Understanding How to Maximize Tax Efficiency in Retirement

Most people judge a tax decision by one number: the bill they owe in April. In retirement, that habit can be expensive. The year you pay the least tax may just be the year you put off taxes that will be owed later, at a higher rate, with less control over the timing.

The goal of retirement tax planning isn't to minimize this year's taxes. It's to make decisions that, taken together, leave you and your family with more after-tax money over your whole retirement. That's a different question, and it usually has a different answer.

The years between retirement and RMDs

While you were working, your paycheck largely set your taxable income. Once wages stop, much of it becomes a choice: how much you take from an IRA, when you sell investments, when you start Social Security.

That flexibility is greatest in the years after you stop working and before required minimum distributions (RMDs) begin. RMDs start at 73 if you were born from 1951 through 1958, and at 75 if you were born in 1960 or later. If you were born in 1959, the law is ambiguous. The IRS has proposed 73, but that regulation isn't final. For people who delay Social Security, these can be the lowest-income years of their adult lives. That's an opportunity, but only if it's used deliberately.

A hypothetical example

Consider a married couple, both 65 in 2026, who have just retired. These are illustrative assumptions, not a real client:

• $1.6 million in traditional IRAs, $400,000 in a taxable brokerage account and $100,000 in Roth IRAs
• No pension. They plan to delay Social Security to 70.
• Spending covered from the brokerage account for now, which produces about $10,000 a year of qualified dividends and long-term gains
• They take the standard deduction and file jointly

Using 2026 federal figures, their deductions total $47,500:

• the $32,200 joint standard deduction;
• an extra $1,650 each for being 65 or older; and
• the new $6,000-per-person senior deduction for 2025 through 2028, which begins to phase out when modified adjusted gross income is above $150,000 on a joint return.

Option 1: do nothing. Their income is $10,000 of investment gains, which is well under their deductions. Federal tax is zero.

That looks ideal. But the IRA keeps growing untaxed until RMDs start at 75, when those withdrawals plus two larger Social Security checks can keep them in a higher bracket with less room to manage it.

Option 2: convert $138,000 to a Roth IRA. Their adjusted gross income becomes $148,000: the $138,000 conversion plus $10,000 of gains. That's just under the $150,000 point where the senior deduction starts to phase out on a joint return, so they keep the full $12,000. That deduction lowers taxable income, not adjusted gross income, so it doesn't help with Medicare premiums or the taxation of Social Security. After $47,500 of deductions, taxable income is $100,500.

The tax is figured in two layers, because ordinary income and long-term gains have separate rate schedules:

• Ordinary income: $90,500. Deductions offset ordinary income first, leaving $90,500 of the conversion taxable. In 2026, the first $24,800 is taxed at 10% ($2,480) and the remaining $65,700 at 12% ($7,884), for $10,364.
• Long-term gains: $10,000. Gains sit on top of ordinary income, filling taxable income from $90,500 to $100,500. The 0% rate applies only up to $98,900 of taxable income on a joint return, so $8,400 of the gains are taxed at 0% and $1,600 at 15% ($240).

Total federal tax is about $10,604, roughly 7.7% of the amount converted.

Notice what happens in that last layer. There, each extra dollar converted is taxed at 12% and also pushes a dollar of gains from 0% to 15%, so its real cost is 27%. Converting about $136,400 instead would keep all the gains at 0%.

Whether Option 2 is better depends on what those dollars would face later. If the couple expects the 22% or 24% bracket once RMDs and Social Security arrive, paying about 8% now looks attractive. If they plan large charitable gifts from the IRA, it may not.

Saving tax isn't the same as having more money

A Roth conversion is taxed as ordinary income in the year you convert. Conversions made after 2017 can't be undone. Two points often get lost:

• The tax paid has an opportunity cost. The roughly $10,600 in the example comes out of the brokerage account and stops growing for the couple. A conversion improves their long-term position only if the tax it avoids later is worth more than what that money could have earned.
• Where the tax money comes from matters. Paying it from outside funds keeps the full converted amount growing tax-free in the Roth. Paying it out of the IRA shrinks what ends up in the Roth. If you're under 59½, any amount withheld for taxes counts as a distribution and may also face the 10% early-withdrawal penalty.

Also, if you're under 59½, each conversion has its own five-year period for the 10% additional tax. And once RMDs start, the year's RMD has to come out first; it can't be converted.

How the pieces interact

Social Security. Up to 85% of your benefits can be taxable, depending on your "combined income": half your benefits plus your other income, including tax-exempt interest. For joint filers, benefits start becoming taxable above $32,000, and above $44,000 up to 85% of them can be taxable. Those thresholds are set in the law in fixed dollar amounts. Delaying to 70 raises the monthly check and can open room for conversions in the meantime. But it doesn't automatically lower your lifetime taxes, because a larger benefit later means more taxable income later. The tax effect depends on what you do with the years in between.

Medicare IRMAA. Higher-income Medicare beneficiaries pay extra for Part B and Part D, based on modified adjusted gross income from two years earlier. Premiums for 2026 are generally based on 2024 tax returns. For 2026, the surcharge starts above $218,000 of modified adjusted gross income for joint filers and $109,000 for single filers.

Two features matter:

• They're cliffs. One dollar over a threshold triggers the full surcharge for that tier.
• The thresholds are lagged. A large conversion in 2026 can raise premiums in 2028.

In the example, if the couple's 2026 income went past $218,000, their 2028 premiums would rise. Using 2026 thresholds and premiums as stand-ins, the first tier would cost the two of them about $2,300 that year. The actual 2028 figures aren't known yet. After certain life-changing events, such as retirement or a spouse's death, you can ask Social Security to use more recent income, using Form SSA-44.

RMDs. Once RMDs begin, that income arrives every year whether you need it or not, and it uses up bracket room you might otherwise have used for conversions. You can still convert after RMDs start, but with less space to work with. The larger the pre-tax balance when they begin, the less flexibility you have.

Withdrawal order should be coordinated, not mechanical

The common rule of thumb is taxable accounts first, then tax-deferred, then Roth. Followed mechanically, it's what produced the zero-tax year in Option 1, and the growing IRA behind it.

A coordinated approach mixes sources each year based on bracket room: spending from the brokerage account while filling a chosen bracket from the IRA, or using Roth money when another IRA dollar would cross an IRMAA threshold.

Capital gains, charitable giving and the surviving spouse

Capital gains. In a low-income year, you may be able to sell appreciated investments and pay 0% federal tax on the gain, which resets your cost basis higher. But conversions and gains compete for the same space below the 0% threshold, as the example showed, so you often have to choose between them. And inherited assets generally get a new basis equal to their value at death. For shares you expect to leave to heirs, holding them may beat realizing the gain yourself.

Charitable giving. Once you're 70½, you can make qualified charitable distributions (QCDs) directly from an IRA to an eligible charity. QCDs are limited to $111,000 per person in 2026. They're excluded from your income, which also helps with Social Security taxation and IRMAA, and once RMDs begin they count toward your RMD. You can't also deduct them, and they can't come from an ongoing SEP or SIMPLE IRA. For the couple in the example, QCDs become available at 70½, years before their RMDs start. For regular givers, that's a reason not to convert everything.

The surviving spouse. This is the part of the plan people most often miss. In the year a spouse dies, the survivor can usually still file a joint return. After that, most surviving spouses file as single. Qualifying surviving spouse status, which keeps joint brackets for two more years, generally requires a dependent child.

For 2026, the single 22% bracket starts at $50,400 and the single IRMAA threshold is $109,000, each half the joint figure. But the survivor's income often doesn't fall by half. They keep the larger of the two Social Security benefits and inherit the IRAs, along with their RMDs. Conversions done while both spouses are alive can reduce that problem.

Looking at the whole retirement

Any of these decisions comes down to a few questions, answered for your whole retirement rather than one tax year:

• Lifetime rates. What rate will these dollars face now, and what are they likely to face later, for you, a surviving spouse or heirs, most of whom must empty an inherited IRA within 10 years? The aim is a lower effective rate across all of those years, not a lower bill this April.
• Growth and the source of the tax. If the rate now and the rate later are the same, a conversion paid from the IRA itself roughly breaks even. Paying the tax from a taxable account effectively moves more money into the Roth, and a longer time horizon magnifies that advantage. But it also uses money that would otherwise keep growing for you, so it belongs in the comparison.
• Side effects this year. Medicare premiums, Social Security taxation, capital gains and the senior deduction phaseout can each raise the real cost of the next dollar.

None of this can be predicted precisely. Tax law changes, returns are uncertain, and nobody knows which spouse will outlive the other. That argues for moderate steps reviewed each year, not for doing nothing.

If you'd like to look at how these decisions fit together for your own situation, you can reach me here.

This article is for general education only and isn't individualized tax, legal or investment advice. The example is hypothetical and uses 2026 federal figures only, without state tax. Tax rules change and depend on your circumstances, so talk with a tax professional before acting.