Dan Reiter, CFP®, CPA, CDFA®,
Retirement can change more than where your income comes from — it can also change when and how that income is taxed. For many pre-retirees, the transition from a paycheck to retirement income creates a period when taxable income may temporarily be lower. How you use those years can have an impact on your tax picture later in retirement.
That becomes particularly important when Social Security enters the equation. Depending on your income, a portion of your Social Security benefits may be taxable, and withdrawals from retirement accounts, pensions, and investment income can all affect the calculation.
Depending on your situation and level of income, you may not be able to avoid paying tax on your Social Security benefits. This may be the case for individuals who receive significant pension income, investment income, or simply need to withdraw more from retirement plans to support their spending needs.
The good news is that retirement can also create opportunities to plan ahead. Strategies such as Roth conversions, intentionally timing retirement withdrawals, and managing capital gains may help you make more tax-aware decisions before and after Social Security begins. The right strategy will look different for everyone, but understanding the opportunities available at each stage of retirement can help you approach those decisions more intentionally.
For a broader look at the financial decisions that come together as you approach retirement, learn more about planning for retirement.
For some retirees, the years between their last paycheck and the start of Social Security can create a valuable tax-planning window. Earned income may have stopped, while Social Security, required distributions, and other retirement income have not yet fully begun.
That doesn’t automatically mean you should minimize income during those years. In some situations, it may make sense to do the opposite.
Generally, there are three overarching strategies that may help reduce tax on Social Security:
The first two strategies take advantage of the period before benefits begin. The third reflects how the planning conversation may change once Social Security becomes part of your income.
Let’s take a look at each of these strategies.
If you are planning to retire before you begin Social Security benefits, you may have a window of opportunity to accelerate taxable income before your benefits begin.
At first, intentionally creating taxable income may sound counterintuitive. After all, isn’t the goal to reduce taxes?
But retirement tax planning isn’t necessarily about paying the least tax possible in any single year. Recognizing income during a lower-income period may sometimes help reduce the amount of taxable income you need to recognize later, when Social Security and other retirement income are already part of your tax picture.
For instance, if you retire at age 65 but plan to wait until age 70 to receive Social Security, you have five years to accelerate taxable income.
How do you accelerate income?
Three common ways are:
Each accomplishes that goal differently, so let's look at how they may fit into this pre-Social Security planning window.
A Roth conversion is the process of electing to take funds from a pre-tax retirement account and “converting” them into a Roth retirement account.
The amount converted to Roth is reported on your tax return and included in your taxable income.
For example, let’s assume that you have $500,000 in a traditional IRA.
If you elect to convert $50,000 of your traditional IRA to a Roth, the $50,000 converted is reported on your tax return as income. The $50,000 is then deposited into a Roth IRA.
Why would you voluntarily pay tax on that income now?
The benefit is that Roth IRA distributions are not subject to tax, provided you meet the requirements for a qualified distribution.
As such, you could theoretically convert all your pre-tax funds to Roth before Social Security begins. Once Social Security begins, if all your funds are in a Roth account, you would not have to take taxable distributions from a pre-tax retirement plan to support your spending needs.
In practice, whether and how much to convert requires careful planning. A Roth conversion creates taxable income in the year of the conversion, so the potential current tax cost needs to be weighed against possible future tax benefits.
A Roth conversion is one way to intentionally recognize income before Social Security begins. If you need money from your retirement accounts to cover living expenses anyway, taking distributions directly from a pre-tax account may accomplish a similar goal.
Withdrawing money from a pre-tax account is similar in concept to doing Roth conversions. When money is withdrawn, you pay ordinary income taxes on the withdrawal amount on a dollar-for-dollar basis. The primary difference is that the money does not end up in a Roth IRA.
This may make more sense than doing a Roth conversion if you have expenses that need to be covered anyway and your cash balances or other income sources are not sufficient to cover them.
Withdrawing money from a pre-tax account, as well as completing Roth conversions, may also have the additional benefit of reducing required minimum distributions later. By reducing the balance in your pre-tax accounts earlier in retirement, future required distributions may also be lower.
What are "Required Minimum Distributions"?Required minimum distributions, or RMDs, are rules that generally require you to begin taking distributions from certain pre-tax retirement accounts at age 73 or 75, depending on the year you were born. |
This is another reason the years before Social Security and RMDs begin may provide a valuable tax-planning window. Roth conversions and pre-tax withdrawals allow you to intentionally recognize ordinary income during those years.
Retirement-account withdrawals can also affect how much of your Social Security is taxable once benefits begin. If you’re wondering how IRA and 401(k) withdrawals can affect taxes on Social Security, we break down the relationship in more detail in this article.
But retirement accounts aren’t the only place you may have control over when income is recognized. If you own appreciated investments in a taxable account, capital gains may provide another opportunity.
Another way to intentionally recognize income before Social Security begins is through capital-gain harvesting. To understand how this works, consider a simple example.
If you purchase a share of Microsoft for $100 and the price of the share increases to $120, you have an unrealized capital gain of $20. Although you have a $20 gain, you do not pay tax on that gain until the shares are sold.
As such, “capital-gain harvesting” is when you intentionally sell investments in non-retirement accounts to realize the gain. Since you can choose when you sell investments with a taxable gain, you have control over the timing of the income and its associated tax.
Don’t want to sell because you want to keep the investment? Consider selling then repurchasing it, which would recognize the gain in the current year and reset your cost basis to the new purchase price.
Like Roth conversions, the potential benefit comes when you expect to pay a lower tax rate on the gain today than in the future. Since capital gains may increase provisional income and potentially increase the taxable portion of Social Security benefits, realizing gains before Social Security begins may be advantageous in some circumstances.
Finally, when can capital-gain harvesting be particularly attractive?
When you may be able to realize long-term capital gains at a 0% federal tax rate.
Long-term capital gains, meaning gains on investments held longer than one year, are taxed at different rates than ordinary income. Generally, federal long-term capital-gains rates are 0%, 15%, or 20%, depending on taxable income.
Here’s what that can look like in practice:
In 2026, the top of the 0% federal long-term capital-gains bracket for married couples filing jointly is $98,900 of taxable income. Depending on the amount and composition of a couple’s taxable income, some or all of their long-term capital gains may therefore fall within the 0% bracket.
When is taxable income often more likely to be lower? Before Social Security.
State taxes may still apply to capital gains, so those should be considered as well.
The broader opportunity is timing. If your taxable income is lower during the years between retirement and Social Security, you may have an opportunity to intentionally realize long-term gains at a lower federal tax rate than you could face later.
Roth conversions, pre-tax withdrawals, and capital-gain harvesting all use that same potential planning window in different ways. And the longer that window remains open, the more time you may have to consider these strategies — which brings us to the timing of Social Security itself.
While not a direct tax-savings strategy, choosing to delay taking Social Security may provide more time to consider the strategies discussed above.
Generally, retirees may opt to begin receiving a reduced Social Security benefit as early as age 62. For most, eligibility for a full benefit begins at age 67. However, enrollees may also choose to delay taking Social Security until age 70. Delaying Social Security beyond your full retirement age earns delayed retirement credits until age 70.
But for tax-planning purposes, the timing can matter for another reason.
Not only can delaying Social Security result in an increased benefit, but it may also allow for more tax flexibility by creating additional “gap years” after retirement. Your “gap years” are those years after your taxable income from working stops but before Social Security begins.
In these years, because Social Security benefits have not yet begun, you may have greater flexibility to do things like Roth conversions, pre-tax account withdrawals, and capital-gain harvesting.
For example, someone who retires at 65 but waits until 70 to claim Social Security could have several years in which earned income has stopped but Social Security benefits have not yet begun. Depending on their circumstances, those years may provide an opportunity to intentionally recognize income using the strategies discussed above.
Ultimately, this may result in a reduction in total taxes paid over your lifetime.
Of course, taxes are only one factor to consider when deciding when to claim Social Security. Your income needs, life expectancy, marital situation, and overall retirement plan can all play a role in determining when it makes sense to begin benefits.
Once Social Security begins, those tax-planning considerations change. Rather than focusing primarily on how to use your gap years, you may want to pay closer attention to which income sources you draw from and how those decisions affect your taxable income.
If you’re wondering why Social Security benefits may be taxable and how the calculation works, we take a closer look at the rules in this article.
Once Social Security begins, the focus of your retirement tax strategy may shift. Rather than intentionally recognizing income during lower-income “gap years,” you may want to be more selective about when and where taxable income is created.
Once you file for and are receiving your Social Security benefits, minimizing or deferring taxable income where appropriate may help reduce the impact of taxes on your Social Security benefits.
How can you defer or minimize your taxable income? Some strategies are essentially the opposite of those that can help you accelerate income before Social Security begins. For instance, you might consider withdrawing funds from cash or Roth accounts rather than pre-tax accounts, or capital loss harvesting rather than capital gain harvesting.
Another common area of focus for retirees seeking to minimize taxes on Social Security is making tax-aware investment decisions.
Let’s look at how each of these strategies may work in practice.
Let’s say you have an IRA, a Roth IRA, and a robust savings account. Once more, you need to withdraw funds to support your spending needs.
Where do you get those funds from?
Taking funds from a traditional IRA generally adds taxable income to your tax return. On the other hand, qualified withdrawals from your Roth IRA and withdrawals from your savings generally do not create taxable income.
As such, you may be able to reduce your reported taxable income — and potentially the tax on your Social Security — if you choose to spend more from Roth and cash accounts and delay distributions from traditional IRAs until later.
However, that doesn’t mean Roth and cash should always be used before traditional retirement accounts. There isn’t one withdrawal order that’s right for every retiree. Your current and future tax situation, required minimum distributions, spending needs, and broader retirement plan can all affect the decision.
The important takeaway is that two accounts capable of providing the same amount of spending money can have very different tax consequences.
Account selection is one way to manage taxable income. For retirees with taxable investment accounts, investment gains and losses can create another planning opportunity.
Capital-loss harvesting is a tactic that can reduce taxable income by selling investments that are currently being held at a tax loss.
A “tax loss” is when the amount paid for the investment, or cost basis, exceeds the current value of the investment. As noted earlier in the discussion on capital gains, losses are only recognized and recorded on a tax return when the investment is sold.
Capital losses reported on the return can be utilized to offset current-year or future capital gains. Under current law, if your capital losses exceed your capital gains, individuals may generally use up to $3,000 of the excess loss to reduce other income. Any remaining unused capital losses can generally be carried forward to future tax years.
That means capital-loss harvesting may provide a tax benefit beyond the year in which the investment is sold. However, there are important rules to understand when realizing those losses.
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A Word of Caution – Wash Sales One of the downsides of capital-loss harvesting is the wash-sale rule. The IRS generally considers a wash sale to occur when you sell or trade stock or securities at a loss and acquire substantially identical stock or securities within 30 days before or after the sale. The rule is intended to prevent taxpayers from selling a security solely to recognize a tax loss and then immediately repurchasing essentially the same investment. If a wash sale occurs, the loss is generally disallowed at that time. Also be mindful of accounts that automatically reinvest dividends. A dividend reinvestment could potentially result in the purchase of an investment you recently sold at a loss and trigger the wash-sale rule. |
Capital-loss harvesting is one example of how investment decisions and tax decisions can overlap in retirement. But tax-aware investing goes beyond deciding when to sell an investment. What you own — and where you hold it — can matter too.
Likewise, you may choose to carefully manage your non-retirement investment accounts. In these accounts, funds are not taxed when withdrawn. However, selling funds that are appreciated in value will add to your income total, called “capital gains.” As such, you or your advisor should be careful when making decisions about when to buy and sell within such accounts.
Moreover, consider carefully what types of investments you should have in your various investment accounts. Not all investments are created equal when it comes to tax efficiency.
This concept is often referred to as asset location: considering not only which investments you own, but which types of accounts you hold them in.
Consider the following examples:
These are general examples rather than rules that apply to every portfolio. Your investment strategy should first align with your goals, risk tolerance, time horizon, liquidity needs, and broader retirement plan, with tax efficiency considered as one part of the decision.
Roth conversions, retirement withdrawals, capital gains and losses, Social Security timing, RMDs, and investment management may sound like separate retirement tax strategies. In practice, they can affect one another. That’s why the bigger opportunity is often not any single tactic, but how these decisions are coordinated over time.
Key Takeaways
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Proactive retirement income planning is having an intentional and strategized approach to determining where, or what accounts you withdraw from in retirement.
A good retirement income plan is proactive in the sense that the tax consequence of each withdrawal is known before it is made. As demonstrated, simply looking at the estimated tax bracket may be an oversimplification when it comes to issues like the taxation of Social Security benefits.
The same is true when looking at any one retirement tax strategy in isolation. Decisions around Roth conversions, retirement withdrawals, Social Security, RMDs, and investments can affect one another — and the strategy that makes sense before Social Security begins may look different after you start receiving benefits.
Ultimately, proactive retirement tax planning is less about minimizing taxes in any single year and more about understanding how the decisions you make today may affect your taxes, income, and flexibility throughout retirement.
Retirement income planning is complex. Working with a trusted fee-only fiduciary financial advisor who is well versed in complex planning and tax issues can help you evaluate these decisions within the context of your broader retirement plan.
If you’re preparing for retirement and want to learn more about the decisions ahead, our team is here to help you navigate your options, answer your questions, and build a strategy that supports the life you want to create in retirement.
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