How Retirement Planning Affects Your Tax Strategy
Tax planning and retirement planning usually go hand in hand. Quite simply, minimizing tax liability during working years maximizes savings for retirement years. Taxpayers can entrust their money to the government and hope that the government will take care of them in retirement. Or they can keep that money and control their destinies.
Retirement plans often have hidden financial implications that only a certified tax professional is fully aware of. A professional partner helps both wealthy and non-wealthy individuals grow their retirement savings year by year and avoid unpleasant surprises later. DIY tax planning, which is mainly filling out forms, cannot substitute for the advice of a professional.
What is Retirement Planning?
Retirement planning involves preparing financially for life after work. This process includes estimating future expenses, determining sources of income, investing in retirement accounts, and managing tax liabilities. Effective planning helps ensure that individuals maintain a desired lifestyle after retirement by optimizing all financial resources.
Retirement and tax planning start with the right savings vehicles, which offer significant tax benefits, either upfront or during withdrawal:
- Traditional IRA and 401(k): Contributions to these plans, as well as other long-term savings plans, such as prepaid college tuition plans, are often tax-deductible, reducing taxable income in the year they are made, therefore reducing tax liability year after year. Earnings grow tax-deferred, and withdrawals are ordinary income for tax purposes. 73 is usually the RMD (Required Minimum Distributions) age.
- Roth IRA and 401(k): For tax purposes, Roth retirement plans are the opposite of traditional plans. The government receives its money up front instead of later. Account owners make contributions with after-tax dollars. Earnings and qualified withdrawals are tax-free after age 59½ and five years of account ownership. Roth plans are not subject to RMDs.
A tax professional should review your situation and help you determine if a traditional or Roth savings account is best. As a side note, converting conventional retirement accounts to a Roth IRA involves paying taxes now, but provides tax-free withdrawals later.
Taxable Investment Accounts
Retirement and tax planning start with these savings accounts. Planning does not end with these accounts. Taxable brokerage accounts are effective retirement accounts in many cases. Owners don’t pay taxes on capital gains until they sell assets. Usually, owners sell assets in retirement, when their incomes (and tax brackets) are lower.
Furthermore, qualified dividends and long-term capital gains are taxed at preferential rates (0%, 15%, or 20%, depending on income). Additionally, loss harvesting offsets capital gains, further reducing tax liability.
HSAs (Healthcare Savings Accounts) offer significant tax and retirement advantages. Most taxpayers get a triple HSA tax benefit. Contributions are deductible, growth is tax-free, and qualified withdrawals for medical expenses are tax-free.
Estate Planning and Taxes
Inherited retirement accounts have different tax rules depending on the type of account and the relationship to the deceased. For example, the SECURE Act requires most non-spouse beneficiaries to withdraw inherited IRA assets within ten years.
We should also mention gifts. For 2025, the annual gift tax exclusion is $19,000 per person ($38,000 for couples). The lifetime exemption is $13.99 million in 2025. Gifts to qualified charities and spouses are not taxable, regardless of the amount. So are tuition and medical expenses paid directly to the provider on behalf of a third person.
Effective Tax Planning Increases Retirement Savings
For more information about these and other credits and deductions, please contact us online or call 610-933-3507.