How to Plan Your Taxes in Retirement

When you retire, your life changes in many ways — and so do your finances. One of the biggest changes is that instead of contributing to tax-deferred retirement savings plans that reduce your taxes, you’ll start tapping those savings for income and paying taxes at your regular rate (unless you’re tapping a Roth account) — not the preferential capital-gains rate reserved for stocks and bonds held in taxable accounts. How will you plan for taxes in retirement?

What to Do with Your 401(k)

One of the first decisions you’ll have to make is what to do with the savings you have accumulated in your 401(k) or similar workplace-based retirement plan. As long as you have a balance of $5,000 or more, you can keep it with your former employer until the plan’s normal retirement age (often 65) or, in some cases, until you reach age 70 1/2. You might want to do that if you like the investment choices and the low fees of your employer’s plan.

Company Stock

If you own highly appreciated company stock, special rules for what’s called net unrealized appreciation (NUA) can result in significant tax savings. When you take a lump-sum distribution from your 401(k), you can move the stock to a taxable account and roll over the rest of the assets to an IRA. You’ll pay ordinary income taxes on your basis (what you paid for the stock), but the remaining NUA (the appreciation while the stock was in your retirement plan) will be taxed only when the stock is sold.

Mandatory Distributions

Tax-deferrals on retirement savings don’t last forever. You must start taking taxable withdrawals from your traditional IRA or 401(k) by the April 1 following the year you turn 70½. Subsequent annual withdrawals are due by December 31 of each year. Each year’s required minimum distribution (RMD) is based on your account balance at the end of the previous year divided by a life expectancy factor set by the IRS.


Pension and annuity payments from employer-sponsored retirement plans are fully taxable. You can elect to have federal income taxes withheld from your pension or annuity check, or you can file quarterly estimated tax payments. State tax laws vary. Some exempt certain types of pensions, such as military or government pensions, from state income taxes. Others allow a portion of any type of pension income to escape state income taxes. A few fully tax pension income. You should get a Form 1099-R from the payer each year showing how much taxable income you received.

For more information, read the full article here.