Retirement is an opportunistic time to be with family, travel or simply enjoy some hard-earned time off. Yet there are many things one should consider when approaching retirement. Careful planning can help minimize one’s tax bill.

Below are four steps you can take to reduce your tax if you’re approaching retirement, and how they help.

1. Consider your post-career lifestyle

Think about what retirement might look like for you. Are you wanting to move to a different state or downsize by selling your home?

• Tax implications: Since income tax must be paid on withdrawals from one’s retirement savings, living in a state with low or no income tax will increase the funds available to spend after taxes have been taken out of the withdrawal.  If the sold your home, you are able to exclude a portion of the gain ($250,000 if single or $500,000 for married couples).   Any profit over the excluded portion will be subject to long term capital gains. Losses on the sale of a personal residence are not deductible.

Will you continue working but shift to part-time?

• Tax implications: Before reaching retirement age (i.e., age 67), if you make over the yearly earnings limit ($23,400 for 2025), the Social Security Administration (SSA) takes out $1 out of your retirement benefit paid to you for every $2 you earn above that limit.  In the year you reach full retirement age, SSA will deduct $1 in benefits for every $3 you earn above a different limit. In 2025, this limit on your earnings is $62,160. SSA only counts your earnings up to the month before you reach your full retirement age, not your earnings for the entire year.

2. Assess your income sources

Social Security is a major income component for many retirees and deciding when to start collecting benefit payments is crucial. If you begin collecting before your full retirement age, the government will permanently reduce your monthly benefit by about 0.5% for each month that collections are started early. Conversely, if you delay claiming your benefits into your full retirement age (up to age 70), you’ll receive larger monthly payments.

• Tax implications: Depending on your marital status and your total income (including wages, retirement distributions and taxable investment income such as dividends and interest), up to 85% of your Social Security benefit collections could be taxable. The lower your combined income is, the smaller the taxable portion of your benefits are. You can potentially reduce or avoid higher taxes on benefits when you plan properly.

If your employer contributes to a pension fund for you, find out your payout options. Some pensions offer lump-sum payouts, while others offer different monthly payment options.

• Tax implications: Most income you receive from a pension is taxable at your ordinary income tax rate.

In addition to retirement accounts, you may have savings and investments such as stocks or bonds that can increase your taxable income.

• Tax implications:  Capital gains and dividends from these investments may be taxed at potentially lower rates than your ordinary income tax rate. Strategic withdrawals from these accounts at times when your income is lower, or when you have losses that can offset your gains, may help you manage the overall tax you may owe.

3. Develop a withdrawal strategy for your retirement account

Every year after you turn 73, you must take required minimum distributions (RMDs) from most tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Failing to do so can result in hefty penalties of up to 25% of the amount of RMD that should have been taken.

• Tax implications: RMDs are treated as ordinary income for tax purposes. If you don’t need them for living expenses, you might want to consider using those funds to make a qualified charitable distribution (QCD) to lower your taxable income. With a QCD, funds go directly from your IRA to a qualified charity. They can count toward your RMD but aren’t included in your taxable income.

Money taken out of Roth IRAs and Roth 401(k)s is generally tax-free, making them valuable tools for reducing taxes in retirement.

• Tax implications: Roth accounts don’t require RMDs during the owner’s lifetime. If you have both traditional and Roth accounts, you might choose to take withdrawals from Roth accounts instead of your traditional accounts in years when you want to keep your tax bracket lower.

4. Plan for health care expenses

Medical costs can significantly impact retirees. Medicare premiums, hospital visits, prescriptions and potential long-term care are just some of the expenses that can eat into your retirement savings without careful planning.

• Tax implications: Health Savings Accounts (HSAs) allow for tax-deductible contributions, tax-free growth and withdrawals for qualified medical expenses without getting taxed. If you’re retiring soon and participate in a health plan where you pay high deductibles and higher co-pays & out-of-pocket expenses, maximizing HSA contributions can be a smart move.

Final thoughts

Retirement can encompass many years and be challenging to figure out with tax laws frequently change. By combining various withdrawal strategies and staying proactive about tax changes, you can minimize your taxes in retirement. These are only some of the tax issues and implications to consider with retirement. For more help forecasting tax outcomes under different scenarios and advice on strategies that complement your retirement goals, contact your Wegner CPAs advisor.