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I’m Paul Mazzabeca, co-founder of Finance consultants. This question continues to grow. It comes from a very specific type of person, and may be the most important transition in retirement planning. Here’s a representative version, and the framework retirement income advisors use to answer it.
“I’m 62 and plan to retire at 65. My wife is 61. We have about $2 million across Vanguard and Fidelity accounts. Taxable IRA, Roth, and brokerage accounts.
My main concern now is taxes. Our goal has always been to enjoy retirement, but we’re concerned that taxes might drain our savings and force us to choose part-time work to make ends meet.
Can an advisor help us come up with a tax-efficient plan for retirement?
Taxes can be scary — they don’t have to be, even during retirement
There’s a reason this is one of the most common questions we receive. You’ve spent your entire life building a respected organization, and you deserve to reap those rewards without having to worry about possibly rejoining the workforce.
The good news is that there are still plenty of things you can do, along with the help of a trusted advisor, to ease your annual tax bill and ensure most of your money stays with you and not with the IRS.
Here are five tax-saving strategies our advisors recommend for people with $1 million in their retirement accounts.
1. Make sure your assets are in the correct account types
Not all types of retirement accounts are created equal, and from a tax perspective, it really matters where you keep your investments.
For example, every dollar withdrawn from a traditional IRA is taxed as ordinary income. On the other hand, a Roth gives you tax-free gains, while income-producing assets in a taxable account may be taxed at a lower capital gains rate.
A qualified advisor can help you determine which accounts are best suited to grow your assets and generate income without increasing your overall tax bill.
2. Look at Roth conversions
If done well over several years, converting portions of your traditional IRA to your Roth can reduce future RMDs, reduce IRMAA exposure, reduce the tax burden on Social Security and create additional tax-free income for the surviving spouse.
If done poorly, this strategy can raise your tax bracket, impose additional IRMAA fees, and cost more than you save.
The math requires modeling your conversion amount against your expected income, your IRMAA limits, state taxes, and the timing of your Social Security for each ladder year. This is not a spreadsheet exercise. It is a multivariate annual projection.
You are good with numbers. But this is a different kind of mathematics.
3. Look at the sequence of withdrawals to save thousands
The order in which you withdraw from each of your retirement accounts can significantly impact your annual tax bill.
For example, in a year when your RMD pushes you into the top 24% bracket but not into the 32% bracket, there may be room to strategically withdraw additional money from a taxable account (taxed at capital gains rates, not ordinary income rates) rather than transferring or withdrawing more from an IRA.
Mathematics changes every year. This is annual planning, not a one-time decision.
4. Use qualified charitable distributions instead of traditional donations
A QCD allows you to send up to $105,000 per year (2024 limit, indexed for inflation) directly from your IRA to a qualified charity. The distribution is counted toward your RMD but is not included in your taxable income.
It meets the RMD, but you don’t pay tax on it. Do your arch height. Does not trigger IRMAA. Your Social Security does not pay higher taxes.
For someone who already donates to charities from their bank account, switching to QCDs is one of the most immediate tax gains in retirement planning.
5. Create a plan to claim Social Security benefits
For a couple with $2 million in assets, Social Security claim decisions involve layers that no calculator can capture. If one spouse dies, the surviving spouse retains the higher of the two benefits. Your claim strategy should take this into account.
At certain income levels, Social Security income pushes you over temporary income thresholds, and suddenly, 85% of your benefits become taxable. If you also take RMDs and do Roth conversions, the interaction between the three determines how much interest the IRS gets.
I’ve made 30 years of smart investment decisions. This deserves the same precision, with someone designing each variant.
Five questions to ask advisors about retirement and taxes
1. “Are my assets in the correct accounts from a tax efficiency standpoint?”
2. “What are the Roth conversion recommendations for me over the next five to eight years, and what are the potential implications?”
3. “What is my withdrawal request across all account types, and how did I decide?”
4. “Do I use qualified charitable distributions, and if not, why?”
5. “When should my wife and I claim Social Security, and how does that interact with our withdrawal plan?”
If your advisor is able to clearly answer all five questions in a way that makes you feel prepared, you are likely in good hands. If they can’t, it’s worth exploring if someone else can.
— Paul Mazzabica, co-founder of FinanceAdvisors.com
About this column
Ask an Advisor is a sponsored Q&A series produced by FinanceAdvisors.com. The questions displayed are composites representing common inquiries received through our advertising, platform and audience interactions. It does not depict specific individuals or actual consulting engagements. Paul Mazzabica is the co-founder of FinanceAdvisors.com. It is not a registered investment advisor and does not provide personal financial advice. His commentary reflects feedback from matching thousands of investors with qualified advisors through the platform, and is intended for general educational purposes only.
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