Tax Planning for Retirement

Retirement is a time to celebrate! It signifies a lifetime’s worth of achievement, of hard work well done. But the part that never feels all that celebratory is paying taxes in retirement. When you’re not working your old job, what’s even being taxed?

Good question. In your retirement years, you’ll pay taxes on Social Security income, annuity distributions, capital gains and possibly more. That’s why your retirement planning should include tax planning: You don’t want to be caught by surprise. Doing some retirement tax planning before you finally retire means you know what to expect. 

Luckily, there are some retirement tax strategies that can save you cash. Here’s what to know about your tax liability in retirement, so you enjoy your golden years to the fullest. 

What Is a Tax-Deferred Retirement Plan?

In a tax-deferred retirement account, such as a 401(k), you postpone paying taxes until you withdraw money from your plan. That means you can contribute money today and get an immediate tax break.

However, you will pay taxes up front on your contributions to an account like a Roth IRA. The benefit of this kind of account is that you’ll have tax-free withdrawals once you’ve reached retirement and meet certain IRS rules. Plus, you can pass a Roth IRA on to your beneficiaries, who can also make tax-free withdrawals (subject to some rules and distribution periods). And under some circumstances, you can even withdraw money early. So, talk to your financial advisor about whether it makes sense to put money into a Roth IRA.

What Will My Tax Rate Be in Retirement?

As with most tax situations, the answer is that it depends. Your income tax liability is largely contingent upon your total annual income and its sources. In a similar way to your working years, the more you earn through Social Security benefits, pension income and 401(k)s, the higher your tax liability will be. Your filing status (single, married filing jointly, married filing separately, head of household or qualifying widow/widower with dependent child) also impacts what you’ll owe.

Depending on your total income amount, retirees may also pay tax on a portion of their Social Security benefits. The amount that is taxable varies based on filing status and total income, so be sure to check the most recent guidelines to know how much you will pay, and talk to a tax professional.

How Do I Reduce Tax After Retirement?

A few key retirement tax strategies can help you reduce your financial burden in retirement, letting you enjoy it as much as possible. Start with these three retirement tax planning tips.

Tip #1. Diversify Your Retirement Income Sources

Start by taking advantage of different retirement savings vehicles today to limit your tax liability in the future. If your goal is to have a smaller taxable income in retirement, you’ll want to limit how much you withdraw from taxable sources like a pension. 

Here are some savings vehicles to look into:

• Employer-funded pension and 401(k) plans: These are pre-tax plans. Your tax responsibility on this retirement income will depend on your total taxable income. 
• Capital gains: This tax applies to your investments, like stocks, mutual funds and bonds. If you’ve had an asset for more than one year, you’ll pay the long-term capital gains tax, which is either 0, 15 or 20%, depending on your total taxable income.
• Health savings account (HSA): HSA withdrawals are tax-free, as long as you’re using the funds for qualified medical expenses.
• Roth IRA: Retirement withdrawals from your Roth IRA plan are also tax-free — you’ve already paid taxes on this income.

Tip #2: Know Your Catch-Up Contributions and Bonus Deductions

As you approach retirement age, contribution restrictions ease up a bit. For 2026, if you’re 50 or older, you can make annual catch-up contributions of an additional $8,000 to your 401(k) plan and $1,100 more to an IRA.

Taxpaying adults 65 and older receive an additional deduction beyond the standard one. Check the IRS guidelines for the latest information about deductions, and talk to a  tax professional.

Tip #3: Work with a Financial Advisor

Retirement may be a decade or three away, but you can put these strategies into effect today. Talking to a financial advisor will help you strategize based on your financial situation today, your career path, your goals and your family situation. Don’t put it off!

Plan for Your Future

If the thought of diversifying retirement vehicles and filling out tax worksheets seems daunting, well, you’re not alone. Start planning for your financial future by reaching out to Farm Bureau and speaking with a financial advisor.