Here’s the three step tax planning process I use in real life to minimize my clients retirement tax burden. The framework is flexible and applies universally. Using this framework you can do your own tax planning or at least understand how the sausage is made.

First, understand how retirement income taxed.

In order to minimize your retirement tax burden you need to understand how income is treated. Generally speaking, income falls into in three different buckets, depending on the source. Ordinary income, tax free, and tax-preferred.

Ordindary income: subject to income tax.
- IRA Distributions
- Most pensions
- Growth on an annuity.
- Nonqualified dividends and interest
- Royalties
- HSA withdrawals for non-medical purposes
Tax Free
- Roth IRA withdrawals
- HSA withdrawals for qualified expenses.
- Principal in a brokerage account
- Municipal bond interest
Tax Preferred: recieves special rates.
- Social Security
- Certain pensions
- Capital gains
- Qualified Dividends
- Rental Income
- REIT and real estate limited partnership income.
- Oil and Gas partnership distributions
- Limited partnership distributions made via Form K-1.

Try to own assets in each category to give yourself options in retirement.

Just as a car can speed up, brake, and maneuver side to side. Owning assets in each category gives you the agility to avoid tax-obstacles on the road in retirement.

What strategies can you use to minimize your retirement tax burden?

Retirement is unique because you have more levers to pull than before. You may be asking yourself “How do I minimize my retirement tax burden this year?” That’s the wrong question. View your tax burden comprehensively, spanning your entire lifetime. Instead the question should be more universal “How do I minimize my retirement tax burden?” This goes beyond a specific tax year and allows you to look holistically. But, where to start?

Awareness is the foundation. Most people I come across don’t take the time to calculate their taxes before the end of the year. The boat of opportunity sails right by you on December 31st, and you’re left with only the shabbiest options. Income resets each year, thus tax planning is an annual activity.

Adopting a commitment to tax planning is like exchanging the old V8 Chevy for a 50 mpg hybrid. You can travel a lot further on the same amount of fuel.

Small actions, repeated consistently, produce significant outcomes. You don’t need an elaborate strategy teetering on the edge of legality to make a big difference.

Start here: Estimate your taxes in October.

This gives you enough time to take action.

Next: Understand the road ahead and its obstacles.

Here are important tax features to be aware of. Some are cliffs, others are unique paths. They apply to everyone:

Premium tax credit phase-outs¹
The top and bottom of your income tax bracket²
The top and bottom of your capital gain bracket³
Income-Related Medicare Adjustment Amounts (IRMAA) thresholds⁴
Net Investment Income Tax (NIIT)⁵

With a good idea of your tax situation and the obstacles to maneuver around. You can now use tax strategies based on your unique circumstances. Here are core strategies you can use to increase, decrease, or avoid tax altogether.

Now, apply the technique that best fits your situation.

Accelerate Income to fill a bracket

Roth Conversions – moving money from a traditional IRA or 401(k) to a Roth IRA or Roth 401(k). This increases the amount of income you have in a year. This is useful to do when you have low income. For example, during the years when you’re waiting for social security to begin or after a layoff. Learn more about Roth conversion rules.
Withdrawals from a tax-deferred IRA or 401(k) – if you’re over 59 ½ you can begin taking withdrawals from an IRA. If you’re 55 you can begin taking “substantially equal payments” from your 401(k) without penalty. Learn more about 72(t) payments
Capital Gain Harvesting – a fancy term for selling investments at a gain. You then buy them back right away. This recognizes capital gain income. It sets a new, higher cost basis for your investments. Resetting your basis means you’ll pay less tax in the future. It gives you extra maneuverability down the road. Learn more about the tax treatment of capital gains and losses.

Reduce Income to stay below a bracket

IRA Contributions – You can make IRA contributions if you have any wage income. You can do so regardless of your age or distribution requirements. This can reduce your income in a particular year. Review the IRA contribution limits.
Charitable donations – donating to charity has a lot of nuance. Your donations and deductions must be greater than your standard deduction. If they are, they count. To give a enough to charity to make donations worth it, consider “bunching” donations. This means donating for many years in a single year. This is where a Donor Advised Fund (DAF) comes in handy. You can donate in one year to get the tax deduction but delay your actual gift(s) until a point down the road. Learn more about DAFs
Harvest capital losses by selling an investment at a loss in a taxable account. Wait 31 days, then buy it back. This artificially locks in losses that you can use in future years. It’s a useful tool for managing capital gains later. Additionally, you can use up to $3,000 worth of loss to offset regular income. Learn more about the tax treatment of capital gains and losses.
Control Your Interest. If you have savings pushing you into higher tax brackets, NIIT, or medicare thresholds, take control with an annuity. Multi-year Guaranteed Annuities (MYGAs) are like a long-term CD from your bank. The tax difference is that you only recognize income when you pull money out of your annuity account. Not when it’s earned. This difference is why this simple annuity structure is useful for tax planning. Learn more about annuity taxation.

Avoid Tax Altogether

You can make Qualified Charitable Distributions (QCDs) if you’re over age 70 with an IRA. You can give directly to charitable organizations. This is one of the best ways to donate to charity. These gifts never count as income. This is helpful if you need to keep your Adjusted Gross Income (AGI) low. Low AGI matters for things like healthcare subsidies. It also determines the amount of your social security that is subject to taxation. It’s important for qualifying for some tax credits. Learn more about QCDs.
Health Savings Account (HSA) Contributions. You can contribute to an HSA if you have a qualifying high-deductible health plan. If you plan to use the money for future healthcare expenses, it’s a win! Keep in mind that once you enroll in Medicare, you can no longer contribute to an HSA. Learn more about HSA rules.
Buying real estate with the intent to hold forever. When you pass away, the cost basis of capital assets like real estate is “stepped up.” This translates to tax preferred income during your life and a tax-free inheritance to your heirs. If you want the benefits without the headache, consider owning professionally managed real estate through a direct fund structure like a limited partnership. Learn more about a step ups.

Your situation will undoubtedly have unique circumstances. If you have a business or a large estate, own a lot of RSUs and stock options, or operate rental real estate, I urge you to hire a professional.

Can you do it alone?

As your net worth increases, the payoff from tax planning increases. It’s not necessary to hire someone, but it can save time better spent elsewhere. I find the most savvy people recognize their weaknesses and manage them. If they’re the type to procrastinate, they outsource. Acknowledge your limitations and shape choices that fit within them.

Keep in mind that if you’re hiring, you may have to shop around for a while. Most financial planners can’t give tax advice. Many tax professionals only see year-by-year, not the big picture. We can only drive looking through the windshield, not the rear view mirror.

How to Minimize Your Retirement Tax Burden