The Power of Tax-Efficient Investing in Retirement

By Gregg Gonzalez, CFP®, CFF®

The Power of Tax-Efficient Investing in Retirement

How to Minimize Taxes on Withdrawals and Investments

Retirement is the time to enjoy the wealth you’ve built—but without a smart tax strategy, unnecessary taxes can eat away at your savings. At RetireStrong Financial Advisors, we have found by focusing on tax-efficient investing and strategic withdrawals, you can keep more of your money and make your retirement funds last longer. Here’s how.

1. Understanding Tax Treatment of Retirement Accounts

Your tax strategy starts with knowing how different retirement accounts are taxed when you withdraw funds:

✔ Tax-Deferred Accounts (401(k), Traditional IRA)

Contributions are pre-tax, reducing taxable income when you contribute.
Withdrawals are taxed as ordinary income in retirement.
Required Minimum Distributions (RMDs) begin at age 73 (or later depending on IRS rules).

✔ Roth Accounts (Roth IRA, Roth 401(k))

Contributions are made with after-tax dollars, so there’s no immediate tax benefit.
Withdrawals are tax-free if the account has been open for at least 5 years and you’re over 59½.
No RMDs for Roth IRAs, allowing funds to grow tax-free longer.

✔ Taxable Investment Accounts (Brokerage Accounts, Mutual Funds, Stocks, ETFs)

Dividends and capital gains may be taxed annually.
Long-term capital gains (held over 1 year) are taxed at a lower rate than ordinary income.
Short-term gains (held less than 1 year) are taxed as ordinary income.

📌 The RetireStrong Key Takeaway: Knowing how different accounts are taxed helps you plan which funds to withdraw first to minimize your tax burden.

2. The Best Withdrawal Strategy: Tax Diversification

A smart withdrawal strategy can help you control your tax bracket in retirement:

A. Follow the Tax-Efficient Withdrawal Order

1️⃣Withdraw from taxable accounts first – You’ve already paid taxes on these funds, and withdrawals may be taxed at lower capital gains rates.
2️⃣ Withdraw from tax-deferred accounts (401(k), Traditional IRA) next – These are taxed as ordinary income, so be mindful of how much you take each year.
3️⃣ Use Roth accounts last – Since withdrawals are tax-free, Roth accounts are best for later years or unexpected expenses.

💡 Why it Works:

This strategy delays taxes on pre-tax accounts as long as possible.
It allows your Roth accounts to grow tax-free for as long as possible.

B. Manage Your Required Minimum Distributions (RMDs)

If you don’t need RMDs from your 401(k) or Traditional IRA, consider qualified charitable distributions (QCDs) to donate directly to charity tax-free.
Convert small amounts from a Traditional IRA to a Roth IRA before RMDs start to lower future taxable income.

3. Minimize Taxes on Investments

Beyond withdrawal strategies, tax-efficient investing can further reduce your tax bill:

A. Focus on Tax-Efficient Asset Location

Place tax-efficient investments (index funds, ETFs, growth stocks) in taxable accounts.
Keep tax-inefficient investments (bonds, REITs, actively managed funds) in tax-deferred or Roth accounts.

B. Use Tax-Loss Harvesting

Sell investments at a loss to offset taxable gains and reduce your tax liability.
Use this strategy in taxable brokerage accounts—not retirement accounts.

C. Take Advantage of Qualified Dividends & Long-Term Capital Gains

Long-term capital gains (held over a year) are taxed at 0%, 15%, or 20%—lower than ordinary income tax rates.
Qualified dividends also receive preferential tax treatment, unlike ordinary dividends.

📌 The RetireStrong Key Takeaway: Where you hold your investments matters just as much as what you invest in.

4. Roth Conversions: A Smart Tax Strategy Before RMDs

A Roth conversion allows you to move money from a Traditional IRA to a Roth IRA, paying taxes now to enjoy tax-free withdrawals later.

🔹 Best time to convert: Early retirement years when your income (and tax rate) is lower.
🔹 Why it works: Reduces future RMDs and protects against rising tax rates.

💡 Example:

If you’re in a low tax bracket at 62-70, convert some IRA funds to a Roth each year to reduce your taxable RMDs later.

5. Plan for Social Security & Medicare Taxes

A. Social Security Taxation

Up to 85% of Social Security benefits can be taxed if your combined income exceeds certain limits.
Delaying Social Security can reduce taxable income in early retirement years, giving you more flexibility.

B. Medicare IRMAA Surcharges

If your income is too high, you’ll pay higher Medicare premiums (IRMAA).
Managing taxable withdrawals can keep your income below these thresholds.

📌 The RetireStrong Key Takeaway: Watch your taxable income in retirement to avoid unnecessary taxes on Social Security and Medicare.

RetireStrong Final Thoughts: Make Your Retirement Money Last

A tax-efficient retirement strategy can help you:
✅ Reduce unnecessary taxes on withdrawals.
✅ Keep more of your Social Security benefits.
✅ Minimize investment-related taxes.
✅ Stretch your retirement savings longer.

The right mix of Roth, tax-deferred, and taxable investments gives you flexibility to manage your taxes year by year. If you’re unsure how to optimize your withdrawals and investments, working with a RetireStrong financial advisor can help you create a tax-smart retirement plan tailored to your needs.

📌 Are you making the most of your retirement savings? Let’s build a strategy to reduce your tax burden and aim to grow your wealth.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.