As a Certified Financial Planner™, I often meet people who have diligently saved in 401(k)s, IRAs, and pensions—only to be surprised by how much of their hard-earned retirement income could be lost to taxes.
If you’re between the ages of 60 and 73, now is a critical window to make decisions that will affect the taxability of your income for the rest of your life. Why? Because at age 73, the IRS forces you to take Required Minimum Distributions (RMDs) from your tax-deferred accounts. And those withdrawals? They’re fully taxable.
The Tax Trap Few Retirees See Coming
Imagine you hit retirement with $1 million in your IRA. You may think you’re set—until you realize:
- Withdrawals are taxed as ordinary income
- They could push you into a higher tax bracket
- They can cause up to 85% of your Social Security benefits to become taxable
- And you could even trigger higher Medicare premiums (IRMAA surcharges)
This is what we call the Retirement Tax Trap—and most people fall into it because they delay planning.
The Opportunity: Build Tax-Free Income Now
Here’s the good news: you don’t have to wait until RMDs start to take control of your tax situation. In fact, the years between retirement and age 73 are often your best opportunity to act.
Let’s walk through a few key strategies:
1. Roth IRA Conversions
Roth IRAs grow tax-free and allow for tax-free withdrawals in retirement. Converting portions of your traditional IRA or 401(k) to a Roth while in a lower tax bracket can save thousands in future taxes.
- Use the “tax bracket filing” strategy: Convert just enough each year to stay within your current tax bracket.
- This reduces future RMDs and gives you access to tax-free income later in retirement.
2. Strategic Withdrawals Before Age 73
Many retirees have low taxable income between retirement and RMD age. Instead of waiting, consider drawing from pre-tax accounts intentionally during these low-tax years.
- Fill your low brackets now
- Leave Roth or tax-free assets to grow longer
- Potentially reduce future Medicare costs and taxable Social Security
3. Health Savings Accounts (HSAs)
If you’re not on Medicare yet and still have a high-deductible health plan, HSAs are powerful:
- Contributions are tax-deductible
- Growth is tax-deferred
- Withdrawals for qualified medical expenses are tax-free
In retirement, you’ll likely have enough health expenses to use these funds efficiently and avoid taxes altogether.
4. Cash Value Life Insurance (IULs)
Indexed Universal Life Insurance (IUL) is another underused tax strategy. It’s not right for everyone, but it can be:
- A source of tax-free income via policy loans
- A tool for wealth transfer without income tax
- An alternative to Roth IRAs for those with high incomes or who are past contribution age limits
A Sample Timeline: Age 60-73
Here’s how a strategic plan might unfold:
Age: 60-65
Action: Retire early, delay Social Security, begin Roth conversions, or strategic IRA withdrawals
Age: 66-70
Action: Continue converting or spending down IRAs, maximize Roth growth, monitor income to avoid IRMAA
Age: 70-73
Action: Take Social Security, finalize Roth conversions, and begin managing RMDs from a smaller IRA base
The Bottom Line
You’ve spent your whole career saving for retirement. Now, it’s time to get strategic about keeping what you saved. With careful planning, you can create a retirement income plan that is sustainable, predictable, and far more tax-efficient.
Let’s work together to design a strategy tailored to your situation. The earlier we start, the more options we have.
Schedule a retirement tax strategy meeting today.