The one thing pros wish you knew: retirement taxes are (mostly) optional, if you plan
The one thing pros wish you knew: retirement taxes are mostly optional, if you plan. Sounds dramatic, I know, but after two decades watching people turn 65 with seven-figure nest eggs and five-figure tax surprises, I can tell you your bill at 70 isn’t some fixed number the IRS hands you. It’s shaped by choices: which accounts you pull from first, when you claim Social Security, how quickly you realize capital gains, and whether you use 2025’s brackets before they potentially get tighter in 2026. Same assets, different sequence, totally different lifetime taxes, we’re talking five- or even six-figure differences over a 25-30 year retirement.
Here’s the part that trips folks up: cash flow is not the same thing as taxable income. You can spend from a brokerage account’s cash or principal and pay $0 of tax on that specific withdrawal, but the moment you tap a traditional IRA or 401(k), it’s ordinary income. Social Security adds another wrinkle, up to 85% of your benefit can be taxable once your “provisional income” crosses thresholds that, annoyingly, haven’t been adjusted since the 1980s: $25,000 for singles and $32,000 for married filing jointly (set by Congress in 1983 and still the law). Those old numbers bite people every year.
Quick reality check from last year’s hard numbers: in 2024, the 0% long-term capital gains bracket ran up to $47,025 of taxable income for singles and $94,050 for married filing jointly (IRS, 2024). If you kept taxable income inside that window, you could harvest gains or fund spending by trimming appreciated positions and pay zero on the gain. Pair that with the 2024 standard deduction ($14,600 single and $29,200 MFJ ) and you start to see how someone can generate cash to live on while keeping taxable income low. That’s not a trick; it’s just sequencing.
And this year matters more than usual. 2025 is the final year before the individual tax cuts from the 2017 law are scheduled to sunset in 2026 if Congress doesn’t act. That likely means the 12% bracket goes back to 15%, 22% to 25%, 24% to 28%, and the top rate returns to 39.6% from 37%. The $10,000 SALT cap is also set to expire after 2025. Translation: bracket management now is a real lever, partial Roth conversions, capital gain realization, and the order of withdrawals can all take advantage of 2025’s still-lower rates before they potentially ratchet up.
What you’ll get from this section: how to coordinate IRA/401(k) withdrawals with Social Security claiming (sometimes delaying benefits to do Roth conversions makes the math work, sometimes it doesn’t), how to use the 0% capital gains bracket without blowing up Medicare premiums, and how to pace withdrawals so Required Minimum Distributions at age 73 don’t shove you into higher brackets later. We’ll keep it practical, account types, timing windows, and the “if-this-then-that” rules that actually move the needle.
One more human note, because this stuff can feel like alphabet soup: if you’re staring at IRMAA, NIIT, RMDs and thinking I did not sign up for this, I hear you. Medicare surcharges are set with a two-year lookback, markets are still choppy with bond yields higher than the 2010s, and the idea that spending more this year (via a planned Roth conversion) can mean paying less tax for the next 20 is… counterintuitive. My take, and it’s just my take, is you treat taxes like you treat risk: manage them proactively when the pricing is good, which in 2025 probably means using your current brackets before 2026’s scheduled changes.
Bottom line: your retirement tax rate is a choice you make over dozens of small decisions (order, amount, timing ) not a number stamped on your forehead at 65. We’ll map the choices so you can keep more of what you already earned.
What actually gets taxed after the paycheck stops
Retirement income isn’t one thing. It’s a mix. And the tax code treats each stream a little differently, which is why two neighbors with the same spending can owe very different taxes. Here’s the plain-English map I use with clients when we sort which dollars hit your tax return (and how hard.
- Taxable brokerage accounts (individual/joint/trust): interest shows up as ordinary income. With cash and short Treasuries yielding around 5% at points this year, that interest adds up. Qualified dividends and long-term capital gains use the separate capital-gains brackets (0%, 15%, 20%). Short-term gains are ordinary income ) same as your paycheck used to be. And yes, loss harvesting still matters because it offsets gains dollar-for-dollar.
- Traditional IRAs/401(k)s and pensions: pre-tax in, taxable out. Withdrawals are ordinary income and feed Adjusted Gross Income (AGI). Pensions are generally fully taxable. For annuities, it’s messier: non-qualified annuities often pay a mix, part return of basis (not taxed), part earnings (ordinary income). The exclusion ratio determines how much of each payment is taxable; once basis is recovered, the rest is taxable.
- Social Security: anywhere from 0% to 85% of your benefit can be taxable, based on “provisional income” (AGI + tax-exempt interest + 1/2 of benefits). The thresholds ($25,000 for single and $32,000 for married filing jointly ) were set in 1983 and never indexed to inflation. That’s why more middle-income retirees get taxed on benefits today. Up to 50% of benefits become taxable above those thresholds, and as income rises, up to 85% can be taxable. It’s not an 85% tax rate; it’s that 85% of the benefit may be included in taxable income.
- Roth IRAs: qualified withdrawals are tax-free, don’t hit AGI, and don’t count in provisional income. That makes them a handy “pressure valve” when you want to keep income under a bracket or under Medicare surcharge lines. Same idea with HSAs: when used for qualified medical expenses, withdrawals are tax-free and don’t inflate AGI.
- Work in retirement: side gig, consulting 1099, part-time W‑2, or rental income (it all feeds AGI. And that extra AGI can push other levers: more of your Social Security gets taxed, capital gains can move from 0% to 15%, and you can trip the 3.8% Net Investment Income Tax once MAGI exceeds $200,000 (single) or $250,000 (MFJ) ) those ACA thresholds haven’t changed since 2013.
Two notes from the real world. First, interest rates matter. Earlier this year, plenty of retirees saw “safe” cash yields around 5% turn into surprise ordinary income, which then pulled more Social Security into taxation. I sat with a couple in May who had no capital gains (zero ) but their money market yield alone nudged them into higher Medicare IRMAA brackets for 2027 because of the two‑year lookback. Second, sequence and location matter. The same $60k spend hits very differently if it’s $30k Roth + $30k taxable dividends vs. $60k all from an IRA.
And one small correction to a common myth: tax-exempt muni interest isn’t counted as taxable income, but it is included in provisional income for Social Security. So the “munis don’t touch my benefits” line is… not quite right. It helps on federal tax, but it can still make more of your benefit taxable.
What do you do with this? You match withdrawals to brackets you actually like. Use the capital-gains 0%/15%/20% structure when markets give you room, use Roth to avoid pushing AGI higher in a year you’re realizing gains, and be mindful that ordinary income (IRA draws, interest, wages ) stacks first and can crowd out your low-rate space. Same point, said another way: order, amount, timing. It’s boring, but it’s the whole game.
Last thing, because state taxes aren’t footnotes: states vary wildly. Some don’t tax Social Security, some exempt part of pension income, some tax it all. If you’re considering a move (and people do in Q4 when family plans solidify for next year ) check the state’s treatment before you pack the boxes.
The Social Security tax trap and the Medicare “cliff” problem
Here’s where small moves punch way above their weight. Social Security has a weird stacking rule: it isn’t fully taxed, but as your provisional income rises, that’s AGI + tax‑exempt interest + 50% of your benefits, more of the check gets pulled into income. The base thresholds are low and haven’t been indexed since the 1980s: $25,000 for single filers and $32,000 for married filing jointly (set by the 1983/1984 reforms). At first, up to 50% of your benefit becomes taxable; cross the upper band, and up to 85% becomes taxable. That phase‑in creates the “tax torpedo,” where the effective marginal rate is way higher than your bracket suggests because every extra dollar can make more benefit taxable too.
Quick mental math: if you’re in the 12% or 22% bracket and you’re still in the phase‑in zone, the effective marginal rate can jump into the high teens or even the low 30s. I’ve watched clients sell a modest fund with a $10k gain and, unintentionally, make an extra few thousand of benefits taxable on top. Not fun cocktail‑party material, but it happens a lot.
Medicare has its own cliff. IRMAA uses a two‑year lookback, your 2023 MAGI drives your 2025 Part B and D premiums. One extra dollar over a bracket means a full year at the higher premium, per person. For context, the 2024 IRMAA brackets (based on 2022 MAGI) started at $103,000 for single filers and $206,000 for married filing jointly, with higher tiers above that. The monthly surcharges at each tier can add up to hundreds per month per person. So yes, going $1 over isn’t a rounding error; it’s a several‑thousand‑dollar swing over 12 months.
Layering effects matter in Q4 planning this year. Required minimum distributions (RMDs) kick in at age 73 under current law, Roth conversions raise AGI on purpose, and capital gains stack on top. Cross an IRMAA line, and you may also trip the 3.8% Net Investment Income Tax if MAGI clears $200,000 single or $250,000 married filing jointly (thresholds established in 2013 and still in effect). Add in money‑market yields that were near 5% earlier this year, and even “safe” interest can push you into the torpedo or an IRMAA tier.
Tactics that actually work
- Income smoothing: Fill the 12% or 22% bracket with planned IRA withdrawals or partial Roth conversions in off years. Avoid big spikes that push benefits into the 85% bucket and jump an IRMAA tier the year after next.
- Harvest gains in the 0% window: If your taxable income sits inside the 0% long‑term capital‑gains band (which ties to the 12% ordinary bracket), realize gains deliberately. Lock in basis without hiking AGI above IRMAA lines. Be careful with the Social Security phase‑in, test it first.
- Realize losses when you’re near a cliff: Tax‑loss harvesting late in the year can pull MAGI back under an IRMAA threshold or dampen the tax‑torpedo marginal hit.
- Sequence matters: Consider Q4 charitable giving (including qualified charitable distributions once you’re 70½) to reduce AGI without jeopardizing cash flow. QCDs count toward RMDs and don’t hit AGI at all.
- Watch the two‑year echo: Before a one‑time sale (a business interest, a property, even a big mutual fund reallocation ) model not just this year’s tax, but the Medicare premiums two years out. I literally keep a sticky note on my screen with the IRMAA lines; it’s saved a few avoidable “why did Part B jump?” calls.
None of this is flashy. It’s calendar work. But in retirement, avoiding a torpedo and a cliff can be worth more than chasing an extra 50 bps on a bond fund, especially with markets whipping around rates the way they have this year.
Frequently Asked Questions
Q: How do I structure withdrawals to keep my retirement taxes low over the next few years?
A: Start with a simple stack: 1) Taxable brokerage for cash and selling appreciated positions up to the 0% long‑term capital gains band (in 2024 that topped out at $47,025 single/$94,050 MFJ). 2) Use 2025 to do measured Roth conversions up to a target bracket, before rates may rise in 2026. 3) Tap traditional IRA/401(k) later, ideally post‑conversions, while minding Medicare IRMAA tiers and RMDs at age 73. Rebalance with sales you’d make anyway.
Q: What’s the difference between cash flow and taxable income in retirement?
A: Cash flow is what you spend; taxable income is what the IRS taxes. Pulling cash or principal from a brokerage account doesn’t, by itself, create taxable income. Realizing gains does. Traditional IRA/401(k) withdrawals are ordinary income, period. Social Security can be up to 85% taxable once “provisional income” crosses old thresholds ($25k single/$32k MFJ set in 1983). That mismatch is why sequencing matters more than you think.
Q: Is it better to claim Social Security now or later if I’m trying to minimize lifetime taxes?
A: Usually later helps, but it’s not one-size-fits-all. Delaying raises your monthly benefit ~8% per year from full retirement age to 70 and boosts the survivor benefit, which is real value. Tax-wise, delaying can create “gap years” in your 60s where wages are gone, Social Security isn’t on yet, and RMDs haven’t started. Those years are gold for Roth conversions at today’s lower brackets (we’re in 2025) before potential 2026 rate hikes. Converting trims future RMDs, which can otherwise inflate your taxable income, trigger up to 85% taxation of Social Security (thanks to those $25k/$32k thresholds from 1983), and push you over Medicare IRMAA cliffs. Tactically: map a year-by-year cash plan. Spend taxable assets first (harvest gains inside the 0% LTCG band when possible, 2024’s was $47,025 single/$94,050 MFJ; 2025 is similar but check the IRS tables), do conversions up to a bracket you’re comfortable with (often 22%/24% in 2025), and delay claiming until 67-70 if your health, longevity, and non‑portfolio income support it. Exceptions: if you need the income, have poor health, or are qualifying a younger spouse for benefits, claiming earlier can still make sense. And don’t forget QCDs at 70½ to lower RMD‑related income later. Run the math; the tax tail shouldn’t wag the retirement dog, but it can chew on it if you ignore it.
Q: Should I worry about tax brackets changing after 2025?
A: Yeah, at least pay attention. The individual rate cuts from the 2017 law are scheduled to sunset after 2025, which likely means higher marginal rates, a smaller standard deduction, the SALT cap going away, and personal exemptions returning. Practically, 2025 is your last clean year to “fill” today’s lower brackets with Roth conversions, realize gains you were going to take anyway, and tidy up basis. Just watch Medicare IRMAA tiers and avoid tripping surtaxes by accident.
@article{how-do-taxes-change-when-you-retire-plan-to-pay-less,
title = {How Do Taxes Change When You Retire? Plan to Pay Less},
author = {Beeri Sparks},
year = {2025},
journal = {Bankpointe},
url = {https://bankpointe.com/articles/how-taxes-change-retirement/}
} 