A key part of retirement planning is knowing how to tap retirement accounts without running up a huge tax bill. Retirement brings so many questions. Should we ditch the house and buy a condo? Will we need a part-time job? And even more importantly, how can we wring as much tax savings as possible from my retirement funds? Here are four tax-saving tips for retirement savings.
Let’s start with the basics.
You have lots of investment options when you save for retirement: stocks, bonds, cash, precious metals—even cryptocurrency. What matters to Uncle Sam is what type of account you use for your retirement savings. You can save for retirement with taxable accounts, such as garden-variety bank or brokerage accounts. You can also save with tax-deferred accounts via individual retirement accounts (IRAs) or 401(k) savings accounts. In addition, you can save in Roth IRAs and Roth 401(k)s. Many people have a mix of taxable accounts, tax-deferred accounts and Roth accounts.
Tap Retirement Accounts: Start With Taxable Accounts
Interest from taxable accounts is taxed at ordinary income tax rates. For the 2025 tax year, the top tax is 37 percent of taxable income above $626,350 for individuals and $751,600 for married couples filing jointly. (See the Tax Foundation’s table for the 2025 federal income tax brackets.)You’re not taxed at the maximum rate for every cent of your income. You reduce your gross income by the standard deduction of $15,000 for individuals and $30,000 for joint returns. Those over 65 and single receive an additional standard deduction of $2,000; for married couples, the extra standard deduction will be $1,600 per qualifying spouse aged 65 or older. A married couple under 65 that earned $100,000 and had only the standard deduction would have a taxable income of $70,000.
U.S. tax rates are graduated. Consider the married couple with $70,000 in taxable income. They would pay 10 percent tax on their income up to $23,850 and 12 percent on income up to $70,000.
Cash is a good place to start. “Your first source of [retirement] funds should be the money in your checking account,” says Christine Benz, director of personal finance and retirement planning for Morningstar and author of “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.” After all, you’d only owe tax on the interest for the year it’s paid to you. For example, if you earned $2,000 in interest on a $50,000 savings account, you’d only owe taxes on $2,000.
And remember, capital gains are your friend. Stocks and most mutual fund shares in taxable accounts are taxed at a maximum of 20 percent if you have held them for at least one year. If you’ve held your stocks for less than a year, you’ll owe ordinary income taxes on your gains. Qualified dividends from stocks you’ve held for at least a year are taxed at a maximum of 20 percent as well. If you haven’t held those stocks for a year, your dividends are taxed at your regular income tax rate.
Some taxpayers with high modified adjusted gross incomes ($250,000 for married couples) pay an additional 3.8 percent tax on their net investment income.
Tax-Deferred Accounts
Don’t be horrified by the tax bite on traditional IRA withdrawals. You’ll have more money in your account than you would otherwise. IRAs, 401(k)s and other tax-deferred accounts help you save for retirement. If you want to invest $5,000 in a taxable account and you’re in the 22 percent tax bracket, you’ll have $3,900 after taxes to invest. A tax-deferred account lets you invest the entire $5,000 and defer taxes until retirement.Furthermore, you defer taxes on your investments until you withdraw them in retirement, which helps boost your rate of return. If you were in the 22 percent tax bracket in a fully taxable account earning 4 percent a year, your rate of return would fall to 3.1 percent after taxes. In a traditional tax-deferred account, you’d earn the full 4 percent a year.
Still, you have to pay taxes on your withdrawals. This is not welcome news to most retirees, particularly if your withdrawals push you into a higher tax bracket. Moreover, you must take required minimum distributions (RMD) when you turn 73, which may push you into an even higher tax bracket.
Nevertheless, assuming equal investment returns, you likely will have more money in your tax-deferred account than your taxable account. A Morningstar study found that a one-time investment of $5,000 in a tax-deferred account earning 8 percent would become $108,623 after 40 years, while a taxable account earning the same rate of return would become $84,726.
If you’re charitably inclined and have to take RMDs from your account, you can donate up to $105,000 to charity tax-free. “It’s an extraordinary opportunity, and it will lower your RMDs in the future,” says Gary Schatsky, a New York financial planner.
Tax-Preferred Accounts
Converting a traditional IRA to a Roth is a good idea—sometimes. Because withdrawals from tax-deferred accounts can cost so much in taxes, Roth IRAs are extremely popular. Although you can’t deduct your contributions, if you’re 59½ or older and you have had your Roth for at least five years, your distributions are free from state and federal income taxes. You can take out your principal at any time—after all, you’ve already paid taxes on that money. Furthermore, there are no RMDs on Roth IRAs.The good news: You can convert a traditional IRA to a Roth. But it doesn’t always make sense. Do the math first.
When you convert from a traditional IRA to a Roth, you’ll owe taxes on the amount you convert. Let’s say you have a $100,000 traditional IRA, you’re in the 33 percent tax bracket, and you convert the whole thing to a Roth. Ideally, you have enough money in other accounts to pay the $33,000 tax bill. Otherwise, in order to get your account back to $100,000, you have to earn 49 percent to get back even—no easy task.
Secondly, the five-year waiting period may apply to the conversion. If you are younger than 59½ and withdraw before the five-year waiting period is over, you’ll owe a 10 percent penalty. One big exception: If you’re 59½ or older when you make the withdrawal from a converted IRA, the five-year holding period doesn’t apply, and you won’t owe the 10 percent penalty. If you are over age 59½, the five-year holding period still applies to taxable earnings in the Roth IRA. But if you do not meet the five-year holding period, at least no 10 percent penalty applies.
Finally, that $100,000 conversion will be considered taxable income, which will almost certainly put you into a higher income tax bracket and could also raise your Medicare premiums, at least temporarily.
