Tax Efficiency in Retirement

Tax Efficiency in Retirement

Will you pay higher taxes in retirement?

It’s possible but much of that depends on how your retirement income is generated.

For some retirees, income may continue to come from part‑time work. For others, it may come primarily from retirement plans or investment accounts. Understanding which sources will help finance your retirement can make a meaningful difference in how much of your income is subject to taxes.

Another important factor is Social Security. When you choose to begin benefits and, if you’re married, when your spouse claims benefits; can influence how much of your income is taxable. Answering key Social Security questions ahead of time can help provide better clarity around your overall tax picture.

Understanding Pre‑Tax Investments

Traditional IRAs and 401(k) plans are common examples of pre‑tax, or tax‑deferred, investments.

Contributions to these accounts are generally made before taxes, meaning you don’t pay income tax on the money as it goes in. Instead, taxes are deferred until you take distributions in the future. During that time, the assets in the account can benefit from tax‑deferred growth.

For individuals covered by a workplace retirement plan, the deduction for traditional IRA contributions in 2026 is phased out based on income. The phase‑out applies to adjusted gross incomes between $129,000 and $149,000 for married couples filing jointly and $81,000 and $91,000 for single filers.[i]

It’s also important to note that once you reach age 73, required minimum distributions (RMDs) must begin from traditional IRAs, 401(k)s, and most other defined‑contribution retirement plans in most circumstances. Withdrawals are taxed as ordinary income, and distributions taken before age 59½ may be subject to a 10% federal income tax penalty.

Understanding After‑Tax Investments

A Roth IRA is one of the most widely recognized after‑tax retirement accounts.

With a Roth IRA, contributions are made using after‑tax dollars. While contributions themselves are not deductible, qualified withdrawals later in retirement may be tax‑free. Like traditional IRAs, Roth IRA contributions are subject to income limits.

For 2026, Roth IRA contributions are phased out for incomes between $242,000 and $252,000 for married couples filing jointly and between $153,000 and $168,000 for single filers.i

To qualify for tax‑free and penalty‑free withdrawals of earnings, Roth IRA distributions must generally meet two conditions:

• The account must satisfy a five‑year holding requirement, and
• The withdrawal must occur after age 59½

Tax‑free and penalty‑free withdrawals may also be available under certain other circumstances, such as the death of the account owner. Unlike traditional IRAs, the original Roth IRA owner is not required to take minimum annual distributions.

Putting Tax Efficiency into Context

Tax efficiency in retirement isn’t about eliminating taxes altogether. It’s about understanding how different income sources interact and how timing may affect what you owe.

For many retirees, even modest financial adjustments may help manage tax exposure over time. That’s why discussions around tax efficiency are especially important during retirement and often worth revisiting as circumstances change.

This article is for informational purposes only and is not a substitute for personalized financial, tax, or legal advice. You should consult qualified professionals before making changes to your retirement strategy.