Tax Planning for Retirement: Withdrawals, RMDs, and Smarter Strategies for Income

Once you hit retirement, the question isn’t just how much you have saved, it’s how you access it without overpaying the IRS. The shift from saving to withdrawing requires a new level of tax awareness, especially when required minimum distributions (RMDs) begin and start pushing up your taxable income.

If you’re not careful, RMDs can trigger higher tax brackets, Medicare surcharges, and the loss of other deductions. The good news? With the right planning, you can manage and often reduce the tax impact, giving your retirement dollars more longevity and flexibility.

Understanding RMDs: What You’re Required to Take and What You’re Taxed On

Starting at age 73 (under current law), the IRS requires you to begin withdrawing a portion of your traditional IRA and 401(k) balances each year. These withdrawals are taxed as ordinary income, even if you don’t need the money.

The RMD formula is based on your age and account balance as of December 31 of the prior year. If you fail to withdraw the required amount, the penalties are steep—up to 25% of the shortfall.

Offsetting the Tax Impact of RMDs

One effective strategy for reducing the tax hit from RMDs is to invest in assets that produce tax deductions or credits. For example, making qualified charitable distributions (QCDs) directly from your IRA can satisfy your RMD without increasing your taxable income.

You can also use depreciation from real estate, business deductions, or other passive losses when available to offset some of the income generated by your RMDs. These types of deductions can be built into your broader financial plan before RMDs begin.

Creating Investment Buckets to Fund RMDs

Rather than pulling from any account or asset class at random, retirees should structure their portfolios to fund RMDs in a way that supports long-term growth and stability. This means creating a “bucket” of liquid, income-producing assets such as dividend-paying stocks, bonds, or cash equivalents dedicated to satisfying RMDs each year.

This strategy allows you to legally meet IRS requirements without being forced to sell long-term growth assets at the wrong time or disrupt your overall investment plan.

Using Roth Conversions Before RMD Age

One of the most powerful tools in retirement tax planning is the Roth conversion. Converting a portion of your traditional IRA to a Roth IRA allows you to pay taxes now, often at a lower rate, and avoid RMDs on those funds later.

The ideal window for Roth conversions is typically between retirement and age 73 when your income may be lower and before RMDs begin. By converting gradually, you can fill up lower tax brackets each year and reduce the size of your traditional IRA, minimizing future RMDs and the taxes that come with them.

Coordinating Withdrawals Across Account Types

Strategic withdrawals across taxable, tax-deferred, and tax-free accounts can help manage your tax bracket and avoid triggering unnecessary penalties. This coordination includes timing withdrawals to avoid jumping into higher Medicare premium brackets or making Social Security benefits taxable.

For example, in low-income years, it might make sense to withdraw more from tax-deferred accounts or complete additional Roth conversions. In higher-income years, drawing from taxable brokerage accounts may provide income with minimal tax impact.

Aligning Your Withdrawal Plan With Your Legacy Goals

If part of your retirement planning includes passing assets to children or grandchildren, your withdrawal strategy should reflect that. Roth accounts, for instance, are generally more tax-efficient to inherit than traditional IRAs. If charitable giving is part of your plan, using IRA assets for donations can be more tax-effective than giving cash or stock from taxable accounts.

Every withdrawal decision has implications for your long-term legacy, so it pays to align your income plan with your estate plan.

Plan the Exit Strategy as Carefully as the Entry

Most people focus heavily on how to grow retirement accounts, but far fewer think through how they’ll draw down those funds. Yet this phase can be just as important, if not more so, when it comes to preserving family wealth.

At Strategic Wealth Legal Advisors, we help families create retirement income plans that work with the tax code, not against it. If you want to reduce the impact of RMDs, optimize Roth conversions, or coordinate your withdrawals to protect your long-term goals, we can help you build a plan that keeps more in your pocket and your family’s future.