Managing Taxes in Retirement

Managing taxes in retirement can be more complicated than during your working years, when your employer typically withholds payroll taxes throughout the year. It's not uncommon for retirees to have multiple sources of income — Social Security, pension, Traditional and Roth IRAs, rental income, and taxable investment accounts. Each has unique rules and tax consequences.

Vanguard research estimates that tax-efficient withdrawal strategies and other planning techniques may add up to approximately 3% in net value over time, depending on your circumstances.

Source: Vanguard, Putting a value on your value: Quantifying Vanguard Advisor's Alpha, Vanguard Investment Advisory Research Center

To effectively manage taxes in retirement, it helps to understand the tax treatment of your different financial instruments.

Tax Treatment by Account Type

Tax rates shown reflect current U.S. tax law as of 2026 and are subject to change.

Taxable Investment Accounts

Taxable investment accounts add tax diversification and additional flexibility to your retirement income strategy.

Tax rates shown reflect current U.S. tax law as of 2026 and are subject to change.

Create a Retirement Spending Plan

The most important tax management strategy is creating a retirement spending plan. Once you transition to retirement, it's time to start drawing from your retirement savings. But if you have multiple sources of income, the question becomes: which accounts do we pull from, and how much should we withdraw?

A retirement spending plan addresses those two questions while keeping current and future tax obligations in mind. There are two core withdrawal strategies to consider.

Strategy 1: Conventional Withdrawals

Withdraw from your taxable investment account first, allowing your tax-deferred and tax-free accounts to continue growing.

This approach maximizes tax-deferred growth by withdrawing from taxable accounts first. Since you're delaying withdrawals from accounts taxed as ordinary income, you may benefit from lower capital gains taxes early in retirement.

Keep in mind: if you're in a high tax bracket, delaying Traditional IRA or 401(k) withdrawals can lead to larger Required Minimum Distributions later. Similarly, if you have substantial pension income alongside Traditional 401(k) or IRA savings, this strategy may only defer — not reduce — your tax burden.

Strategy 2: Proportionate Withdrawals

If you achieved solid tax diversification during your saving years, the proportionate withdrawal strategy draws from all three tax layers in the same year — aiming to keep taxes at a minimum throughout retirement.

Asset Location

If you carry a taxable investment account into retirement, choosing where your investments live can reduce your tax bill throughout retirement.

Taxable bonds pay interest (coupon payments) periodically — typically semi-annually. Holding them in a taxable account adds to your income tax liability as each payment arrives. Common stocks and equity ETFs, by contrast, tend to pay lower dividends but carry a higher chance of capital appreciation — and open the door to tax loss harvesting.

An asset location strategy keeps taxable bonds inside tax-deferred accounts, giving coupon payments a tax-deferred treatment. Common stocks and equity ETFs are held in taxable accounts, where more favorable capital loss rules apply.

Create a Tax-Efficient Investment Portfolio

Asset location addresses where your investments live — but not what you hold. Investment products are structured differently, resulting in different tax consequences. If you have a taxable account heading into retirement, it's worth examining the individual securities in your portfolio.

Exchange Traded Funds (ETFs)

ETFs are a low-cost, tax-efficient way to add diversification to your portfolio. Most are designed to track the performance of a specific index — such as the S&P 500, Russell 2000, or Nasdaq 100. Compared to mutual funds, ETFs are generally more tax-efficient.

Direct Indexing

Direct indexing allows you to own the individual stocks within an index rather than holding an ETF or mutual fund. Instead of owning an S&P 500 ETF, you hold all 500 stocks directly at their respective weights.

This enables more precise tax loss harvesting. To harvest a loss in an S&P 500 ETF, you must sell your entire position — reducing exposure to all 500 stocks. By owning the stocks outright, you can harvest losses on the underperformers and offset gains on the winners, even if the index as a whole has appreciated.

Manage Required Minimum Distributions (RMDs)

For anyone holding a tax-deferred account in retirement, forced distributions begin at age 73 or 75. Remember — you've only deferred your tax liability, not eliminated it. Any distribution is added to your taxable income for that year.

Retirees have a few options to reduce the tax burden that RMDs create.

Roth Conversions

One way to manage future RMD tax liability is to move tax-deferred dollars into a tax-free account before distributions begin. While Roth conversions don't eliminate your tax burden, they let you decide when to pay — today rather than in the future.

Use caution before executing a Roth conversion in a year when ordinary income is already high. A large conversion can trigger a significant tax payment that year, and the tax payment itself reduces your portfolio's overall value — adding to sequence of return risk.

Qualified Charitable Distributions (QCDs)

For those who are charitably inclined, QCDs allow you to eliminate all — or a portion of — the tax burden from your RMDs by transferring funds directly from your IRA to a qualified charity. QCDs count toward satisfying your RMD for the year, as long as the following rules are met:

• Age: You must be 70½ or older to make a QCD.
• Contribution limit: The most an individual can donate in a calendar year across all charities is $111,000 (as of 2026). If you file jointly, your spouse may also donate up to $111,000 from their IRA.
• Eligible accounts: Traditional IRAs, rollover IRAs, inherited IRAs, SEP IRAs (inactive plans only), and SIMPLE IRAs (inactive plans only)**.

QCDs can also prevent RMDs from pushing you into a higher tax bracket. It's important to note: you don't keep any of this money — it is a direct donation to a 501(c)(3) charity.

Putting It Together

Navigating the tax treatment of retirement accounts and investments is complex, and tax laws change over time. The optimal strategy will vary based on your individual circumstances — income sources, account mix, bracket, charitable intent, and more.

At Voyage, we work with pre-retirees to develop retirement income strategies that account for tax efficiency, withdrawal sequencing, and long-term investment planning. After building an initial retirement plan, we monitor and update strategies as tax laws and personal circumstances evolve.