Retirement is often seen as the finish line in a lifetime of financial planning. After years of saving, budgeting, and investing, retirees finally have the freedom to draw on the nest egg they’ve worked so hard to build. But this phase—often referred to as the “decumulation phase”—requires just as much strategy as the accumulation years. While many people assume that retirement naturally brings them into a lower tax bracket, that’s not always the case. Without thoughtful withdrawal planning, retirees can inadvertently push themselves into higher tax brackets, incur unnecessary penalties, and even reduce the net value of their Social Security or Medicare benefits. Advisors like Graydon Coghlan have long emphasized that managing tax exposure is one of the most crucial, yet overlooked, components of retirement income planning.
Understanding the Taxable Layers of Retirement Income
Retirees often have multiple sources of income: traditional IRAs and 401(k)s, Roth accounts, pensions, taxable brokerage accounts, and Social Security benefits. Each of these income streams has its own tax treatment, and the order in which they’re tapped can dramatically affect how much tax a retiree pays. Traditional retirement accounts like IRAs and 401(k)s, which are funded with pre-tax dollars, require distributions that are fully taxable. On the other hand, Roth IRAs allow for tax-free withdrawals, and taxable accounts are subject to capital gains taxes, which can be lower than ordinary income taxes depending on the situation.
The challenge arises when retirees treat all income sources as equal or follow a “first in, first out” approach. Without coordinating withdrawal sequences, they may unknowingly trigger higher marginal tax rates. This often happens when required minimum distributions (RMDs) from traditional retirement accounts begin at age 73. These mandatory withdrawals can spike taxable income, especially when layered on top of Social Security benefits and other income sources. This domino effect can lead to Medicare premium surcharges, the taxation of up to 85% of Social Security benefits, and reduced eligibility for certain deductions or tax credits.
The Role of Roth Conversions in Smoothing Tax Brackets
One of the most effective tools for managing tax brackets in retirement is the Roth conversion. This strategy involves moving money from a traditional IRA or 401(k) into a Roth IRA, paying taxes on the converted amount in the current year, but enjoying tax-free withdrawals in the future. When executed correctly, Roth conversions can create more flexibility in later retirement years, especially when RMDs begin. By gradually reducing the balance of traditional accounts, retirees can better control their future tax picture and avoid large spikes in taxable income.
However, Roth conversions require careful planning. Converting too much in one year can push income into a higher tax bracket, negating the benefits of the strategy. On the other hand, spreading conversions over several low-income years—such as the early years of retirement, before RMDs kick in—can minimize the tax bite. The goal is to “fill up” the lower tax brackets each year without crossing into more punitive tiers. This approach requires a clear view of one’s full income picture and often benefits from collaboration with both financial advisors and tax professionals.
Timing Matters More Than Many Realize
The sequence of withdrawals matters not just in terms of which accounts to access, but when to access them. Early retirees who delay claiming Social Security often experience several years of lower taxable income, creating a window of opportunity for strategic withdrawals or conversions. Tapping taxable brokerage accounts or initiating small Roth conversions during this time can optimize the long-term tax outcome. Conversely, waiting until RMDs begin before taking any distributions can result in ballooning income levels and significantly higher taxes in later years.
In some cases, drawing modest amounts from traditional retirement accounts before RMDs begin can actually lower a retiree’s lifetime tax burden. It spreads out taxable income over more years, helping to avoid sudden increases that can result in higher marginal tax rates. This type of income leveling creates a smoother tax curve, allowing retirees to remain in lower brackets more consistently. It’s not about avoiding taxes altogether, but about managing the timing and amount of taxation for the most efficient outcome.
Impact on Social Security and Medicare
Tax planning in retirement isn’t limited to income taxes alone. It also plays a critical role in determining how much of a retiree’s Social Security benefits are taxed and how much they’ll pay for Medicare. Once income reaches certain thresholds, up to 85% of Social Security benefits become taxable. Likewise, higher income levels can trigger Income-Related Monthly Adjustment Amounts (IRMAA), resulting in increased Medicare Part B and Part D premiums.
These hidden tax costs often catch retirees off guard. A seemingly minor spike in income—perhaps from a capital gain or unexpected RMD—can have outsized effects, reducing net retirement income and increasing health care costs. Strategic withdrawals that manage modified adjusted gross income (MAGI) can help retirees stay below key thresholds, preserving more of their Social Security and keeping Medicare premiums in check.
Why Coordination is Key
Withdrawal strategies cannot exist in isolation. They must be integrated with the broader retirement plan, accounting for cash flow needs, investment returns, tax rules, and life expectancy. This level of coordination requires a deep understanding of not only tax laws but also the nuances of each account type and income source. It’s a balancing act between accessing funds when needed and preserving wealth for the long haul.
This is why retirees benefit most from advisors who take a comprehensive, personalized approach to planning. Effective advisors look at the full picture—retirement goals, risk tolerance, estate intentions, and tax exposure—then build a withdrawal strategy that supports all of those elements in tandem. They revisit the plan annually, adjusting for changes in tax laws, market performance, or personal circumstances. This level of proactive management is what turns a good plan into a great one.
Avoiding the Panic Withdrawals
Emotional decision-making in retirement can be costly. When market downturns occur or unexpected expenses arise, retirees without a structured withdrawal plan may react by pulling from whichever account feels most accessible or least painful at the moment. Unfortunately, this reactive approach often leads to higher taxes, missed opportunities, and increased financial stress.
Having a withdrawal strategy in place before retirement—and reviewing it regularly—is one of the best defenses against these pitfalls. It provides a roadmap that retirees can follow with confidence, even in uncertain times. When each withdrawal has a purpose and is part of a broader tax strategy, retirees can maintain control over their financial future and avoid the panic that often comes with poorly timed decisions.
A Lifelong Process, Not a One-Time Choice
Withdrawal planning isn’t something retirees can set and forget. It’s a dynamic process that evolves with time, requiring ongoing attention and adaptation. Life events such as the death of a spouse, changes in tax law, healthcare transitions, or shifts in spending patterns can all necessitate updates to the plan. The most successful retirees are those who stay engaged, seek guidance when needed, and treat tax strategy as a vital part of their overall financial wellness.
Too often, retirees view their tax return as a backward-looking document—a summary of what already happened. But in reality, tax planning should be forward-looking. It should inform decisions about where to draw income next, how much to convert, or when to rebalance. The goal is not to eliminate taxes but to manage them with intention, maximizing what retirees keep and minimizing what is lost to poor timing or inattention.
Empowerment Through Awareness
At its core, strategic withdrawal planning is about empowerment. It’s about giving retirees the tools and information they need to make smarter decisions and protect the wealth they’ve built over a lifetime. Taxes are one of the largest expenses in retirement, yet they are often the least discussed. By bringing this conversation to the forefront, advisors and clients can work together to create plans that are efficient, resilient, and tailored to individual needs.
Retirees who understand their tax landscape—who know how different income sources interact and when to draw from each—are better positioned to enjoy their retirement years with confidence. With the right strategy in place, the retiree’s tax trap becomes a path to greater security and lasting peace of mind.