Tax Planning In Retirement

Published by Christina Hester Snyder, Associate Partner and Wealth Advisor


It can be easy to underestimate the role of taxes during retirement. Because taxes are frequently associated with income during the working years of life, many overlook tax planning during this next chapter. However, if properly managed, there are serious financial advantages to be gained by an effective tax strategy within retirement.

Maintaining sufficient cash flow without incurring a large tax burden will usually require some finesse. Here are some strategies of how to do just that.


Liquidity Strategies

In retirement, having a sufficient supply of liquid funds is critical to avoid a cash flow crisis. Liquid assets are simply assets that are easily attainable for frequent use, like a bank account or some money market funds. If all of your assets are tied up in retirement funds like a 401(k), you may have an issue if faced with an immediate emergency need.

Further, if your liquid assets are insufficient for a prolonged season of economic downturn, you may be faced with making withdrawals from your savings at inopportune times. If the market is at a real low spot and you’ve taken some losses, a withdrawal might mean you shortchange yourself from the gains of the next recovery.

Just be careful to avoid taking large amounts out of taxable retirement accounts all in the same year. You didn’t earn and save carefully just to give a large chunk of it to the government! It is critical to have an appropriate balance between withdrawing enough to have the resources you need at hand, and not crossing over into a tax bracket that leaves you disadvantaged.


Roth Conversions

Speaking of not giving large amounts of money to the government, let’s talk about Roth conversions. If you primarily have a traditional 401(k) or IRA, a conversion to Roth may save you tens of thousands of dollars in taxes over the course of retirement.

A Roth conversion allows you to take your traditional pre-tax 401(k) and turn it into a post-tax account. When you take withdrawals from a traditional 401(k), you pay regular income tax for that money in the year you take it out. However, withdrawals of the growth from a Roth account are tax-free, meaning that all of the interest your money earns during the rest of your retirement has no tax burden when you take it out.

For example, let’s pretend that Jen and Sally both have retirement accounts. Jen has a traditional 401(k) earning 10% on $1,000,000 annually. Jen paid no taxes on her contributions, so when she makes a withdrawal, she has to pay taxes on both her contributions and her growth. When Jen takes out $50,000 per year, she pays taxes on the whole $50,000.

Sally has a Roth IRA, also earning 10% on $950,000. She paid taxes on all of her contributions into the account, but all of her growth (most of her money) is tax-free. Sally takes out $50,000 per year and pays $0 in taxes. It doesn’t take a rocket scientist to see the advantage of a Roth.

Conversions can be tricky, and since you have to pay the taxes on them at the time you convert, it usually makes sense to do this over the course of several years. Also, there is a five-year rule to wait to make withdrawals on your growth or you might face a penalty.

You definitely want to sit down with your financial advisor and go over the details carefully to see how this might benefit you.


Tax-Loss Harvesting

Tax-loss harvesting is basically taking a tax advantage by claiming losses you had within your portfolio. For example, if you are participating in a direct indexing SMA or if you have had some single stocks that suffered losses, you can claim the losses as tax deductions.

If you have done very well and find yourself paying a large amount in taxes every year during retirement, tax-loss harvesting can help offset the tax pain. This can also be a helpful tool if you are facing a large one-off tax bill, perhaps in the same year as a Roth conversion or after a heavy liquidation from a traditional 401(k) or IRA.


Partner With A Professional

Whether you are looking at liquidity strategies, Roth conversions, or something more complicated like tax-loss harvesting, you don’t want to try to figure it out on your own. That’s why it’s wise to partner with a financial advisor.

Jacob William Advisory has professionals ready to help you navigate the financial ebbs and flows of retirement, and keep you confident in the strength and security of your portfolio. To get a personalized tax analysis of your retirement plan, contact our office today by calling 410-821-6724 or emailing [email protected]. Or, if you prefer, schedule an appointment directly at


About Christina Hester Snyder

Christina is an Associate Partner and Wealth Advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP™). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.


The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results.  Actual investment results may be more or less than those shown.  This does not represent any specific product (and/or service).

This piece is not intended to provide specific legal, tax, or other professional advice.  For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

Converting from a traditional IRA to a Roth IRA is a taxable event.

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