This article was published in the August 2025 issue of the Traverse City Business News and can be read in its entirety below. Black Walnut Wealth Management contributes articles and is featured in various media outlets.
Effective tax planning is essential for those approaching or already in retirement, as numerous tax pitfalls can erode wealth if not carefully managed. Without proper planning, retirees may end up paying more to the IRS than necessary.
The most impactful tax strategies are often implemented before claiming Social Security benefits or beginning required minimum distributions (RMDs) since both are taxed as ordinary income and can push individuals into higher tax brackets.
Tax Planning Is a Long-Term Approach
To maximize tax strategies, it’s wise to approach tax planning as a multi-year endeavor. The goal here is not only to lower taxes in the short term, but throughout the retirement years and afterward.
Start With Lowering Current Taxes
Prior to retirement, take advantage of accumulation-efficient tax strategies, including:
- Maximize your retirement contributions: In 2025, 401(k) and other employer retirement plans allow an additional “catch-up” contribution of $7,500 on top of the normal $23,000 payroll deferral maximum. Those aged 60-63 may also contribute an additional $3,750 as a “super catch-up.”
- Open and invest in a health savings account (HSA): An HSA offers triple-tax advantages for future medical expenses. Contributions are income-tax-deductible, growth in the account is tax-deferred, and distributions for qualified medical expenses are tax-free.
Implement Retirement Tax Strategies
Be “tax-aware” in all aspects of your finances year-round, not just at tax time.
Make Your Investments Tax-Efficient
Optimize tax efficiency in your taxable investment accounts.
- Utilize low-cost, tax-efficient exchange-traded funds (ETFs) and mutual funds.
- Minimize trading that may generate high-tax short-term investment gains within taxable accounts.
- Use tax-loss harvesting strategies to lower capital gains tax liability each year and consider tax-effective income investments, such as municipal bonds, for your taxable portfolios.
- If your AGI is high enough, all investment income above a certain limit will be subject to an additional 3.8% Medicare surcharge as well. Another reason to coordinate tax planning within your investments.
Consider Roth IRA Conversions
Roth IRA conversions are a powerful tax strategy for turning part or all of a tax-deferred IRA into a tax-free source of retirement income. You’ll pay income taxes on the amount converted, but once in the Roth, the funds can grow and be withdrawn tax-free—either during your lifetime or by your heirs. Because the converted amount is treated as ordinary income, it’s important to plan carefully and coordinate with your overall tax picture. This strategy can be especially beneficial for those retiring early and not yet collecting Social Security benefits.
Be Mindful of Medicare Premium Surcharges
Medicare Part B and D premiums are based upon prior adjusted gross income (AGI). The added surcharge is called IRMAA (the “income-related adjustment amount”) and can boost Medicare premiums paid each year. For 2025, the first threshold where the surcharge is assessed is above $106,000 AGI for single taxpayers and $212,000 for married couples. The surcharges increase rapidly thereafter. As an example, the IRMAA more than doubles from $185 per spouse per month for joint filers under $266,000 AGI to $406.90 once the joint AGI reaches $336,000.
Use Charitable Deductions to Lower Taxable Income
Philanthropic strategies remain an effective method to lower taxable income in retirement. Not only might high-income retirees lower their potential IRMAA surcharge, but making deductible charitable bequests can also offset RMDs for traditional IRAs that begin at age 73 and continue for your lifetime afterward. Two common strategies:
- Qualified charitable deductions (QCDs): QCDs are a smart way for retirees who already give to charity to make their donations more tax-efficient. By designating a charitable cause to directly receive your RMD, you receive an immediate tax break that offsets the tax liability of the RMD.
- Donor-advised funds (DAFs): DAFs are charitable investment accounts that allow an immediate tax deduction for contributions of cash or, better yet, appreciated stock. Earnings grow tax-free and the donor may designate which charitable cause will receive donations, either currently or in the future.
Engage With the Right Professional
Smart tax planning helps retirees keep more of their wealth by reducing unnecessary taxes and avoiding common pitfalls. Coordinating strategies like Roth conversions, tax-efficient investing, and charitable giving—especially before claiming Social Security or starting RMDs—can lead to lasting financial benefits throughout retirement.
