10 Ways to Reduce Taxes on Your Retirement Accounts

By minimizing the amount of taxes you pay in retirement, you can preserve more of your savings. There are a number of ways to reduce or avoid taxes on certain sources of retirement income. Getting familiar with how different types of retirement income are taxed can help with developing a strategy for reducing the amount you owe.

You can also talk to a financial advisor about creating a tax-efficient retirement savings plan.

Understanding Taxation of Retirement Income

With a few exceptions, most retirement income is subject to tax. How tax applies can depend on the type of income in question.

• Traditional 401(k) plans and IRAs: Traditional 401(k) plans and traditional IRAs are funded with pre-tax dollars. That means distributions of pretax contributions and earnings are generally subject to ordinary income tax. The same rules apply for other workplace plans, including 403(b) plans and governmental 457 plans, as well as SEP and SIMPLE IRAs. You do, however, get the benefit of tax-deductible contributions with these accounts. RMDs generally begin at age 73. If you fail to take the full RMD, the shortfall can be subject to a 25% excise tax, though this may fall to 10% when corrected within the applicable period. Early withdrawals from these plans made before age 59 ½ can also result in a 10% tax penalty.
• Roth 401(k) plans and Roth IRAs: Roth 401(k) plans and Roth IRAs are funded with after-tax dollars, so you don’t get any type of deduction for contributions. However, qualified withdrawals are tax-free. Additionally, Roth IRAs don’t obligate you to take RMDs. However, the early withdrawal penalty can apply to Roth 401(k) and IRA plans. You can, however, withdraw original contributions to a Roth IRA at any time without a tax penalty.
• Social Security benefits: Social Security benefits may be taxable, depending on your overall income and filing status. The IRS considers one-half of your Social Security benefits, plus other income and tax-exempt interest, when determining how much may be taxable. Depending on your combined income and filing status, up to 50% or 85% of your benefits may be included in taxable income.
• Pension and annuity income: Payouts from pensions and annuities can increase your taxable income. Pension and annuity benefits from qualified retirement plans are tax-deferred, meaning distributions are taxed as ordinary income when you retire. There’s an exception for distributions from designated Roth accounts. If you purchase an annuity from an annuity company, your tax liability depends on how it was funded. If you purchased the annuity with pre-tax dollars, withdrawals are taxed as ordinary income. Taxes only apply to the earnings from annuities funded with after-tax money.
• Taxable investment accounts: Taxable investment accounts are subject to capital gains tax. Whether you pay the short-term capital gains tax rate, or the more favorable long-term rate, depends on how long you hold investments in your account before selling them. Assets held for one year or less generally produce short-term gains taxed at ordinary income rates, while assets held for more than one year can qualify for long-term capital gains rates.

How Can I Avoid Paying Taxes on Retirement Income?

Minimizing or avoiding taxes on retirement income can take some planning, but it can be well worth it to preserve more of your wealth. Here are some strategies to consider:

1. Fund Roth accounts

As mentioned, income from Roth accounts isn’t subject to income tax when withdrawals are qualified, since you’re contributing after-tax dollars. If you have the option to choose a Roth 401(k) at work or you’re eligible to save in a Roth IRA, you might consider doing so to reduce taxation later.

For 2026, the combined annual contribution limit for traditional and Roth IRAs is $7,500, or $8,600 if you’re 50 or older. ¹ Roth IRA contributions begin to phase out at the following modified adjusted gross income (MAGI) levels:

• $153,000 to $168,000 for single filers and heads of household
• $242,000 to $252,000 for married couples filing jointly
• $0 to $10,000 for married taxpayers filing separately who lived with their spouse during the year

Once your MAGI reaches the upper end of the applicable range, you generally cannot make a contribution to a Roth IRA account.

2. Convert to a Roth account

If you’re not eligible to contribute to a Roth IRA because of your income, there’s a workaround you might consider. You could first contribute funds to a traditional IRA, then convert them to a Roth account.

There is a tax consequence here, since you’d have to pay ordinary income tax on the converted amounts. That’s because those amounts have not already been taxed at the time you move those assets to a Roth IRA. However, you’d reap tax benefits over the longer term as qualified withdrawals would be tax-free.

A conversion can be particularly useful during a year when your taxable income is lower than usual. Converting increases taxable income for that year, so the amount you convert can affect your marginal tax bracket and other income-based tax provisions.

3. Roll traditional IRA funds to an HSA 

Health savings accounts (HSAs) allow you to save money for health care expenses on a tax-advantaged basis. Contributions are tax-deductible, growth is tax-deferred and withdrawals are tax-free when used for qualified medical expenses. If you’re HSA-eligible, you can generally make a one-time qualified HSA funding distribution directly from a traditional or Roth IRA to an HSA. The transfer counts toward your HSA contribution limit for the year and is subject to additional eligibility and testing-period rules.

For 2026, the HSA contribution limit is $4,400 for self-only coverage and $8,750 for family coverage. ²

You could then make tax-free withdrawals for health care in retirement. If you stay healthy, you could withdraw money from your HSA for any other purpose. You’d just pay ordinary income tax on distributions. Keep in mind that if you’re under age 65 and make a non-qualified withdrawal, you’d owe a 20% tax penalty along with income tax. So, it’s important to choose your timing for non-qualified distributions carefully.

4. Make qualified charitable distributions (QCDs)

If you have a traditional IRA and are 70 ½ or older, you could make qualified charitable distributions (QCDs) directly to eligible charities. You can exclude a QCD from taxable income, and it can count toward your RMD once those begin.

The annual QCD limit is indexed for inflation. As such, retirees should check the applicable limit for the year in which the distribution is made. This strategy can be particularly useful for retirees who would otherwise have to include an IRA distribution in taxable income.

Taking RMDs on time is important. The penalty for a shortfall is generally 25% of the amount that was not distributed as required. This can potentially fall to 10% if you correct the mistake within the applicable period.

5. Invest in tax-exempt bonds

Bonds can provide income in retirement, and some of them can offer tax benefits. Municipal bonds, for instance, are generally exempt from federal income tax. In some cases, they may be exempt at the state level as well.

Tax-exempt interest does not necessarily make a municipal bond the better investment, though. Comparing its after-tax yield with taxable alternatives can help determine which produces more income after federal and state taxes.

6. Choose a tax-friendly state

In addition to federal income tax, it’s also important to consider how state taxes might impact retirement income. Moving to a state with no income tax or that doesn’t tax Social Security benefits could yield some tax savings.

Of course, it’s a good idea to weigh the overall cost of living in a new state as well. It wouldn’t make much sense to save on taxes only to then redirect that money to housing or other expenses.

7. Opt for direct rollovers

Rolling money from one retirement account to another is something you might consider if you want to consolidate savings or simply keep your money in a different place. Choosing to do so through a direct rollover can help to minimize negative tax consequences.

With a direct rollover, funds move from one account to the other without any money ever touching your hands. In contrast, you were to request an indirect rollover, you would receive a check. You’d then have 60 days to deposit the amount into the new account.

Missing the deadline can cause the distribution to become taxable unless an exception or waiver applies. Indirect rollovers from employer plans can also be subject to mandatory federal income tax withholding, which can complicate moving the full account balance.

8. Consider a buy-and-hold strategy

If you’re investing in stocks, mutual funds or other securities through a taxable brokerage account, it’s important to be mindful of capital gains. From a tax perspective, holding an investment for more than one year can allow a gain on a later sale to qualify for long-term capital gains rates.

That said, it’s important to consider taxes alongside investment risk, diversification and your reasons for owning or selling the asset.

9. Harvest losses

Tax-loss harvesting allows you to offset capital gains with capital losses. You can use losses to offset all of your gains for the year, and up to $3,000 in ordinary taxable income if your total losses exceed your gains. Harvesting losses isn’t an appropriate strategy for 401(k) plans or IRAs, but it could result in tax savings if you’re investing for retirement in a taxable brokerage account.

If you do attempt tax-loss harvesting, pay attention to the wash-sale rule. Selling an investment for a loss and purchasing the same or a substantially identical security within the applicable period can prevent you from claiming the loss immediately.

10. Time withdrawals strategically

The timing of retirement account withdrawals can have a significant impact on how much tax you owe. Spreading withdrawals across multiple years, taking distributions during lower-income years or completing Roth conversions before RMDs begin can help manage your taxable income. The appropriate approach depends on your tax bracket, account balances, spending needs and other income sources.

How Different Retirement Withdrawals Can Change Your Tax Bill

One practical way to reduce retirement taxes is to decide which accounts to draw from each year rather than automatically withdrawing from the same account. Traditional retirement accounts, Roth accounts and taxable brokerage accounts can produce different tax results, giving retirees some flexibility over the amount of taxable income they recognize.

For example, assume you need an additional $40,000 for annual spending. Taking the full amount from a traditional IRA would generally add $40,000 of taxable income. A qualified $40,000 Roth IRA withdrawal, by comparison, would not generally increase federal taxable income. Meanwhile, selling investments from a taxable brokerage account could create a capital gain only on the portion of the sale that exceeds your cost basis rather than making the entire $40,000 taxable.

You can also withdraw funds from multiple different accounts. Taking part of your spending money from a traditional IRA and the rest from a Roth or taxable account may help limit the amount of ordinary income recognized in a particular year. This can be useful when you are trying to stay within a targeted tax bracket or manage other income-related costs.

Social Security adds another consideration because additional taxable income can cause a larger portion of your benefits to become taxable. Later in retirement, RMDs can reduce your ability to control taxable withdrawals from traditional retirement accounts. Reviewing these sources together before taking distributions can help you decide where each year’s spending money should come from.

Bottom Line

Reducing taxes on your retirement accounts often comes down to thoughtful planning, smart timing and the right mix of account types. Strategies like managing withdrawals carefully, taking advantage of tax-advantaged contributions and planning for RMDs can help preserve more of your savings over time. Roth accounts, QCDs, tax-loss harvesting and strategic withdrawals can also affect how much income becomes taxable in a given year. Because the result depends on your accounts, income and tax situation, the same strategy will not produce the same savings for every retiree.

Retirement Planning Tips

• Creating an estimated retirement budget can give you a better idea of whether you’re on track with your current savings rate and what adjustments you might need to make, if any. You can have a financial advisor look over your plan and offer suggestions for improving it, if you have one. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Choosing the right age to retire can influence your tax situation, as it may determine when you begin drawing down your savings. Age also matters when deciding when to take Social Security benefits.

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