Retirement creates a financial change that often receives less attention than the day you actually stop working: your taxable income may begin to look very different. For decades, salary may have been the largest item on your tax return. Once that paycheck stops, income may come from a different combination of sources.

Social Security may not have started yet, required minimum distributions may still be years away and you may be living partly from cash, taxable investments or retirement accounts. For some retirees, those years create a planning window in which their tax picture looks very different from both their working years and the later years of retirement.

Recent retirement tax research has increasingly focused on this period because the final working years and early retirement years may create opportunities to evaluate Roth conversions, capital-gain realization, Social Security timing and other tax-sensitive decisions. That makes it worth understanding what your tax return could look like during the first several years after retirement rather than waiting until required distributions begin.

Retirement Does Not Mean Taxes Stop

People often think about retirement accounts in terms of the balance shown on the statement, but those balances do not always represent the amount available to spend after taxes. Traditional retirement accounts generally contain money on which income taxes have been deferred, which means distributions from those accounts are generally taxable when withdrawn.

The IRS currently requires many retirement-account owners to begin required minimum distributions at age 73, although the applicable starting age depends on birth year and individual circumstances. Roth IRAs generally do not require lifetime distributions for the original owner. That means the amount shown on the account statement and the amount ultimately available to spend after taxes may not be the same.

The Early Retirement Years Can Create a Different Tax Picture

Consider someone who retires at 65. Their salary disappears, they decide to delay Social Security and RMDs have not begun. Suddenly, the sources creating taxable income may be very different from what they were during the working years.

That does not automatically mean the retiree is in a low tax bracket, and it does not mean taxable income should be created simply for the sake of filling one. It does mean there may be planning decisions available during those years that deserve to be evaluated. Once Social Security and RMDs are both flowing, the amount of taxable income may become less flexible. That is one reason retirement tax planning often makes more sense before those income sources become automatic.

Deciding Whether Taxes Should Be Paid Earlier

For someone with substantial tax-deferred retirement savings, a Roth conversion may be one strategy worth evaluating. A Roth conversion moves money from a traditional retirement account into a Roth account, and the converted amount is generally taxable in the year of the conversion.

That means the strategy is not about avoiding taxes. It involves intentionally recognizing taxable income today in exchange for different tax treatment on qualified Roth distributions later. Whether that makes sense depends on the individual situation. The better question is whether paying tax on some of the money today may provide more flexibility later in retirement.

Current Tax Law Changes the Planning Conversation

One major uncertainty that shaped retirement tax discussions several years ago has changed. The individual federal income-tax rate structure enacted in 2017 was made permanent under legislation enacted in 2025, which means the old planning assumption that those rates would automatically expire after 2025 is no longer accurate.

That does not mean retirement tax planning is less important. Your personal tax situation can still change significantly as income sources change, RMDs begin, Social Security becomes taxable, investment gains are realized or Medicare premiums are affected by income. A surviving spouse may also eventually file as a single taxpayer, which can change the tax picture again. Even when the tax code becomes more predictable, your own retirement income structure may not.

Roth Conversions Should Be Evaluated Alongside Medicare and Other Income

This is one of the areas where retirement tax planning can become more complicated than it first appears. A Roth conversion may look reasonable based only on your federal tax bracket, but the conversion also increases adjusted gross income and may affect other parts of your financial life.

For someone enrolled in Medicare, higher modified adjusted gross income may influence future Medicare Part B and Part D premiums through IRMAA. That does not mean the conversion was necessarily a mistake. It means the decision should be considered alongside the rest of the retirement plan.

A tax decision should not create an avoidable surprise somewhere else.

Withdrawal Sequencing Matters Too

Roth conversions are not the only tax-planning consideration. Retirees may have money in tax-deferred accounts, Roth accounts, taxable brokerage accounts, cash and health savings accounts, and each type of account has different tax characteristics.

If retirement spending requires an additional $80,000 one year, where that money comes from may affect the tax result. There may not be one permanent answer. In one year, drawing from a taxable account may make sense. Another year may create an opportunity to recognize income from a traditional IRA. Later, Roth assets may become more useful. The point of withdrawal sequencing is not to create complexity for its own sake. It is to preserve choices and understand the tax consequences before money is moved.

Tax Diversification Can Create More Flexibility Later

Most investors understand the concept of investment diversification, but tax diversification receives less attention. If nearly all retirement savings are held in tax-deferred accounts, many future withdrawals may eventually create taxable income.

If assets are spread among accounts with different tax treatments, there may be more flexibility in deciding where retirement spending comes from. Understanding your tax-free options can be one part of that broader conversation. That does not mean everyone needs equal amounts in taxable, tax-deferred and Roth accounts. It means the tax character of retirement savings matters alongside the total account balance.

Tax Planning Should Support the Retirement Plan, Not Take It Over

The goal of retirement tax planning is not necessarily to pay the smallest possible tax bill every year. Sometimes paying more tax in one year may support a longer-term planning goal, while avoiding income to remain below a certain threshold may interfere with another priority.

A strategy that looks attractive strictly from a tax perspective may also create an investment, income or healthcare tradeoff. That is why Freedom Financial approaches this as tax-aware retirement planning rather than tax avoidance. Taxes are one part of the plan. They should be coordinated with the other parts rather than becoming the entire plan.

Review Your Retirement Tax Strategy With Freedom Financial

You cannot control future tax laws, but you may have some control over when income is recognized, which accounts retirement spending comes from and how tax decisions are coordinated with the rest of your plan.

At Freedom Financial, tax planning is considered alongside retirement income, investments, healthcare and legacy planning because decisions in one area can affect the others. The goal is not to provide tax advice, but to help identify the retirement-planning questions that may need to be coordinated with your tax professional.

If you are approaching retirement, or you have recently retired and have not yet reached RMD age, this may be a useful time to take a closer look at your tax picture. Call Freedom Financial at 205-988-0006 to start the conversation.

REVIEW YOUR TAX STRATEGY

Insurance products are offered through the insurance business Freedom Financial Group. Freedom Financial Group is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Freedom Financial Group are not subject to Investment Advisor requirements.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Freedom Financial Group is not affiliated with the U.S. government or any governmental agency.

This blog is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. 4525223 – 9/26