8 Completely LEGAL Ways to Pay Less Tax In Retirement

Many people think their biggest tax challenge happens during their working years. That’s not always the case. Retirement comes with its own set of tax rules and tax strategies. The good news is that several retirement tax strategies can help you keep more of your money and potentially reduce your lifetime tax bill. Let’s walk through eight strategies that can help you pay less tax in retirement. 

Strategy #1: Plan Ahead for Required Minimum Distributions (RMDs)

When people hear about RMDs, they often think, “That’s years away. I’ll worry about it later.” But that’s exactly why they’re so important. Some of the decisions that produce the biggest tax savings happen long before your first RMD ever arrives. Depending on your age, you’ll generally have to begin taking Required Minimum Distributions at age 73 or 75. If you’ve built up large balances in traditional IRAs or 401(k)s, those accounts could continue growing for years before you’re required to withdraw any money.

Many retirees hear the same advice:

“Spend your taxable accounts first and leave your retirement accounts alone for as long as possible.”

Sometimes that’s the right move. But it isn’t always.

Why Waiting Can Cost You Later

The IRS doesn’t let retirement accounts grow tax-deferred forever. Eventually, you’ll have to start taking Required Minimum Distributions, and every dollar withdrawn from a traditional IRA or 401(k) is generally taxed as ordinary income. The bigger your account becomes, the larger those required withdrawals may be.

Your RMDs could eventually be much higher than the income you actually need to live on. Instead of withdrawing money because you want to, you’re withdrawing it because the IRS requires it. That extra income can push you into higher tax brackets and increase your lifetime taxes.

Sometimes Paying Tax Today Saves Money Tomorrow

One way to reduce future RMDs is by taking smaller, planned withdrawals before you’re required to. For example, imagine you’re retired and currently in the 22% tax bracket. Rather than waiting until RMDs begin, you might withdraw enough from your IRA each year to stay within that same bracket.

By doing that over several years, you may be able to:

• Reduce future Required Minimum Distributions.
• Spread your taxes over a longer period.
• Keep more future income in lower tax brackets.

The goal isn’t to avoid taxes completely. It’s to pay taxes strategically instead of being forced into larger taxable withdrawals later.

Know How Your Tax Bracket Works

This strategy only works if you understand your tax bracket. Many people think that once they move into a higher tax bracket, all of their income is taxed at that higher rate. That’s not how the tax system works.

Only the income that falls into the higher bracket is taxed at that higher percentage. That’s why it’s important to know where you currently fall and how much room you have before reaching the next bracket. Taking a planned withdrawal while staying inside your current bracket may allow you to reduce future RMDs without significantly increasing today’s tax bill. Instead of focusing only on this year’s taxes, think about how today’s decisions affect your taxes over the rest of your retirement.

Strategy #2: Consider Roth Conversions

A Roth Conversion allows you to move money from a traditional IRA into a Roth IRA. You’ll pay taxes on the amount you convert today, but those funds can then continue growing tax-free for the rest of your life. Qualified withdrawals are also tax-free. That’s why many retirees choose to convert money while they’re still in a relatively low tax bracket.

Why Roth Conversions Can Make Sense

Let’s say you need $50,000 in retirement to buy a new car. If that money comes from a traditional IRA, it increases your taxable income for the year. If it comes from a Roth IRA, qualified withdrawals generally don’t increase your taxable income at all. Qualified Roth withdrawals don’t increase your taxable income or trigger Income-Related Monthly Adjustment Amount (IRMAA) surcharges that can increase your Medicare premiums.

Think About The Long Term

Every dollar you convert into a Roth today is one less dollar that may eventually be subject to Required Minimum Distributions. That means you’re not only paying tax at today’s rates, but you’re also creating a source of tax-free income later in retirement.

You don’t necessarily have to choose between taking IRA withdrawals and completing Roth conversions. Depending on your situation, you may be able to do both while still staying within your current tax bracket. The key is being intentional instead of waiting until Required Minimum Distributions make those decisions for you.

Strategy #3: Use Qualified Charitable Distributions (QCDs)

If charitable giving is already part of your retirement plan, Qualified Charitable Distributions (QCDs) may help lower your taxes. Once you reach age 70½, you can donate money directly from your IRA to a qualified charity. After your Required Minimum Distributions begin, those donations can count toward your annual RMD. One of the biggest benefits is that the distribution generally isn’t treated as taxable income.

For example, if you normally give $10,000 to charity each year but don’t itemize your deductions, you may not receive much of a tax benefit by writing a personal cheque. Making that same donation through a QCD allows you to give pre-tax money while reducing your future taxable income at the same time. Many of these retirement tax strategies work well together, and QCDs are a good example of that. They can help satisfy your RMD requirements while supporting the charities you already care about.

Strategy #4: Optimize Your Account Withdrawals

Not all retirement income is taxed the same way. That’s why one of the most important retirement tax strategies is deciding which accounts to withdraw from and when. Let’s assume you need a certain amount of income each year to support your retirement.

That money could come from several different sources, including:

• Social Security
• Pension income
• Traditional IRAs
• Roth IRAs
• Dividends and interest
• Taxable investment accounts

Don’t Automatically Withdraw Everything From Your IRA

Taking all of your retirement income from a traditional IRA may seem simple, but it can increase your taxable income enough to push you into a higher tax bracket. It may also trigger IRMAA, which can increase your Medicare Part B premiums.

Instead, many retirees benefit from mixing their withdrawals. That might mean taking some money from a traditional IRA, some from a Roth IRA, and some from taxable investments. Because each account is taxed differently, combining withdrawals strategically may help reduce your overall tax bill.

Retirement Tax Planning Isn’t One-And-Done

One of the biggest themes throughout retirement tax planning is that it isn’t something you set up once and forget. Your income changes, along with tax laws and brackets. The best withdrawal strategy this year may not be the best strategy next year. Reviewing your withdrawal plan regularly can help you minimize taxes over your lifetime instead of simply focusing on this year’s tax return.

Strategy #5: Use a Health Savings Account (HSA)

If you have access to an HSA, it can be one of the most powerful retirement tax strategies available. An HSA offers what many people call a triple tax advantage. Your contributions go in pre-tax, your money grows tax-free, and qualified withdrawals for medical expenses are also tax-free. You can only contribute to an HSA if you’re enrolled in a high-deductible health plan. Because of that, some people avoid using one because they’re worried about paying a higher deductible.

However, there’s more to an HSA than simply paying medical bills. If you contribute to your HSA and spend the money in the same year, you’ve at least paid those healthcare expenses with pre-tax dollars. That’s already a tax advantage. The real opportunity comes when you leave the money invested.

Many HSA providers allow you to invest your balance once it reaches a certain amount. From there, your savings can continue growing over time and be used tax-free for qualified medical expenses in retirement. Healthcare is one of the biggest expenses many retirees face. Building an HSA early can give you a dedicated pool of tax-free money when those costs arise later in life.

SEE ALSO: 4 Retirement Traps No One Tells You About

Strategy #6: Harvest Capital Gains and Losses

Not all investment income is taxed the same way. Long-term capital gains are generally taxed differently than ordinary income. Depending on your income, you may even qualify for a 0% long-term capital gains tax rate. That makes it important to think carefully about which investments you sell and when. If you’ve made money on one investment, you may be able to offset those gains by selling another investment that’s currently at a loss.

This is known as tax-loss harvesting. For example, if you bought a stock for $1,000 and it’s now worth $10,000, you’ll have a $9,000 capital gain if you sell it. If you also own investments that have lost value, selling those positions may help reduce or even eliminate some of the tax you owe on your gains. If your losses are greater than your gains, you may even be able to carry the remaining losses forward into future tax years.

One important rule to remember is the wash sale rule. If you sell an investment at a loss and then buy the same investment, or something the IRS considers substantially identical, within 30 days before or after the sale, you generally can’t claim that loss for tax purposes. If you still want to stay invested in the market, one option may be to sell the individual investment and purchase a broad market ETF instead. That allows you to maintain market exposure while avoiding a wash sale in many situations.

Strategy #7: Be Strategic With Charitable Giving

Many people give to charity naturally, but from a tax perspective, how you give can make a big difference.

If you’re still in your working years and have a high income, consider front-loading future donations into what’s called a donor-advised fund. For example, if you normally give $10,000 a year to charity, you could contribute $100,000 all at once. If your income is high enough, you may be able to claim the full deduction in that year and then distribute those funds to charities over time.

Why Does This Matter?

One reason is the higher standard deduction, which is available through 2028. For couples over age 65, it could be more than $45,000. That means many people won’t itemize their deductions, so their charitable gifts may not reduce their taxes at all.

Instead of making charitable donations the same way every year, it helps to have a plan. One approach is to front-load your charitable giving into a donor-advised fund while you’re still working. If you’re eligible, you may also be able to take advantage of the special charitable deduction available to non-itemizers in 2026, which allows up to $2,000 in charitable deductions even if you don’t itemize. 

Then, once you reach RMD age, you can make Qualified Charitable Distributions (QCDs) directly from your IRA. That allows you to donate pre-tax dollars, reduce your taxable income, and still satisfy your Required Minimum Distribution. Looking at charitable giving as part of your overall tax strategy instead of treating it as a separate decision can help you make the most of every donation.

SEE ALSO: Charitable Gifting 3 Ways

Strategy #8: Think Ahead About Future Tax Law Changes

One of the easiest mistakes to make is assuming today’s tax rules will always stay the same. They won’t. Today’s higher standard deduction won’t last forever. A strategy that makes sense today may need to change as tax laws evolve. Looking ahead gives you more flexibility. It may influence when you complete Roth conversions, when you make charitable gifts, or whether you take advantage of certain deductions before they expire. The earlier you plan, the more options you’ll usually have.

The Right Retirement Tax Strategy Starts With a Plan

Reducing taxes in retirement isn’t about finding one perfect strategy. It’s about understanding how different retirement tax strategies work together and knowing when to use them. At Paces Ferry Wealth Advisors, we help clients build retirement income strategies that focus on more than just growing wealth. If you’d like to create a retirement tax strategy that’s built around your goals, schedule a conversation with us to see how we can help.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.