How Can I Lower My Taxes in Retirement?
- Charlie Horonzy
- Jul 9
- 6 min read
Updated: Aug 3
A Chicago Financial Planner's Guide to Keeping More of What You've Earned
One of my favorite sayings is:
"You worked hard for your retirement. Don't let Uncle Sam tax it away."
After spending decades saving, investing, and preparing for retirement, the last thing you want is to pay more taxes than necessary. While nobody gets to eliminate taxes altogether, many retirees end up paying thousands more than they need to simply because they never developed a tax strategy.
As a fee-only CFP® and CPA serving clients throughout Chicago, La Grange, Riverside, Naperville, Oak Park, Evanston, Hinsdale, and across Illinois, one of the most important ways I help clients is by making their retirement income as tax-efficient as possible. Tax planning isn't something you do once when you file your return. It's something you do every year.
Let's look at some of the best ways to lower your taxes in retirement.
Bur first - I help people retire in Chicagoland and across the country in a tax-efficient way. You may want to earmark these other blogs about financial planning for people in Illinois and other places in the United States.
And now – for the feature presentation!
1. Think Beyond Your Investment Returns
Most people spend years trying to earn another 1% on their investments.
Meanwhile, they completely ignore the taxes they pay.
Imagine two retirees earning exactly the same investment return. One carefully manages taxes while the other simply withdraws money without a plan. The retiree with the better tax strategy may end up keeping significantly more of their wealth over a 20- or 30-year retirement. Every dollar saved can continue to compound in the market. Over 20 years, that can become serious coin.
Sometimes saving taxes has a bigger impact than chasing higher returns.
2. Be Strategic About Which Accounts You Withdraw From
Not all retirement accounts are taxed the same way.
You may have money spread across:
Traditional IRA
Traditional 401(k)
Roth IRA
Roth 401(k)
Brokerage account
Cash savings
Every withdrawal has different tax consequences.
Many retirees assume they'll simply spend their taxable accounts first, then their IRAs, then their Roth accounts.
Sometimes that's appropriate.
Often, it isn't.
The order in which you withdraw assets can dramatically affect your lifetime tax bill. A customized withdrawal strategy can help smooth out your taxable income over many years instead of creating unnecessary spikes. Especially in low income years after retirement and before social security, this can be golden years to be tax savvy. With the current tax law we are seeing brackets and rates that are historically low, and they may not be around forever.
3. Don't Wait Until Required Minimum Distributions Surprise You
One of the biggest retirement tax mistakes I see is waiting until Required Minimum Distributions (RMDs) begin before thinking about taxes.
By then, your options may be much more limited.
Large IRA balances can eventually force sizable taxable withdrawals that may:
Push you into a higher tax bracket
Increase taxation of Social Security
Increase Medicare premiums
Create larger tax bills for surviving spouses
Planning years before RMDs begin often creates much more flexibility.
4. Consider Roth Conversions
A Roth conversion allows you to voluntarily move money from a traditional IRA into a Roth IRA.
Yes, the tax man still needs to be paid…you'll pay taxes on the conversion today.
But future qualified withdrawals can be tax-free.
The key isn't converting everything.
The key is converting the right amount during the right years.
For many retirees, the years after retirement but before Social Security and RMDs begin can provide an excellent opportunity to gradually convert portions of retirement accounts while staying within a desired tax bracket.
5. Watch Your Tax Bracket Every Year
Taxes aren't just about how much income you earn.
They're about when you earn it.
Instead of viewing tax planning as something you do every April, look at your income throughout the year.
Questions worth asking include:
Do I have room in my current tax bracket?
Should I recognize more income this year?
Should I defer income until next year?
Would harvesting capital gains make sense?
Would a Roth conversion fit this year's tax picture?
Small decisions repeated over many years can produce meaningful lifetime tax savings.
6. Coordinate Social Security With Your Tax Plan
Many people ask:
"Should I claim Social Security as early as possible?"
The answer depends on much more than age.
Claiming benefits affects:
Your monthly income
Your survivor benefits
Your withdrawal strategy
Your overall tax picture
Sometimes delaying benefits allows retirees to perform Roth conversions or withdraw from traditional retirement accounts while in lower tax brackets.
Every retirement income source works together.
That's why it helps to build one coordinated strategy rather than making each decision independently.
7. Don't Ignore Capital Gains
Retirement doesn't mean investment taxes disappear.
If you own taxable investment accounts, selling appreciated investments can generate capital gains.
Sometimes realizing gains strategically makes sense.
Sometimes waiting is better.
The goal is to coordinate investment decisions with your overall tax situation rather than making investment choices in isolation.
8. Keep Medicare Premiums in Mind
Many retirees are surprised to learn that higher income can increase Medicare Part B and Part D premiums.
Certain retirement decisions can temporarily increase taxable income enough to trigger higher premiums later.
That doesn't necessarily mean those decisions are wrong.
It simply means the tax impact should be evaluated before making them.
Sometimes paying slightly higher Medicare premiums today still produces substantial lifetime tax savings.
The important part is knowing the tradeoffs.
9. Give to Charity Tax-Efficiently
If charitable giving is important to you, your retirement years may offer opportunities to make those gifts more tax-efficient.
Rather than simply writing checks each year, there may be strategies that align charitable giving with your retirement income plan.
The right approach depends on your goals, your assets, and your tax situation.
Good tax planning supports both your financial goals and your personal values.
10. Review Your Tax Strategy Every Year
Tax laws change.
Your income changes.
Markets change.
Your retirement spending changes.
Your tax strategy should change too.
The most successful retirees don't create a single retirement plan and ignore it for 20 years.
They make adjustments.
Each year presents new opportunities to reduce taxes, improve cash flow, and keep more of what they've earned.
Retirement Tax Planning Isn't About Avoiding Taxes
Some people hear "tax planning" and think it's about finding loopholes.
It's not.
It's about making smart decisions within the existing tax rules.
That's exactly why retirement planning should include more than investment management.
A comprehensive retirement plan coordinates:
Retirement income
Tax planning
Investment strategy
Social Security decisions
Medicare planning
Cash flow
Estate planning
Long-term financial goals
Each piece affects the others.
Frequently Asked Questions
How can retirees legally lower their taxes?
Retirees can often lower taxes by coordinating withdrawals from different account types, considering Roth conversions, managing taxable income each year, and developing a long-term retirement income strategy.
What is the biggest retirement tax mistake?
There isn’t one biggest mistake, however, waiting until Required Minimum Distributions begin before creating a tax strategy is one of the most common, and often most expensive, mistakes.
Are Roth conversions worth it?
For many retirees, yes. The value depends on your current tax bracket, expected future income, retirement goals, and overall financial plan.
Should I work with a financial planner for retirement tax planning?
Retirement taxes involve far more than preparing a tax return. A financial planner who is a CPA or incorporates tax planning into retirement income decisions can help identify opportunities that may reduce taxes over your lifetime.
Final Thoughts
Retirement isn't just about accumulating wealth.
It's about keeping as much of it as possible.
As both a CFP® professional and CPA, I enjoy helping clients connect the dots between investment decisions and tax planning. A thoughtful retirement tax strategy can provide greater flexibility, more confidence, and potentially leave you with more after-tax income to enjoy the retirement you've worked so hard to build.
If you're in Chicago or the surrounding suburbs—including La Grange, Naperville, Riverside, Hinsdale, Oak Park, or Evanston—and you're wondering whether your retirement tax strategy could be improved, it may be time for a second opinion.
After all, you've already done the hard part by saving for retirement.
Now let's make sure you keep as much of it as possible.
My name is Charlie and I help people create a financial plan for retirement, whether they are retiring in Illinois or elsewhere. I am a CPA and a financial planner. If you’d like to set up a time to talk about tax-efficient retirement planning for people in Illinois or elsewhere, please schedule a time.
Source: Open AI
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