Taxes in Retirement: What Every Retiree Needs to Know
For many retirees, the biggest surprise isn’t market volatility—it’s taxes. After decades of saving diligently, it can be frustrating to discover that poor tax planning erodes income just when you need it most. The good news? With thoughtful strategies and proactive planning, you can significantly reduce tax surprises and create more confidence around your retirement income.
This article walks through the most important tax considerations for retirees and pre-retirees in the Rochester, Minnesota area—without jargon, fear, or guesswork.
The Hidden Risk of Tax Surprises in Retirement
One of the most common issues retirees face is the unexpected tax bill.
These surprises often stem from:
- Cashing out a small, forgotten retirement account
- Taking irregular, large withdrawals during the year
- Failing to coordinate withdrawals with tax withholding
- Not communicating all income sources to your CPA
Even a $10,000–$15,000 one-time withdrawal can push income higher than expected and create a several-thousand-dollar tax liability. Strategic planning aims to eliminate—or at least minimize—these unwelcome surprises.
Why Withdrawal Sequencing Matters More Than You Think
Consistency Creates Control
Most retirees prefer a “paycheck replacement” approach—steady monthly income rather than sporadic lump sums. This approach offers several advantages:
- Easier budgeting
- Better tax visibility
- Reduced risk of overspending
- Fewer accidental tax bracket jumps
By contrast, irregular withdrawals—$10,000 here, $30,000 there—can quietly inflate taxable income and increase your tax bill before you realize what’s happened.
A consistent withdrawal strategy encourages discipline and aligns spending with long-term planning.
Roth Conversions: Powerful, But Not for Everyone
What Is a Roth Conversion?
A Roth conversion involves moving money from a pre-tax IRA into a Roth IRA. The converted amount is taxable today—but potentially tax-free forever after.
When Roth Conversions Can Make Sense
Roth conversions may be beneficial if:
- You’re currently in a lower tax bracket (such as 12% or 22%)
- A large portion of your assets are in pre-tax accounts
- You don’t need the converted funds immediately
- You want to reduce future Required Minimum Distributions (RMDs)
- Your heirs are likely to be in higher tax brackets
Notably, Roth IRAs are not subject to RMDs, which gives retirees greater flexibility and control later in life.
When Roth Conversions May Not Be a Fit
Roth conversions generally do not make sense if:
- You need to tap the converted funds to pay the tax
- You’re already in a high marginal tax bracket
- The conversion would push you into a significantly higher bracket
As with most retirement strategies, context matters.
Medicare IRMAA: The Two-Year Lookback That Catches Many Retirees
Medicare premiums are based on income from two years prior. This is known as the IRMAA (Income-Related Monthly Adjustment Amount) rule.
What this means:
- A high-income year at age 63 can raise Medicare costs at 65
- One-time income spikes (bonuses, Roth conversions, business sales) can have lingering effects
In some cases, it may even make sense to delay Medicare enrollment briefly and remain on private insurance—especially after a high-income working year.
Planning income timing carefully can prevent unnecessary Medicare premium increases.
Required Minimum Distributions (RMDs): What to Know
Under current law:
- RMDs begin at age 73
- They apply only to pre-tax retirement accounts (IRAs, 401(k)s, 403(b)s)
- The required amount increases as you age
RMDs are calculated using:
- Your account value as of December 31 of the prior year
- An IRS life expectancy factor
You can take RMDs:
- Monthly, quarterly, or annually
- All at once or spread throughout the year
- With taxes withheld automatically if desired
Failing to plan for RMDs can create unnecessary tax pressure later in retirement.
How Social Security Is Taxed
Depending on your total income:
- Up to 50% of Social Security may be taxable
- Up to 85% may be taxable at higher income levels
This does not mean you lose benefits—it means a portion is included in taxable income alongside pensions, IRA withdrawals, and investment income.
Managing other income sources strategically can reduce how much of Social Security becomes taxable.
The Case for Planning Early—Even After Retirement
Tax planning isn’t just for your working years.
Whether you’re:
- Still employed in your 50s
- Newly retired at 62 or 65
- Well into your 70s
There is still opportunity to improve outcomes.
Early retirement years—before Social Security and RMDs begin—often present a valuable planning window. During these years, retirees may be in lower tax brackets, making strategies like Roth conversions especially effective.
At Fortress, we often model plans out to age 90 or beyond—not because we expect everyone to live that long, but because longevity risk is real, especially for couples.
Key Takeaways for Retirees
- Taxes are often the largest controllable expense in retirement
- Consistent income strategies reduce surprises
- Roth conversions offer long-term flexibility when done correctly
- Medicare premiums are affected by past income
- RMDs require advance planning—not last-minute decisions
- It’s never too early—or too late—to evaluate your tax strategy
Ready for a More Confident Retirement?
If you’re approaching retirement—or already there—and want clarity around taxes, income, and long-term planning, a brief conversation can make a meaningful difference.
Schedule a complimentary 15-minute introductory call to discuss your situation and explore whether proactive tax planning could help you keep more of what you’ve earned.
Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. or current FFG information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with FFG’s CRD# 315329
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
