If you are like most Americans, the majority of your retirement savings sit in tax-deferred accounts. A 401(k). A traditional IRA. Maybe a 403(b) or a SEP IRA.
You got a tax break when you contributed. That was the trade-off. But every dollar you contributed pre-tax is a dollar the IRS will tax when you withdraw it — at whatever rate Congress sets at that time.
For most retirees, the total tax bill over a 20- to 30-year retirement is the single largest expense they never planned for.
Consider a retiree with $1 million in a traditional 401(k). If they withdraw $50,000 per year — and tax rates stay at current levels — they will pay roughly $5,000 to $8,000 in federal income tax each year. Over 30 years, that is $150,000 to $240,000 in taxes.
But most people do not stay in the same bracket. Social Security, pensions, and investment income stack on top of IRA withdrawals, often pushing retirees into higher brackets than they expected. Add in Required Minimum Distributions starting at age 73, which force larger withdrawals, and the tax bill can easily exceed $400,000 over a retirement.
That is money you earned, saved, and invested — going to the government instead of funding your retirement.
A Roth conversion allows you to move money from a traditional IRA or 401(k) into a Roth account. You pay income tax on the amount converted today, but every dollar grows tax-free from that point forward. Withdrawals in retirement are tax-free.
The strategy works best when you have a "low-income year" — perhaps between retiring and starting Social Security, or after a market downturn when your account balance is lower. Converting during these windows lets you pay taxes at a lower rate.
Key considerations:
Yes — and this is where most retirement plans miss an opportunity. There are legitimate strategies for generating retirement income that is partially or fully tax-free:
Roth accounts are the most straightforward. Contributions are after-tax, growth is tax-free, and qualified withdrawals are tax-free. The challenge is that most people have limited Roth savings because they prioritized the upfront tax break of traditional accounts.
Fixed indexed annuities offer another path. Interest credited in a fixed indexed annuity grows on a tax-deferred basis. When structured as part of an income strategy, the income stream can be substantially more tax-efficient than withdrawals from a traditional IRA because the return of principal is not taxed.
One of the most effective strategies is simply managing which accounts you withdraw from and when. Think of your retirement accounts as tax buckets:
By strategically withdrawing from these buckets in different years, you can keep your taxable income in lower brackets, reduce or eliminate taxes on Social Security benefits, and minimize the impact of RMDs.
"The goal is not to avoid taxes entirely. The goal is to control when you pay them and at what rate. That alone can add years of income to your retirement."
At Everguard Advisors, we look at taxes through the ERFT framework: Eliminate Risk, Fees, and Taxes. For taxes specifically, this means:
The right tax strategy depends on your specific numbers: account balances, expected retirement timeline, Social Security claiming strategy, and overall income needs. There is no one-size-fits-all answer.
In 15 minutes, we will map your tax exposure and identify strategies to keep more of what you saved.
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