By Brian Bloxom, ChFEBCSM
When imagining your retirement and dreaming about your next chapter, taxes probably aren’t the first thing you think of. Most people only focus on taxes once a year around filing season and then forget about them until the next deadline rolls around.
But if your goal is to reduce your tax burden, it’s crucial to keep taxes in view all year long, especially in retirement when you’re withdrawing from your savings rather than adding to them.
With that in mind, here are 5 tax-efficient retirement strategies to help you make the most of your income and preserve more of your hard-earned wealth.
1. Limit Your Exposure to the 3.8% Medicare Surcharge Tax
If you have a higher income and have investment income, you should be aware of the 3.8% Medicare surcharge tax. This tax applies to individuals and couples whose earnings exceed certain limits, meaning they contribute more to Medicare and help support the healthcare system for everyone. Here’s how it works:
If you’re single and make more than $200,000, or if you’re married and together make more than $250,000, this 3.8% tax may apply to you. These income limits are based on your Modified Adjusted Gross Income (MAGI)—that’s your usual income with some deductions added back in, such as tax-free foreign income, IRA contributions, and student loan interest.
The surcharge tax affects what you earn from investments such as stocks, bonds, and real estate (which includes interest, dividends, annuities, gains, passive income, and royalties). The IRS calculates this tax on whichever is less: your total net investment income or the amount by which your income goes over those $200,000 or $250,000 thresholds.
If your MAGI is near or above the thresholds, there are steps you can take to limit your exposure. First, you will want to review the tax efficiency of your investment holdings. It may be worthwhile to move less efficient investments into tax-deferred accounts and capitalize on tax-loss harvesting. Other moves you can make include investing in municipal bonds, which have tax-free interest, and taking capital losses to offset gains. Installment sales can spread out large gains and minimize your adjusted gross income, and real estate like-kind exchanges can also defer gains and their taxability.
2. Utilize Roth IRA Conversions
Distributions from Roth IRAs are tax-free, so they are a great tool to have in retirement. However, many people cannot contribute directly to a Roth IRA because of income limitations. Instead, you have to convert traditional IRA funds to a Roth account by paying the related income taxes. You can take advantage of low-income years, such as when you have stopped working but are not yet collecting Social Security, to convert your funds to a Roth IRA so you’ll have tax-free income later.
It is important to be mindful of tax brackets when you do conversions so you don’t inadvertently push yourself into higher tax rates. As we mentioned above, be sure to consider the impact of that 3.8% Medicare surcharge tax. Another crucial item to be aware of is the Income-Related Monthly Adjustment Amount (IRMAA), which increases your Medicare premiums if your income is above a certain limit. For 2025, if your Modified Adjusted Gross Income (MAGI) from 2023 is over $106,000 as an individual filer or $212,000 as a couple filing jointly, your premiums will increase. The higher your income, the higher the premium. This is where careful planning can help you manage these additional costs and make the most of your IRA conversions—without unexpected expenses.
3. Take Advantage of the 0% Rate on Long-Term Capital Gains
If the Medicare surcharge tax is irrelevant to you because your income is lower, then you may be able to take advantage of the 0% long-term capital gains rate. Profits on the sales of assets owned over a year are tax-free if your 2025 taxable income is below $48,350 for singles or $96,700 for married couples filing jointly. Once you exceed those thresholds, long-term capital gains are taxed at 15% until your taxable income for 2025 gets above $533,400 for singles or 600,050 for couples, at which point the tax rate goes up to 20%.
Claiming more deductions or making deductible IRA contributions can help keep your taxable income within the 0% capital gains tax range while also providing their usual tax benefits. However, you will want to be strategic about taking tax-free gains as they can raise your adjusted gross income and affect the taxability of your Social Security benefits. Also, taking those gains may incur state tax liabilities as well.
4. Be Strategic About Inherited IRAs
The IRS clarified rules for inherited IRAs in July 2024, addressing concerns about the 10-year rule introduced in 2020. Non-spousal beneficiaries must now take required minimum distributions (RMDs) annually if the decedent had already started RMDs. Additionally, the inherited IRA must be completely depleted by the end of the 10th year following the account holder’s death.
Key exceptions to the 10-year rule remain unchanged. These include surviving spouses, minor children, disabled or chronically ill beneficiaries, and those less than 10 years younger than the deceased. These groups can continue to use the stretch IRA approach, taking distributions over their life expectancy.
For beneficiaries of account holders who passed away before their RMD age (currently 73), there is more flexibility. In these cases, beneficiaries are not required to take RMDs in years 1 through 9, allowing for strategic tax planning during the 10-year period.
Being strategic about timing withdrawals is crucial to managing tax implications and minimizing overall tax liability.
5. Donate Effectively
If you are charitably inclined, one of the best ways to save on taxes is through donations. You may be able to get a tax deduction on donations up to 60% of your adjusted gross income. If you have appreciated assets, the tax break could be even greater. When you donate an appreciated asset that you have owned for over a year, such as stocks, to a charity, you do not have to pay capital gains taxes on the appreciation, but you still get to claim the full value for your deduction. This allows you to avoid the capital gains tax altogether. If your assets have declined in value, it is best to sell them yourself and donate the proceeds so you can claim the loss when filing your taxes.
Another strategy to consider is the use of a charitable lead annuity trust or a donor-advised fund, which allow you to take an up-front write-off that can help offset other income, such as from a Roth IRA conversion or withdrawal from an inherited IRA.
Supporting You With Tax-Efficient Retirement Strategies
There are many ways to reduce your tax burden in retirement, but implementing tax-efficient retirement strategies requires careful planning and a deep understanding of your unique financial situation. With so many moving parts, it’s important to consider timing, income sources, and long-term goals to make the most of your options.
The good news? You don’t have to figure it out on your own. Working with an experienced financial advisor can help you navigate the details and align your strategy with your vision for the future.
If you don’t already have a trusted advisor, I’d welcome the opportunity to connect. Let’s talk about how our team at Sentinel Wealth Partners can help you create a tax-smart plan for the retirement you deserve.
Take the first step toward your ideal retirement by calling our office at 703-832-0164, sending an email to brian@sentinelwealthpartners.com, or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.