amount each month or year that you have very little influence around.
Income from savings/investment accounts
The 2nd source of your adjusted gross income comes from savings and investments. Income from savings and investments can come from a variety of vehicles including: Traditional (tax deferred) 401ks, Roth (tax free) 401k, Traditional IRAs, Roth IRAs, Brokerage accounts funded with after-tax dollars (taxed at capital gains rates), dividends, interest and capital gains that pay off of those accounts the equity in your home, HSAs, Cash Value from permanent life insurance policies (whole life, variable life etc).
Account types and how they are taxed
| Account Type | Accumulation Phase | Decumulation Phase |
|---|---|---|
| Qualified (401k, 403b, etc) | Grows Tax Deferred | Taxed on all distributions |
| Traditional IRA | Grows Tax Deferred | Taxed on all distributions |
| Inherited IRA | Grows Tax Deferred | Taxed on all distributions |
| Roth IRA | Grows Tax Deferred | Tax-Free distributions |
| Taxable brokerage | Taxed on capital gains | Taxed on capital gains |
| Health Savings Accounts | Tax Deferred | Tax Free distributions |
| Home Equity | Taxed on capital gains if sold* | Taxed on capital gains if sold * |
| Home Equity | Tax Free if accessed via home equity line (interest rate applies) | Tax Free if accessed via home equity line (interest rate applies) |
| Cash Value from Life Insurance | Typically Tax Free | Typically Tax Free |
*$250k in capital gains is exempted per spouse if you’ve lived in your primary residence 2 out of the last 5 years
Diversifying amongst these various accounts heading into retirement is important, because you are able to mix and match your withdrawals to help optimize your taxable income.
Standard Deduction or Itemized Deduction?
After the Tax Cuts and Jobs Acts passed in 2017, increasing the standard deductions from $6,500 for single filers to $12,000, and $13,000 to $24,00 for married filing jointly couples, the % of Americans itemizing is estimated to have gone from 31% in 2017, to 11% (or less) in 2018. You probably remember itemizing for mortgage interest, charitable deductions, state and property taxes, but with the higher standard deduction, you may take the standard deduction now.
If your itemized deductions do exceed your standard deduction, you will take the itemized deduction amount instead of the standard deduction.
Going back to the taxable income formula:
Taxable Income = AGI (Guaranteed Income + Income from savings/investments) – Deduction (standard or itemized, the higher of the two)
Marginal Tax Brackets
Now that you know how to calculate your taxable income, let’s review how the marginal tax bracket system applies to it. Here are the marginal tax rates for individuals and married couples who file jointly:
Single Filing Brackets 2025
| Income | % Taxed |
|---|---|
| 0-$11,925 | 10% |
| $11,926-$48,475 | 12% |
| $48,476-$103,350 | 22% |
| $103,351-$197,300 | 24% |
| $197,301-$$250,525 | 32% |
| $250,526-$626,350 | 35% |
| $626,351+ | 37% |
Married Filing Jointly Brackets 2025
| Income | % Taxed |
|---|---|
| 0-$23,850 | 10% |
| $23,851-$96,950 | 12% |
| $96,951-$206,700 | 22% |
| $206,701-$394,600 | 24% |
| $394,601-$501,050 | 32% |
| $501,051-$751,600 | 35% |
| $751,601+ | 37% |
Source: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
Let’s say a married couple has $210,000 in taxable income.
The first $23,850 at 10% = $2,385
The next $73,100 at 12% = $8,772
The next $109,750 at 22% = $24,145
The last $3,300 at 24% = $792
Note: only the small amount above $206,700 is taxed at 24%
$2,385 + $8,772 + $24,145 + $792 = $36,094 in taxes paid
They cross into the 24% bracket — but only a small portion is taxed at that rate. Their average tax rate is closer to ~17%. ($36,094 taxes paid ÷ $210,000 taxable income)
Understanding this helps you take advantage of today’s brackets — especially if you’re considering Roth conversions and IRA distributions.
Now that you understand the fundamentals of how to calculate taxable income and how the marginal tax bracket system works, here are 7 ways to avoid tax traps in retirement!
7 tax traps to avoid in retirement
- Fill Roth conversions opportunistically in the 0%, 12%, 22%, and 24% tax brackets before year-end to lock in low rates and lower future RMDs.
Compared to pre-2017 tax rules, the 2025 tax brackets are expanded allowing more income at lower tax rates, a direct impact of the Tax Cuts and Jobs Act and subsequent legislation like the One Big Beautiful Bill.
We live in an unprecedentedly low tax rate system, so ask yourself, would you rather pay taxes now? Or potentially later at higher rates?
The “golden” years to consider these conversions are the years after you retire from your position and before you turn on social security. You may have lower income and therefore more room in the 0%, 12%, 22% and 24% brackets.
- Optimize your tax sequencing drawdown strategy
The rule of thumb used to be: draw from your non-qualified (aka brokerage accounts) first, then pre-tax next, and Roth last.
However, with lower tax rates, the order of operation of how you draw down your various accounts depends.
In lower income years, you may opt to draw from traditional pre-tax accounts in the lower tax brackets (0%, 12%, 22%, 24%) before tapping cash savings.
- Understand safe harbor rules to avoid tax penalties if you owe taxes but meet certain payment thresholds.
If you are tired of paying tax penalties, you can avoid tax penalties by meeting the “safe harbor” each year. The IRS allows you avoid penalties by meeting the safe harbor rule. This rule is as follows:
- If you meet one of the two payment thresholds during the year, you will avoid tax penalties. The safe harbor rule protects you from penalties but does not eliminate tax owed. Here are the two thresholds, meeting either one satisfies safe harbor:
Option A: you pay 90% of your tax liability in the current year through withholdings and/or quarterly estimated taxes
Option B: you pay 110% of last year’s taxes owed (if your AGI for the previous year was over $150k) or 100% of last year’s taxes owed (if your AGI for the previous year was $150k or less).
Option B has more certainty because you know what you owed last year and you can apply 100% or 110% to it depending on where your AGI fell last year.
- Use Qualified Charitable Distributions (QCDs) if charitably inclined to reduce taxable income while fulfilling RMD requirements. Once you are 70 ½, you are able to distribute money from your pre-tax vehicles to your charities, and they will not be taxed. There is a maximum of $108k per individual in 2025.
- Gifting – some folks refrain from proactively gifting while they are alive because they believe they will be taxed on gifts. Unless you gift (while alive or through you estate) greater than $15 million, news flash, you are not getting taxed.
Anyone can gift $19k a year in 2025 to another individual and not have to report it to the IRS, even if you go over this $19k, while you are required to report it, you are not taxed on it. An individual would have to gift over $15M in 2026 before owing any gift and estate taxes. There is a difference between a reportable event and a taxable event, if you gift $19,001 to someone, that $1 is reportable, but it doesn’t mean it’s taxable, the $1 is deducted from your lifetime gift exemption of $15M.
- About the sale of your primary residence: The IRS allows a $250,000 exclusion ($500,000 if married filing jointly) on capital gains if you lived in the home for at least 2 of the last 5 years (not necessarily consecutive).
- The strategies above address Uncle Sam, but don’t ignore Aunt IRMAA – understand that what you do today will impact your medicare premium surcharges 2 years from now. What you do today will impact your Medicare surcharges 2 years from now. By not monitoring your income, if you draw down pre-tax money and bump yourself into higher IRMAA brackets you can potentially pay thousands more in premiums.
Conclusion
Get that tax check up! Be proactive and plan ahead. Retirement tax planning is not about reacting each year but setting a proactive plan. By understanding tax mechanics, using Roth conversions strategically, managing withdrawals intelligently, and leveraging deductions and charitable giving, you have the potential to keep more of what you’ve saved, extending your financial independence in retirement.
You’ve worked hard for this money — now make it work hard for you. Proper tax planning can be one of your greatest allies in enjoying retirement on your terms.
Understanding our marginal tax bracket system is a fundamental building block to understanding how to potentially:
- Extend your retirement savings
- Reduce Medicare costs
- Lower Social Security Taxes
- Increase tax-free income
- Reduce Required Minimum Distributions
- Leave more to family and causes you care about
Retirement isn’t “set it and forget it” — it’s a phase where thoughtful tax planning = meaningful dollars saved.
We want you to live a retirement with clarity and purpose!
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
