Making taxes a controllable risk in retirement

When most people think about retirement risks, they focus on threats like market volatility, outliving their money, and inflation. Yet one of the largest—and most controllable—risks retirees face is easy to overlook: taxes.

For many households, taxes will be the single largest expense in retirement after housing and healthcare. The difference between proactive tax planning and reactive tax filing can mean tens or even hundreds of thousands of dollars over a retirement lifetime. The key thing to remember is while tax rates themselves are outside your control, the timing and structure of your income often is not.

This is where thoughtful, forward-looking planning becomes invaluable. Completing your annual tax filing is important and necessary. Tax planning with an FSG advisor is critical for controlling risk in your retirement.

Retirement Tax Planning Is Really Income Planning

The most effective tax strategy in retirement is managing the timing of income across decades. Retirement often includes several distinct tax windows:

• Early retirement years (before Social Security and RMDs)
• The Social Security start period
• The RMD years

Each window presents opportunities to shape income in a more tax-efficient way.

For decades, retirement saving strategies have emphasized tax deferral. Traditional 401(k)s and IRAs allow contributions to reduce taxes today while postponing taxation until withdrawals occur in retirement. By retirement, many individuals have accumulated the majority of their savings in tax-deferred accounts. Required Minimum Distributions (RMDs), which begin in your early 70s, force withdrawals that can push taxable income higher than expected. These withdrawals can increase marginal tax brackets, trigger taxation of Social Security benefits, and raise Medicare premiums through IRMAA surcharges. The result is a retirement tax spike that many people may never have anticipated.

You can control that risk in the years between retirement and the start of required minimum distributions which may offer a rare opportunity to recognize income at relatively low tax rates. Strategic withdrawals from tax-deferred accounts or partial Roth conversions during these years can reduce future RMDs and smooth income across retirement thereby avoiding the undesirable spikes.

Roth Conversions as a Long-Term Tax Strategy

One of the most powerful planning tools available is the Roth conversion. By voluntarily moving funds from a traditional IRA into a Roth IRA, taxes are paid today in exchange for tax-free growth and tax-free withdrawals in the future. When executed thoughtfully, Roth conversions can help reduce future required minimum distributions, create a tax-free income source later in retirement, provide greater flexibility for managing taxable income and improve estate outcomes for your heirs.

The key is not converting everything at once, but rather filling lower tax brackets strategically over several years.

The Power of Tax Diversification

A well-designed retirement plan often includes assets across three tax categories:

• Tax-deferred accounts (Traditional IRAs, 401(k)s)
• Tax-free accounts (Roth IRAs, Roth 401(k)s)
• Taxable accounts (brokerage accounts)

This structure creates flexibility. Instead of being forced to withdraw from one type of account regardless of tax conditions, retirees can mix income sources each year to manage their tax bracket. For example, in a year where income is already high, withdrawals might come from a Roth account. In a lower-income year, tax-deferred withdrawals might make more sense. Flexibility is what turns taxes from a threat into a manageable variable for controlling risk in retirement.

Taxes: One of the Few Retirement Risks You Can Influence

Market returns cannot be controlled. Inflation cannot be predicted with certainty. Longevity is largely outside our influence. Taxes, however, fall into a different category.

While no one can predict future tax law with precision, individuals can control how and when income appears on their tax return. Through coordinated withdrawal strategies, Roth conversions, and thoughtful income timing, taxes can become a planned component of retirement rather than an unpleasant surprise.