Tax Efficiency in Retirement

Understanding how taxes can affect your retirement income is an important part of planning. Your tax situation in retirement depends on how you generate income, including earnings from work, retirement accounts, and Social Security benefits.

How Social Security Affects Retirement Taxes

Social Security can play a significant role in your taxable income. The timing of when you and your spouse choose to start benefits can impact the amount of taxes you pay. It is important to review Social Security rules and estimate your benefits to better understand potential tax liabilities.

Learn more about Social Security benefits: Social Security Administration.

Pre-Tax Retirement Accounts

Pre-tax or tax-deferred retirement accounts, such as Traditional IRAs and 401(k)s, allow you to contribute money before taxes are applied. Taxes on contributions and investment growth are deferred until you take distributions in retirement.

Contribution Limits and Phase-Outs

For individuals covered by a workplace retirement plan, the tax deduction for a Traditional IRA in 2026 is phased out based on income:

• Married couples filing jointly: $129,000–$149,000
• Single filers: $81,000–$91,000

Required Minimum Distributions (RMDs)

Starting at age 73, you generally must take RMDs from Traditional IRAs, 401(k)s, and other defined contribution plans. Withdrawals are taxed as ordinary income and may be subject to a 10% federal tax penalty if taken before age 59½.

After-Tax Retirement Accounts

After-tax accounts, such as Roth IRAs, are funded with money that has already been taxed. These accounts offer the potential for tax-free withdrawals of contributions and earnings, provided certain conditions are met.

Contribution Limits and Phase-Outs

Roth IRA contributions are limited based on income for 2026:

• Married couples filing jointly: $242,000–$252,000
• Single filers: $153,000–$168,000

Tax-Free Withdrawals

Withdrawals from Roth IRAs are tax-free and penalty-free if the account has been held for at least five years and the owner is at least 59½. Other qualifying circumstances include the owner’s death. Unlike traditional IRAs, Roth IRAs do not require minimum annual withdrawals.

Strategies for Tax Efficiency

Maintaining tax efficiency in retirement may involve combining pre-tax and after-tax accounts, reviewing Social Security timing, and managing withdrawals carefully. Discussing options with a qualified tax or financial professional can help tailor a strategy to your situation.

Remember, this content is for educational purposes only and does not replace personalized financial advice. Consult with your tax, legal, or financial professionals before making changes to your retirement strategy.