How to Cut Your Tax Rate in Half During Retirement

Speaker 1 – 00:00
I think this is a hugely important topic and it’s relevant for really everyone that is working.
Speaker 2 – 00:05
Blanket statement is I’m going to be in a lower tax bracket when I’m retired, but that’s decades from now.
Administrations change, tax codes change. If you’re not making the right proactive decisions before heading into
retirement, the IRS could end up getting a lot more than you want them to.
Speaker 1 – 00:19
RMDs huge factor for why tax rates often go up and not down in retirement or at least stay the same. So two other
things are Social Security and then IRMAA surcharges or Medicare surcharges.
Speaker 2 – 00:30
There’s a lot of factors that are pointing to a higher tax climate the next couple of decades where you could be into
retirement.
Speaker 1 – 00:36
We have our strategies in place, but not every account is going to be taxed the same. There’s going to be your tax
deferred accounts, there’s going to be your Roth accounts, there’s going to be your brokerage accounts.
Speaker 2 – 00:45
Each one’s different. So we need to be mindful of what we’re holding in each account to be just tax efficient
through your old plan.
Speaker 1 – 00:51
These levers and strategies, they don’t work in isolation with each other. They have to be quarterbacked and
coordinated in really one plan. Chris, if you’ve saved well into a 401k your entire career, you’ve generally had
beneficiaries listed, whether that’s your spouse, whether that’s kids, other family members. But if not planned for
properly, one of the largest beneficiaries that you have in your tax deferred accounts is actually the irs. And what
we’re going to talk about today is How to manage your tax rate in retirement and what planning you can do in the
five, 10, 20 years prior to retirement to help lower that tax exposure. So, Chris, what it’s a popular conception you’re
going to be in a high tax bracket when you’re working now, when you’re retired, you’ll be in a low tax bracket.
Number one. Is this true?
Speaker 1 – 01:42
Is this more of a trope? What are, what are your thoughts on that?
Speaker 2 – 01:45
It could be true. Also depends on when you’re saying it. We hear that from a lot of people that are in their prime
working years, whether you’re in your late 30s, 40s, whenever it is. Blanket statement is I’m going to be in a lower
tax bracket when I’m retired. But that’s decades from now. Administrations change, tax codes change. So one, it’s
like, who knows what’s actually going to be the case. What we do know is some things change no matter what. So
even though your active income drops, you’ll have Social Security coming in, required minimum distribution start in
your 70s. So that’s, we’ll talk about those. But those are forced withdrawals from pre tax accounts.
Speaker 2 – 02:20
And then if you have any other income streams like a pension, real estate income, there’s oftentimes or even just
dividends and interest, there’s other things that still show up on your tax return. So that’s what we need to be
mindful of. Because if you’re not making the right proactive decisions before heading into retirement, then like you
said, the IRS could end up getting a lot more than you want them to. Absolutely.
Speaker 1 – 02:43
And so just before we dive into this, I wanted to just touch base on How our tax system is structured. So I’m going
to use 20, 26 numbers. Depending on when you’re listening to this, these could be a little bit. But we’re going to
assume if you’re married filing jointly in 2026, really the first $24,800 of income that you earn is taxed at 10%. And
our system is graded so it goes up into basically different schedules as your income increases. So any income that
you earn between 200 or excuse me, 24,800 and 100,000 is taxed at about 12% from 100,000 to 211,000 at 22%,
up to 400,000 at 24%. And then you get into 32, 35, 37% bracket at about 768,000 of income and up. And so again
that’s for married filing jointly.
Speaker 1 – 03:33
If you’re single, if you’re a single filer, those brackets are really just cut in half. So instead of 25,000 at 10%, it’s
about 12,500. And then it goes vice versa. So the three things that we really wanted to hit on and why retirement
tax rates. Even if you’re in high income earning years, during your working years, you could stay in those high
income ranges when you’re in retirement. There’s really three things that come about that come into play. The first
one, like you said, are rmd. Can you just give a little bit more of an explanation as to what that is and How that
works?
Speaker 2 – 04:07
So RMD is applied to pre tax retirement accounts. So if you think about whenever those accounts are established
and funded, if we use a 401k for example, the current elective deferral, it’s 24,500 right now that you can do. You
could either do that as pre tax or Roth. So if you do it pre tax, that 24,5 is excluded from your taxable earnings in
that tax year. So since you’ve never paid tax on the money going in, eventually the IRS wants their take and they’re
going to want to tax that at some point. So those start depending on your birth year from 73 to 75. The new
SECURE act pushed it back to 75 for those born after 1960. So at that point, say you have a couple million dollars
in a pre tax 401k or an IRA that you rolled that plan into.
Speaker 2 – 04:56
When you turn 75, the IRS is going to make you take out a portion of that. And that distribution’s based on the IRS
has a lifetime expectancy table. So there’s a divisor that whenever you turn 75 it applies. And then as you get older,
you have to take more and more out of that account.
Speaker 1 – 05:12
Absolutely. A good general rule of thumb is to think it’ll be close to around 4% of whatever the account value is. So
like you mentioned, if you have $2 million in a traditional 401k that you saved into your whole life, you roll it into a
traditional IRA when you retire, you hit that RMD age, you got to take out $80,000 out of that account, regardless of
whether you need to or not, regardless of whether the market is up or down. We’re going to talk through some
strategies for what to do with those RMDs if you don’t need them in a second. But those are entirely taxable. So
where you could run into trouble is you plan around accelerating income, realizing those income in those lower
brackets. But then RMDs kick in, you could be accelerating income into those higher brackets, like you said.
Speaker 2 – 05:57
Right. I don’t know if we want to get to this just yet, but with these RMDs, it’s also important to be mindful of. It’s
called the widow penalty, where if one spouse has a large pre tax balance, you’re filing jointly. Maybe that RMD
doesn’t hurt so bad. But if one spouse passes now you go from the joint tables to the single, they’re cut in half. So
maybe you’re in the 24% as a married couple, but if you’re single, maybe you’re in the 32 or 35, depending on what
things look like. Exactly right.
Speaker 1 – 06:31
Perfect example. If you’re married, filing jointly, you’re showing income of about 400,000. The chunk of that income
between $211,000 and $400,000 is taxed at 24%. And so if you’re married filing jointly, that’s manageable. That’s
the tax rate that we really want to see income realized at. But like you said, if you’re now filing as a single filer, one
spouse passes, your income range is still going to be around that 400 range. But now the large majority of that
income is being taxed at 35%. And you didn’t really change anything about your lifestyle, it’s just How they’re
structured. So you could have that RMD come out at 24% when you’re married and then the very next year it comes
out at 35%. So those are the things that we really want to try to avoid and plan for moving forward.
Speaker 2 – 07:14
Yeah, we have, I know there’s other episodes and videos and other stuff that we’ve recorded on pre tax and Roth. I
think we could talk about that a lot. But ultimately I think anything that like looks very good, like a big tax
deduction, it’s usually kind of like there’s a catch to it at some point. So that’s the thing. It’s if there’s some sort of
instant gratification, like in this case you get a nice tax refund like usually in life gratification, like you gotta,
something is on the other end of that. So that’s where mistakes can happen. Because if you’re in the 37% bracket
and say you’re in California or New York and your overall tax rate between everything and Social Security is over
40%, it’s really attractive to take those pre tax deferrals and save that way.
Speaker 2 – 07:58
But if that happens for decades, you’re going to get to retirement as a high income earner with millions and these
wrong buckets that we have to rearrange or else you’re kind of sitting on a big tax bomb.
Speaker 1 – 08:07
Absolutely.
Speaker 2 – 08:08
So.
Speaker 1 – 08:08
Absolutely. So RMDs huge factor for why tax rates often go up and not down in retirement or at least stay the
same. Yeah, two other things are Social Security and then IRMAA surcharges or Medicare surcharges. Social
Security, 85% of that is taxable. Now depending on when you claim, the earliest you can take it is 62. The latest you
can take it is 70. Large majority of that is going to be taxable. So that’s going to be included as income even in your
retirement years. And then your Medicare surcharges based on IRMAA that is based on income from two years
prior.
Speaker 1 – 08:42
So again, if we’re thinking about 2026, just when we’re recording this podcast, if you are married, filing jointly and
you earn $218,000 or less from 2024’s tax return, your Medicare Part B premiums are going to be about $200 a
month and you won’t pay anything for Part D surcharge. So that’s again per month per spouse, about $200. 200,
$200 A month if your income is even just a dollar over that. So from $218,001 to $274 instead of $200 a month of
Part B premiums, now you’re at 284 and those scale upwards. If you’re showing income in the 400 thousands,
that’s going to be closer to 600, 650amonth. Again that’s per spouse per month. So How do we avoid that? Again,
these are these kind of hidden costs in retirement based on those large pre tax buckets.
Speaker 1 – 09:35
We’ll talk about strategies for that in a second. But it’s crucial to try to keep that income down so that we’re not
realizing so much in Medicare surcharges at the same time. Your RMD is, Chris, would be a significantly lower.
Speaker 2 – 09:47
Yeah, absolutely. So do you want to get into some of the strategies that we can.
Speaker 1 – 09:52
Yeah, let’s talk through it because we just mentioned RMDs are, you know, mid-70s when you have to start taking
that out. Maybe you’re retired at 60 or 65. What are some things that you’re talking to clients about that are in that
situation where hey, they’re retired or they’re approaching retirement, but they don’t have to start taking some of
those RMDs yet.
Speaker 2 – 10:13
Yeah, yeah. The first thing that we’re doing is just establishing that retirement budget. So what’s the net number
that you need coming in to keep lifestyle comfortable, maintain the same money temperature that you’re used to
during your earning years? So after we have that number decided on it turns into where are we drawing from now?
So in most cases we want to, like you said earlier, we want to realize income up to that 24% bracket. Because if we
look back historically, our current tax environment is we’re in one of the lowest that we’ve really ever been in.
There’s a lot of factors that we can get into, but there’s a lot of factors that are pointing to a higher tax climate, not
maybe in the next year or two, but in the next couple of decades where you could be into retirement.
Speaker 2 – 10:57
So ideally we want to look at what are the known tax rates. Now we know that we can go up to 24%. So there’s a
really nice window between a lot of times whenever people retire, whether it’s in their 60s or whenever it is up until
when Social Security starts in your later 60s and then whenever your RMD start in your 70s. So that’s a really good
window to either intentionally withdraw from IRAs up to the 24% bracket for your spending money and just avoid
that 32% jump. Use other assets like a brokerage account because those withdrawals don’t show up on the income
rates like your IRAs do. Or secondly, what we’re typically doing is living off of if you have a brokerage account using
those.
Speaker 2 – 11:44
And by brokerage I just mean a non retirement based account that you can take distributions from that there’s
capital gains treatment, but it doesn’t count towards the federal brackets, the 10, 12, 22 and so on. So that’s used
for the living income. And then that gives us during that bridge between when your RMD start, we can do Roth
conversion planning. So we can voluntarily move dollars from the pre tax IRA into the Roth up to the 24% bracket
every single year. Because by doing that it’s reducing the amount that’s in that traditional IRA balance. So ideally by
the time you’re 75, we’ve converted enough where that required distribution fits right into the puzzle. Where we
have your Social Security filling up the bottom layers of the tax code, the 10 and 12.
Speaker 2 – 12:30
And then there’s going to be tax interest, capital gains, other small ticket items that go in there and then the
conversions fill up the rest. So we’re effectively, we’re using that 24% headroom. And then by the time the RMD
start, you know, everything’s right size.
Speaker 1 – 12:46
Absolutely. So in that example you kind of mentioned it, but let’s say we’re looking at 20, 26 brackets. We have up
until about 400,000 of income at the 24% range. That’s really where we want to say hey, let’s try to realize income
up to that point and really no further, we want to avoid that 32, 35, 37. So in that example you have maybe Social
Security, if you claimed it early, you have dividends and interest from your portfolio. Maybe you have a pension.
You know, those are things that are Kind of adding up as income for you in your 60s. And let’s say all of that adds
up to $250,000. I’m just, I’m using round numbers.
Speaker 1 – 13:21
That means we have a Runway of about 150,000 where we can accelerate distributions from a pre tax account and
or perform a Roth conversion to get up to that $400,000 number at the 24% range. So those are super important to
do that. What’s that? Tax bracket management when you’re in those kind of crucial years, pre rmd. Because a lot of
that planning that you’re going to need in your 70s and 80s requires a lot of foresight in your 50s and 60s. Getting
money into Roth or shifting money out of a pre tax bucket into a different bucket.
Speaker 2 – 13:55
Yeah, we could talk Roth conversions all day. That’s like the biggest thing that we’re working on for the most part
with the retiree families that we work for. Because a lot of people they fund well intended, like do the pre tax to
save money during your higher earning years. But like we said earlier, that can create tax issues later in life. So
we’ve ran scenarios where it’s literally seven figures of lifetime tax savings by doing these conversions properly.
And then there’s the legacy component of it too because with a good plan there’s going to be something left over
when, if you know, whenever you do pass one day, so those dollars that you converted, it’s not only helping your
retirement be more tax efficient, but that money also passes to whoever your beneficiaries are free and clear of tax
as well in the Roth.
Speaker 1 – 14:38
One other thing in this space that is helpful if you’re thinking about being charitably inclined. Something to think
about would be a donor advised fund, which is a fund that, to think of it almost like an investment account that has
to go to charity. So any contributions you make to the donor advised fund, the year in which you make them, you
get an income tax deduction and then the charity receives the proceeds tax free. So it’s almost a double tax benefit
because you avoid the capital gains if you just sold the positions and donated the cash to charity. So one thing to
think about would be pairing a Roth conversion and a donor advised fund.
Speaker 1 – 15:11
Because if you make a large donor advised fund, let’s say you batch five years worth of charitable contributions in
one fell swoop, you put that amount into a donor advised fund. Not only do you get the large tax deduction the year
you do it, but it allows you to Itemize your deductions that year, get a larger benefit and then that can help offset
any Roth conversion that you do. So you’re not paying any tax out of pocket. The large deduction that you take
from.
Speaker 2 – 15:37
That would offset it.
Speaker 1 – 15:39
So again, kind of more of an advanced strategy if you’re charitably inclined in this space, but something that makes
a lot of sense.
Speaker 2 – 15:45
That’s a really good one because you can. The donor advised fund contribution is based on what your income is
for the year. So whenever you’re doing what you’re talking about, then the contribution of appreciated securities for
that double tax by the capital gains avoidance, you can that limit for the contribution, it’s 30% of your adjusted
gross income if you’re using securities. So if you only have Social Security and you know, not a big income,
showing a big income to support a contribution of five years worth of gifting, then you can do that conversion to
create the taxable income. So maybe we show conversion of 250,000. Now you can do 30% of the 250 for the
contribution. So it really works great with these, with the conversions, if you’re charitably inclined, of course.
Speaker 2 – 16:33
So we want to do it first and foremost if you want to give and then if you do, then it pairs great.
Speaker 1 – 16:38
100%. Absolutely. So the second real topic here that we want to discuss is, you know, we have our strategies in
place, but not every account’s going to be taxed the same. There’s going to be your tax deferred accounts, there’s
going to be your Roth accounts, there’s going to be your brokerage accounts. So not all assets should really live in
the same account. So Chris, why don’t you just give us a little bit of a breakdown. If you have a brokerage account
generally, what should that hold? If you have a pre tax account generally, what should that hold? And same thing
with the Roth.
Speaker 2 – 17:09
Yeah, each account it’s taxed differently. So we need to be mindful of what it’s holding. So in a taxable brokerage
account, so like a non retirement account, if you’re holding bonds that pay out interest or stocks that pay a lot of
dividends or funds that kick out capital gains, all of that shows up on your tax return. So we want to be mindful of
holding the right things there. So we want to hold growth oriented equities or funds that are reinvesting that into
the fund rather than pushing it out to the investors. Because pretty much every December in quarter four
November, December, a lot of the mutual funds schedule those capital gain kickouts to the investors. So it can be
a big surprise if a fund has a lot of turnover.
Speaker 2 – 17:48
So you need to be mindful of holding tax of be mindful of holding what’s the tax consequence of what you’re
holding in those accounts. By contrast, tax deferred accounts like these pre tax accounts that we’ve been talking
about that are taxable upon withdrawal. No matter what you hold in there, whether it grows by a million dollars or it
grows by a hundred dollars, whatever you take out during retirement, that full distribution is going to be included as
income. So you take 50 out, 50 of it’s taxable. So if you’re heading into retirement or you’re already retired and you
want to hold bonds for, you know, reduced volatility in the portfolio, you could hold that bond in a brokerage
account. If it’s a corporate bond, that interest is going to show up on your tax return. So we won’t want to hold it
there.
Speaker 2 – 18:32
But if we hold it in the ira, all of that interest gets paid out inside of the tax deferred wrapper. So it’s just a little bit
more efficient. It’s keeping that activity off of your tax return. And then the last one, Roth, since that grows,
distributes tax free. That’s really the last bucket that we ever want to pull from. Ideally we’re never pulling from it.
And that’s what we’re leaving for generational planning. So that’s where we want to hold our highest growth
yielding assets. Because the more growth in there that happens over decades, the longer we’re compounding the
tax free treatment inside of that account. So in summary, each one’s different. So we need to be mindful of what
we’re holding in each account to be just tax efficient through your whole plan.
Speaker 1 – 19:13
100%. One other, one other strategy that is super helpful. We talked about the donor advised Fund, if you’re
charitably inclined. There’s another strategy called a QCD or a qualified charitable distribution. This once you turn
70 and a half, you can take up to about $110,000 person and basically direct transfer that amount from your IRA
that’s subject to the RMD to a qualified charity. A couple benefits to that counts towards your rmd, but it never hits
your AGI or your adjusted gross income. So that help keeps those IRMAA surcharges that we talked about low.
Because taking that 100,000 as an example does not count as Income the charity receives a tax free and then it
keeps. The charity likes it because it keeps. They receive the funds tax free.
Speaker 1 – 20:00
And then it’s just better than taking the RMD and investing the cash proceeds because again, it keeps your AGI
down. So QCD is, if you’re charitably inclined, make a ton of sense for that RMD figure like we talked about, if you
don’t necessarily need it to support your lifestyle. Couple other things. If you have grandchildren and education
funding is a priority, you can gift a portion of your RMD to help fund a 529 plan, which is a college savings plan. We
have many resources that talk about that in more detail. In 2026, the limit is $19,000 you can gift person. So if
you’re married, that is $38,000 you can gift to an individual, to a 529. You can also combine that and do five years
worth of gifting all at once if and when that makes sense.
Speaker 1 – 20:47
And then the last thing would be just gifting strategies in general. So I mean we talked about gifting to 529s, but
you can just gift to any individual, whether that’s a family member. You know, if you wanted to gift appreciated
stock to family members in lower tax brackets, that’s something to consider. They can sell those at maybe like a 0
or 15% long term capital gains tax if you’re in the 23.8 range. Again, all dependent on client situation.
Speaker 2 – 21:13
So one point about the lifetime gifting is if you know that you’re going to give something to, whether it’s kids,
grandchildren, whoever it is in the future, it’s really efficient, really, I guess depending on your state to do that while
you’re living. And we could argue for just the conversations it sparks while you’re giving the money while you’re still
around versus if somebody just gets a windfall. Like a lot of mistakes can happen. But for example, in
Pennsylvania there’s a 4 1/2% PA inheritance tax that applies. Say you had a million bucks in a brokerage account,
you just waited till you died to give that to beneficiaries, they’d have to pay four and a half percent on that.
Speaker 2 – 21:48
But if you started giving 19 per year or 38 if you’re married to beneficiaries, then whatever you give during your
lifetime passes free and clear of that inheritance tax. So there’s definitely more layers to it. But just on a high level,
if you know that you’re not going to spend the money during your retirement. It could be, you know, there’s not just
income like day to day tax consequences. There’s also the estate inheritance tax component too that is worth
discussing. We have other resources on that too as well.
Speaker 1 – 22:15
Yeah, I think that just almost, you know, putting a bow on all this, these levers and strategies, they don’t work in
isolation with each other. They have to be quarterbacked and coordinated in really one plan. There’s a lot of
investment components, there’s a lot of tax components, there’s a lot of estate components, charitable
components. So having a team that is organizing all of this and all talking to each other and all on the same page
is really important because that is How this is going to get done successfully is making sure that all these parties
are talking to each other. So I would say common mistakes that we see again, waiting to, waiting until RMDs kick
in to start.
Speaker 1 – 22:53
A lot of this planning, a lot of the stuff that we talked about, Chris, is done in your working years helping fund the
right accounts, making sure that they’re invested properly and then in those early to mid retirement years, really
taking advantage of How your income structured before RMDs. I think a mistake that we see is waiting to RMDs
kick in and say, okay, like let’s start being efficient about this. So Chris, anything to add? Anything we missed?
Speaker 2 – 23:16
No, I think he, I think you hit on everything here. So.
Speaker 1 – 23:20
Awesome. Well, I think this is a hugely important topic and it’s relevant for really everyone that is working that has
a, plans to retire, plans to leave a legacy to their beneficiaries and plans to spend and live the life that they design
throughout retirement in the most efficient way possible. So if you have any questions on any of the topics that we
discussed, feel free to reach out. We’re happy to help.