How to Minimize Taxes for Early Retirement

Taxes can drain your retirement savings faster than you think. But smart planning can help you keep more of your money. Here’s the gist:

• Use Tax-Advantaged Accounts: Max out contributions to 401(k)s, IRAs, and Roth accounts during your working years. Each has unique tax benefits - learn how to balance them.
• Plan Withdrawals Strategically: Start with taxable accounts, then move to tax-deferred accounts, and save Roth accounts for last. This order can lower your tax burden.
• Leverage Advanced Tactics: Consider Roth conversions, tax-loss harvesting, and even relocating to low-tax states. These strategies can save thousands over time.

Tax-Advantaged Accounts Explained

Knowing how tax-advantaged accounts work can make a big difference when it comes to reducing retirement taxes. Each type of account offers unique benefits, and understanding when and how to use them can help you save more in the long run.

Tax-Deferred Accounts: 401(k) and Traditional IRA

Tax-deferred accounts, like 401(k)s and traditional IRAs, are essential tools for retirement planning. These accounts let you contribute pre-tax dollars, giving you an immediate tax break on your contributions. Once the money is in the account, it grows without being taxed - until you withdraw it. At that point, the withdrawals are taxed as ordinary income.

For 2025, the contribution limits are generous:

• Up to $23,500 for a 401(k) (plus an extra $7,500 if you're 50 or older).
• For traditional and Roth IRAs, the limit is $7,000 (with an additional $1,000 for those 50 and up).

These accounts work best for high-income earners who expect to be in a lower tax bracket during retirement. But there’s a downside: all withdrawals are taxed as ordinary income, which could push you into a higher tax bracket if you’re not careful.

"Many people are seeking ways to help reduce the taxes that they will pay over the course of their retirement. Timing is critical, so how and when you choose to withdraw from various accounts - workplace savings plans, IRAs accounts, and brokerage or savings accounts - can impact your taxes in different ways."

• Andrew Bachman, CFA®, CFP®, director of financial solutions at Fidelity Investments

Withdrawals from tax-deferred accounts can also affect Social Security and Medicare calculations, making strategic planning even more important. Once you've maximized the benefits of these accounts, Roth accounts can provide tax-free income in retirement.

Roth Accounts: Tax-Free Growth and Withdrawals

Roth accounts flip the script compared to traditional accounts. You contribute after-tax dollars, but in return, qualified withdrawals - including both contributions and investment growth - are entirely tax-free.

Roth accounts are especially valuable for long-term tax planning. Ali Hashemian, CEO of Kinetic Investment Management, highlights why they’re becoming more important:

"The conventional belief that taxes will be lower in retirement is outdated. The modern retiree spends more money and generates more income than previous generations did. Also, the tax environment may be worse for retirees in the future than it is today. These are just some of the reasons that tax-exempt strategies may be advantageous."

For 2025, Roth IRA contributions are phased out at higher income levels. Full contributions are allowed if your modified adjusted gross income (MAGI) is under $150,000 for single filers or $236,000 for married couples filing jointly.

Roth accounts are particularly useful for early retirees. Since withdrawals don’t count as taxable income, they won’t push you into a higher tax bracket or impact other tax calculations. This makes them a powerful tool for managing taxes in retirement.

Another strategy to consider is Roth conversions. If you have years with lower income - perhaps after retiring but before starting Social Security - you can convert funds from traditional accounts to Roth accounts. While you’ll pay taxes on the converted amount, future withdrawals will be tax-free, potentially saving you a lot in the long run.

Taxable Brokerage Accounts

Taxable brokerage accounts may not offer upfront tax advantages, but they shine when it comes to flexibility. There are no limits on contributions, no age restrictions for withdrawals, and no required minimum distributions.

In these accounts, dividends and interest are taxed when earned, and you’ll pay capital gains taxes when you sell investments for a profit. Long-term capital gains, however, are taxed at favorable rates, making this a tax-efficient option for many retirees.

For 2025, here’s how long-term capital gains are taxed:

• 0% for single filers with taxable income up to $48,350.
• 15% for incomes between $48,351 and $533,400.

Married couples can take advantage of even more tax-free income. By combining the standard deduction ($30,000) with the 0% capital gains bracket ($96,700), they can enjoy up to $126,700 of tax-free income annually.

Take Bob and Mary Jones, for example. They retired at the end of 2024 with $80,000 in savings, $1.4 million in taxable brokerage accounts, $530,000 in Roth IRAs, and $2.3 million in traditional 401(k)s. They need $120,000 annually to cover expenses. In 2025, they could withdraw $25,000 from Roth IRAs (tax-free), $30,000 in dividends/interest (ordinary income), and $90,000 in long-term capital gains. Thanks to the standard deduction and 0% capital gains rate, their federal income tax bill would be zero.

When using taxable accounts, asset location is key. Investments that produce high taxable income, like bonds, are better suited for tax-advantaged accounts, while tax-efficient options like index funds and ETFs work well in taxable accounts.

Account Type	Tax Treatment	Best For	Key Considerations
Tax-Deferred (401k, Traditional IRA)	Pre-tax contributions; taxed as ordinary income on withdrawal	High earners expecting lower retirement tax rates	Withdrawals increase taxable income, affecting other calculations
Roth (Roth IRA, Roth 401k)	After-tax contributions; tax-free qualified withdrawals	Those expecting higher future tax rates or seeking tax flexibility	Income limits apply; no impact on tax calculations
Taxable Brokerage	No upfront tax benefits; capital gains and dividends taxed	Flexibility; early retirement bridge	Favorable long-term capital gains rates; asset location matters

Marguerita Cheng, CEO of Blue Ocean Global Wealth, underscores the importance of spreading your savings across different account types:

"I actually think clients often load up too much on tax-deferred accounts. Just as we preach investment diversification, tax diversification is just as important. It's important to realize tax savings today. However, there is something to be said for tax-free or tax-exempt retirement savings. The combination of dollar-cost averaging, time value of money, and tax-free growth is a powerful trifecta."

Withdrawal Order to Reduce Taxes

The sequence in which you withdraw funds from your accounts can significantly affect your tax bill during retirement. While there's no universal strategy, understanding the traditional approach and newer methods can help you make smarter choices about your retirement income. Below, we break down the phased approach: starting with taxable accounts, moving to tax-deferred accounts, and saving Roth accounts for last.

Start with Taxable Accounts

The traditional withdrawal strategy begins with taxable accounts. This method offers several advantages, particularly for early retirees who may find themselves in lower tax brackets.

When you withdraw from taxable accounts, you're primarily dealing with capital gains taxes, which are often lower than ordinary income taxes. For example, in 2025, single filers with taxable income up to $48,350 pay 0% on long-term capital gains, while those earning between $48,351 and $533,400 are taxed at just 15%. Compare this to ordinary income tax rates, which can quickly climb to 22% or higher for middle-income earners.

Let’s look at an example: Jamie, a single filer in 2025, has $26,925 in ordinary income and $5,000 in long-term capital gains. After applying the $15,000 standard deduction, only $11,925 of her income is taxed at 10%, while her $5,000 in capital gains is taxed at 0%. Her total tax bill? Just $1,192. Now compare that to David, who earns $63,350 in ordinary income and $5,000 in long-term capital gains. After the standard deduction, his income pushes him into the 15% capital gains bracket, resulting in a total tax bill of $6,161 - more than five times Jamie's.

David Koh, managing director and senior investment strategist at Merrill and Bank of America Private Bank, highlights the importance of flexibility:

"For some people, it will make sense to consider tapping taxable accounts first, then tax-deferred and finally tax-free. But, depending on your circumstances, this order may not be right for every person."

Another benefit of starting with taxable accounts is that it allows your tax-advantaged accounts to keep growing. Since these accounts often offer better tax treatment, letting them grow longer can enhance your wealth over time - especially if you expect substantial capital gains from your investments.

Once you've optimized withdrawals from taxable accounts, the next step is to focus on tax-deferred accounts.

Move to Tax-Deferred Accounts

After exhausting your taxable accounts, tax-deferred accounts like 401(k)s and traditional IRAs become your next source of income. These accounts benefit from tax-deferred growth, but withdrawals require careful planning to avoid unnecessary tax penalties and higher tax rates.

The main drawback of tax-deferred accounts is that withdrawals are taxed at your ordinary income rate, which is often higher than the capital gains rates applied to taxable accounts. To minimize your tax burden, aim to stay in lower tax brackets when withdrawing from these accounts.

For early retirees, there’s an added challenge: the 10% early withdrawal penalty for distributions before age 59½. However, there are exceptions to this rule. The Rule of 55 allows penalty-free withdrawals from your most recent employer’s 401(k) if you leave your job in or after the year you turn 55. Another option is Substantially Equal Periodic Payments (SEPP), which lets you take penalty-free withdrawals from an IRA or 401(k) before age 59½, though it requires a fixed withdrawal schedule for at least five years or until you turn 59½.

Joni Meilahn, Vice President and Senior Product Manager at U.S. Bancorp Investments, stresses the importance of understanding these rules:

"Simply put, if you don't follow the rules for qualified retirement plans, you'll be penalized. That's why it's critical to understand these rules before withdrawing money from a retirement plan."

Traditional withdrawals from tax-deferred accounts can also lead to a "tax bump" - a sudden increase in your tax burden. This is why some advisors recommend alternative strategies to smooth out taxes over time.

With taxable and tax-deferred accounts addressed, the final step is to preserve your Roth accounts for maximum tax efficiency.

Use Roth Accounts Last

Roth accounts are typically the last to tap into, and for good reason. Withdrawals from Roth accounts are entirely tax-free, giving you maximum flexibility without affecting your tax calculations.

By leaving Roth accounts untouched for as long as possible, you allow them to grow tax-free. Unlike traditional accounts, Roth IRAs don’t require minimum distributions during your lifetime, making them an excellent tool for passing wealth to heirs.

That said, the traditional withdrawal order isn’t always ideal for everyone. A proportional withdrawal strategy - drawing funds from all account types based on their proportion of your total savings - can sometimes yield better results.

Take Joe, a 62-year-old retiree with $200,000 in taxable accounts, $250,000 in traditional 401(k)s/IRAs, and $50,000 in a Roth IRA. He needs $60,000 annually and receives $25,000 from Social Security. Using the traditional withdrawal approach (taxable, then traditional, then Roth), his savings would last nearly 23 years, with total taxes exceeding $57,000.

By adopting a proportional withdrawal strategy, Joe’s portfolio would last almost 24 years, and his total taxes would drop to about $34,000, saving him over 40% in taxes.

Withdrawal Strategy	Portfolio Duration	Total Taxes Paid	Tax Savings
Traditional Order	Nearly 23 years	$57,000+	Baseline
Proportional Withdrawals	Almost 24 years	~$34,000	Over 40% reduction

The best withdrawal strategy depends on factors like your tax bracket, account composition, and financial goals. Consulting with a financial advisor and tax professional can help you create a plan tailored to your situation, ensuring you maximize your retirement income while minimizing taxes.

Advanced Tax Strategies for Long-Term Planning

Beyond the basics of withdrawal strategies, there are several advanced approaches that can help early retirees keep their tax bills in check over the long haul. These methods demand a bit more planning but can lead to meaningful savings throughout your retirement. By building on foundational strategies, these techniques aim to fine-tune your tax outcomes over time.

Tax-Loss Harvesting to Offset Gains

Tax-loss harvesting is a tactic where you sell investments that have lost value to create capital losses, which can then be used to offset gains from other investments. This is especially beneficial for early retirees managing taxable brokerage accounts, as it helps lower overall tax liability.

Here’s how it works: When you sell underperforming investments, the losses can cancel out gains dollar-for-dollar. If your losses exceed your gains, you can deduct up to $3,000 of the excess losses against your ordinary income each year. Any leftover losses can be rolled over into future years, giving you continued tax benefits.

For example, let’s say you have $8,000 in gains from selling appreciated stocks but also $12,000 in losses from other investments. You can offset the entire $8,000 in gains, deduct $3,000 from your ordinary income, and carry forward the remaining $1,000 in losses to the next year.

However, there’s a catch: the wash-sale rule. This rule prohibits you from buying the same or a very similar investment within 30 days before or after selling it for a loss. It’s designed to prevent taxpayers from claiming artificial losses while keeping the same investment.

To make the most of tax-loss harvesting, review your portfolio regularly - not just at year-end. Many robo-advisors and tax-aware platforms can help automate this process. For tailored advice, consult a tax professional to ensure the strategy aligns with your financial goals.

Moving to Tax-Friendly States

Relocating to a state with lower or no income tax can lead to big savings for retirees. Currently, nine states do not impose an income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. For retirees relying on Social Security, pensions, or withdrawals from traditional retirement accounts, these states offer appealing financial benefits.

The difference can be striking. Take Oregon, a high-tax state, versus Iowa, which exempts IRA withdrawals for those aged 55 or older. A married couple withdrawing $100,000 from an IRA could face a 12.98% combined state and federal tax rate in Oregon, compared to just 7.66% in Iowa - a gap of over 5 percentage points.

Ben Storey, Director of Retirement Research & Insights at Bank of America, highlights the importance of weighing financial factors when considering a move:

"There are plenty of reasons for people nearing retirement to explore relocating...But the financial implications of your choice should play a large role as you begin to plan your retirement budget."

That said, states without income tax often compensate with higher sales or property taxes. It’s essential to evaluate the full cost of living, including housing, healthcare, and daily expenses, before packing your bags. Other factors like climate, proximity to family, and access to healthcare should also play a role in your decision. Vinay Navani, CPA and shareholder at WilkinGuttenplan, advises:

"If you live in a high-tax state and are considering relocating in retirement, it could make financial sense to move to one that would reduce your tax liability."

Before making any decisions, work with a tax professional to estimate your new tax bill and consult a financial advisor to understand how relocating might impact your overall retirement plan.

Deductions and Credits for Retirees

As part of long-term tax planning, retirees can take advantage of specific deductions and credits designed to ease their tax burden. These include:

• Higher Standard Deduction: Taxpayers aged 65 and older can claim an additional standard deduction of around $1,950 for single filers and $1,550 per person for those married filing jointly.
• Medical Expense Deductions: With healthcare costs often rising in retirement, you can deduct medical expenses exceeding 7.5% of your adjusted gross income (AGI).
• Health Savings Account (HSA) Contributions: HSAs offer triple tax benefits - pretax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. In 2024, individuals can contribute up to $4,150, and families up to $8,300, with an additional $1,000 catch-up contribution for those 55 and older.
• Qualified Charitable Distributions (QCDs): Starting at age 70½, you can make tax-free charitable donations directly from your traditional IRA. For 2024, you can donate up to $105,000 tax-free via QCDs.
• Credit for the Elderly or Disabled: This nonrefundable credit ranges from $3,750 to $7,500, depending on your income and filing status. However, income limits apply.

Scott Bishop, Partner and Managing Director at Presidio Wealth Partners, underscores the importance of leveraging these tax breaks:

"Maximizing your deductions to lower your tax bill will help offset the impact of taxes on your retirement income and leave more money for you to spend in retirement."

How Maybe Finance Can Help Simplify Tax Planning

Handling multiple retirement accounts while juggling tax implications can feel overwhelming. Between traditional IRAs, Roth accounts, taxable brokerage accounts, and HSAs, each may require a unique withdrawal strategy. That’s where having a centralized system becomes invaluable for streamlining tax planning.

Maybe Finance steps in as a practical solution, bringing all your financial accounts into one place. This platform simplifies the process of applying the tax strategies we’ve discussed. With its AI-driven insights and open-source design, Maybe Finance equips early retirees with tools to navigate and optimize their tax landscape throughout retirement.

Centralized Account Tracking

For early retirees, one of the trickiest parts of tax planning is keeping tabs on multiple accounts spread across different institutions. As we’ve highlighted in withdrawal strategies, having a clear and integrated view of your finances is essential. Maybe Finance makes this possible by enabling users to link accounts from over 10,000 institutions, creating a single, unified dashboard.

This all-in-one view saves you from the hassle of logging into various accounts to check balances or track withdrawals. Instead, you can see your entire financial picture at a glance. The platform covers everything - bank accounts, credit cards, investment accounts, and retirement accounts - giving you the clarity needed to make informed tax decisions.

Even for accounts that can’t be automatically linked, Maybe Finance offers flexible tracking options, ensuring you maintain complete financial oversight, no matter how complex your situation.

AI-Powered Tax Insights

The platform’s AI capabilities take tax planning to the next level. Built on GPT technology, Maybe Finance delivers personalized tax strategies tailored to your financial data, age, location, and goals. This makes it especially useful for early retirees tackling scenarios like tax-loss harvesting, Roth conversions, or timing withdrawals.

Josh Pigford, founder and CEO of Maybe, explains the evolution of this feature:

"The way that we were initially tackling this is giving you access to a financial adviser who can answer those questions for you directly. As we started testing GPT's ability around that, we realized, well, OK, actually GPT can do this really well."

The AI doesn’t stop at insights - it also offers scenario planning and simulation tools. These features let you test different withdrawal strategies and assess their potential tax impact before making decisions. Additionally, Maybe Finance’s forecasting tools show how your tax strategies align with your long-term retirement goals, giving you confidence in your planning.

Multi-Currency and Open-Source Flexibility

For retirees managing global assets or considering a move to a tax-friendly state, Maybe Finance provides multi-currency support. This feature simplifies tracking international investments and taxes, making it easier to manage accounts across borders. For instance, if you move from a high-tax state to one with no income tax, Maybe Finance can help you manage accounts in different currencies and locations seamlessly.

The platform’s open-source design is another standout feature. It allows users to self-host and maintain full control over their financial data - an appealing option for retirees who prioritize privacy and data security. Additionally, this flexibility means the platform can be customized to fit unique tax planning needs or integrated with other financial tools.

Maybe Finance offers this comprehensive service for a flat monthly fee of $9 or an annual fee of $90 (a 17% discount). With no assets-under-management fees, it’s a cost-effective way for early retirees to manage their finances without cutting into their savings.

Conclusion: Key Points for Reducing Taxes in Early Retirement

Cutting down on taxes during early retirement isn’t just about saving money - it’s about keeping more of what you’ve worked so hard to earn. A solid tax plan can make a big difference, potentially saving you thousands of dollars each year.

Recap of Smart Tax Strategies

The cornerstone of effective tax planning for early retirement starts with making the most of tax-advantaged accounts during your working years. These accounts offer tax-free growth, which becomes especially helpful when you're on a fixed income and want to avoid surprise tax bills.

Your withdrawal strategy also plays a key role. Tapping into taxable accounts first, followed by tax-deferred accounts, and then Roth accounts can help minimize your tax bill. This approach ensures you stay in lower tax brackets over time.

For those looking to go a step further, advanced strategies like tax-loss harvesting and Roth conversions can make a noticeable impact. Since nearly 40% of retirees pay income taxes on Social Security benefits, managing your income levels carefully is essential. And if you’re living in a high-tax state, moving to a state with lower taxes could lead to substantial savings.

Steps to Put These Strategies Into Action

Ready to get started? Here’s how you can begin:

• Evaluate your account contributions. Maximize both traditional and Roth accounts based on your current and future tax expectations. In taxable accounts, consider tax-loss harvesting to offset gains and reduce your tax liability.

• Work with a tax professional or retirement planner. As Kasey Gahler, a Certified Financial Planner, points out:

  "There are a number of tax burdens to be aware of in retirement. For most retirees, a large majority of their savings is usually in pre-tax accounts such as 401(k)s or 403(b)s."
  
  An expert can guide you through these complexities and craft a plan tailored to your needs.

• Leverage technology to simplify your tax planning. Tools like Maybe Finance can centralize your accounts and provide AI-driven insights to help you make smarter decisions about withdrawals, conversions, and overall tax strategies.

Taking these steps now can help you fine-tune your tax approach and keep your savings growing, giving you greater financial security as you enjoy your early retirement.

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