If you’re a frequent reader of personal finance articles or listen to any number of personal finance podcasts, then you’ve most certainly heard this one before: It’s not what you earn, it’s what you keep. It’s trite and arguably incomplete. But the basic concept is true. It would be easy to build wealth if you got to keep every dollar you earned. But we all know that’s not reality. (Especially given today’s ever-increasing cost of living.)
Most people spend their working years focused on accumulating wealth. But what often gets overlooked is that the IRS is waiting to take their share each year—for life. So what can you do? Like anything financially related, you plan.
Tax planning isn’t about dodging taxes or playing games with the IRS. It’s about strategically managing when and how you pay taxes over your lifetime to keep more of the money you’ve earned.
Tax Preparation vs. Tax Planning
Tax preparation is backward looking. Every April, you gather your documents and calculate what you owe based on what already happened. It’s compliance, not strategy.
Tax planning is forward looking. It involves making deliberate decisions throughout your life, all with a focus on minimizing your total lifetime tax burden.
The distinction matters because tax rates fluctuate, your income and withdrawal needs change over time, and different accounts carry different tax treatment. Without a plan, you’re leaving the outcome to whatever tax bracket you end up in from year to year.
Retirement’s Unique Window
Here’s something counterintuitive: the years leading up to and immediately after retirement are often when proactive tax planning matters most.
Consider the typical trajectory. During your career, you’re in a higher tax bracket, so deferring income into traditional retirement accounts can make sense. But once you retire, your earned income drops or completely disappears. You may be living on savings, a pension, or Social Security, which in total are likely to be less taxable income than your former earnings.
Likewise, if you retired in your 60s, required minimum distributions haven’t started yet. The IRS isn’t forcing you to take distributions from 401(k)s or traditional IRAs until age 73 (or 75 for those born in 1960 or later). This creates a retirement window where your tax bracket may be lower than it was during your working years and lower than it will be once RMDs begin. For perhaps the first and only time in your adult life, you decide to some extent how much taxable income to recognize each year during this window.
The Roth Conversion Strategy
Let’s walk through a scenario to see how this works.
Meet David and Susan, our example clients. They retire at 65 with $1.5 million in traditional IRAs and 401(k)s, a paid-off home, and modest Social Security benefits that will begin at 67. They spend about $75,000 per year.
During ages 65 and 66, their only taxable income comes from withdrawals. They’re firmly in the 12 percent federal bracket—a far cry from the 24 percent bracket they occupied while working.
At 75, RMDs kick in. With investment growth, their retirement accounts might exceed $2 million. Their first RMD would be roughly $80,000 and set to increase each year. Combined with Social Security, their income could easily land back in the 22 percent bracket or higher.
This can also impact the future cost of their Medicare premiums. Medicare has its own set of brackets known as the Income-Related Monthly Adjustment Amount. If your modified adjusted gross income (MAGI) reaches above a certain level, Medicare adds a surcharge to your monthly premiums for Part B and Part D.
Now consider this alternative scenario for our fictional clients. Between ages 65 and 75, David and Susan convert a portion of their traditional IRA to a Roth IRA each year. They’re careful to stay within the 12 percent bracket. Over a decade, they might convert $400,000 to $600,000.
Yes, they pay taxes now—but within the remainder of their 12 percent tax bracket. That money then grows tax-deferred in the Roth. When RMDs begin at 75, the traditional account balance is smaller, so the required minimum distributions are smaller. Their taxable income remains more within their control, as any additional withdrawals can come from tax-free Roth accounts or other savings. This results in lower lifetime taxes.
The Broader Principle
Roth conversions are just one example in this simplified scenario. Tax planning encompasses a range of strategies, including balancing asset location across different types of accounts, balancing risk capacity with income needs, sequencing withdrawal strategies, and more. The common thread is intentionality and purposeful planning. Whether you’re 35 or 65, tax planning should be part of your financial plan. The earlier you build flexibility into your accounts—through a mix of traditional, Roth, and taxable investments—the more options you have later. The tax code rewards those who plan. Don’t wait until the bill comes due and wonder if you, or your heirs, could have paid less.