Smart Strategies to Keep Taxes Low in Retirement

Although we often complain about taxes, as of 2025, the tax rates in the USA are historically on the lower side. With the country debt at 36+ trillion and counting, the taxes can only go up in the future. We might get temporary tax cuts like TCJA(Tax cuts and Jobs act) in 2018. But on the long run experts predict there is no other way than increasing taxes to handle the huge debt the country has.

With this possibility of increasing taxes in long-term, is Tax free/friendly retirement possible?

There are 3 things to do in retirement to legally pay zero taxes. Not everyone will be able to achieve zero taxes but knowing this calculation will help to plan a tax efficient retirement and stay in low tax brackets.

• Withdraw only up-to standard deduction from tax deferred accounts.
• Manage provisional income under social security tax thresholds.
• Fund all other retirement expenditure from tax advantage accounts.

Withdraw only up-to standard deduction from tax deferred accounts

Standard deduction is the amount that you can reduce from your income to get to the taxable income. Another way to say is, if your income is under the standard deduction amount, then, you will not pay any taxes. For year 2025, for married filing jointly, this is $30,000 per year. The good news is this number gets adjusted to account for the inflation. Considering a 3% inflation, if you are retiring in the year 2040, this standard deduction is projected at $46,739.

What happens if you manage to withdraw only up-to standard deduction in your retirement from tax deferred accounts like 401k? You will pay $0 taxes on this portion. You need to fund the rest of the money you need in retirement from tax advantage sources.

Manage provisional income under social security tax thresholds

What is the full retirement age for withdrawing social security?
As of writing this article, It's 67 years. Though you can have access to social security money earlier than this age, you will receive reduced benefits. When you start withdrawing your social security, you need to maintain your provisional income under $44,000(for married filing jointly) to avoid 85% of your social security money getting taxed. IRS hasn't adjusted this threshold to account for the inflation.

If you don't understand what is provisional income and social security taxation, I would encourage you to read previous week's article on this website. For our discussion here, just note that your 401k withdrawals plus half of social security will be counted part of provisional income. To keep the provisional income under threshold, you need to bring down your 401k withdrawals drastically. From 59 and half years, you can withdraw up-to standard deduction from your 401k. But when you hit 67 years, with social security withdrawals start, you need to bring down 401k withdrawals drastically to keep provisional income under $44,000.

If you have smartly contained your 401(k) accounts and moved money to tax advantage accounts, managing provisional income under $44,000 is possible.

Fund all other retirement expenditure from tax advantage accounts

These are the accounts you have built with post tax dollars. IRS has no interest in these accounts because they got their taxes already. Withdrawals from these accounts won't be considered part of your provisional income. These accounts are mainly your Roth IRA and Cash Value Life Insurance(CVLI) accounts. It doesn't matter how much money you withdraw from these accounts. They are not taxed and doesn't count against provisional income. If you don't have much in these accounts and all your money is concentrated in tax deferred accounts, then, you need to plan to convert them paying taxes now. I understand it's bitter pill to swallow. But it's a choice to make whether you want to pay tax when you know the exact number or pay unknown percentage in future.

That's a wrap this week. I know it's a lot to digest. But thinking through and planning a tax friendly retirement is worth it.

Happy learning!