Personal Finance

Paying Too Much Tax in Retirement? Here’s How to Lower Your Bill

Maurie Backman

Published: February 6, 2025 1:43 pm

As painful as it is to pay taxes during your working years, you might loathe the idea of paying taxes in retirement even more. At that point, you’re not earning a paycheck so much as living off of your savings and other income you’re entitled to. So it stinks to have to part with a chunk of it to hand over to the IRS.

The good news, though, is that with the right strategies, you can lower your tax bill in retirement. Here are some options worth considering.

1. Consider a Roth IRA conversion

A Roth conversion is something you may want to do ahead of retirement. But it’s a good way to keep your IRS burden to a minimum once you’re no longer working.

Roth IRA or 401(k) withdrawals are yours to enjoy tax-free. Roth accounts also don’t impose required minimum distributions (RMDs), which means your investments can enjoy tax-free growth for as long as you don’t need the money.

That said, a Roth conversion creates a tax liability — and a potentially large one — the year you move those funds over. So it’s a good idea to consult a tax or financial professional before going this route. You’ll also want to time your conversion to when your tax rate is likely to be the lowest, and it wouldn’t hurt to get help figuring out when that is.

2. Be strategic with your RMDs

If a Roth conversion doesn’t make financial sense for you, you may have to stick to a traditional IRA or 401(k) for retirement. And that means not only paying taxes on withdrawals, but adding to your tax burden once RMDs become mandatory.

But if you’re strategic with your RMDs, you can avoid a big tax hit. To that end, look at qualified charitable distributions, or QCDs. This has you donating money to registered charities directly from your IRA or 401(k), thereby eliminating the tax obligation on that withdrawal.

3. Take losses strategically in taxable accounts

You may have some of your retirement savings in a taxable brokerage account. This is a smart thing to do when you’re retiring early and don’t want to worry about being penalized for an early IRA or 401(k) withdrawal.

But because investment gains can create a tax liability, it’s important to manage your brokerage account carefully. To that end, aim to hold investments for at least a year and a day before selling them at a profit. This bumps your gains into the more tax-friendly long-term category. And, when possible, take losses strategically to offset gains.

4. Choose municipal bonds

Municipal bonds are a terrific investment for retirees because they’re relatively stable income producers. And from a tax perspective, they’re truly ideal.

Municipal bond interest is always federally tax-exempt. And if you buy municipal bonds issued by your state of residence, you can avoid state and local taxes on your interest income as well.

5. Don’t pay off your mortgage

A lot of people have the goal of paying off their mortgages prior to retirement. But keeping yours could work to your advantage — especially if you locked in a low interest rate.

Mortgage interest could serve as a valuable tax deduction if you’re someone who itemizes on your returns. So could your property taxes.

In fact, it pays to read up on the various credits and deductions you may be eligible for as a retiree. A tax professional can help you figure out what benefits you’re entitled to.

6. Delay Social Security

Waiting to claim Social Security beyond full retirement age results in boosted benefits. And delaying your filing could also give you some near-term relief in the context of taxes. If you wait to take benefits, you won’t have to pay taxes on that income right away.

That said, the more money Social Security pays you each month, the higher your total tax bill might be once those benefits start rolling in. So it’s a good idea to work with a tax professional and/or a financial advisor to time your Social Security claim just right.

In fact, it’s a good idea to get professional help if your goal is to pay the IRS as little as possible in retirement. An expert in that field may be able to identify strategies on top of that you wouldn’t have thought of yourself.