Ready For Retirement: Episode Summary

Episode Title: Maximize Your Retirement Tax Savings: How to Maximize Tax-Saving for Each Account
Host: James Conole, CFP®
Release Date: April 8, 2025

In this episode of Ready For Retirement, host James Knoll delves deep into strategies for minimizing tax liabilities during retirement by optimizing withdrawals from various investment accounts. The discussion is structured around understanding different account types, their tax implications, and how to effectively manage inheritances and Social Security benefits to achieve a tax-efficient retirement.

1. Controlling Your Tax Rate in Retirement

James opens the episode by emphasizing that retirees have significant control over their tax rates through strategic income withdrawals. He states:

“One of the biggest things you can actually control in retirement is your tax rate.”
[00:00]

This control doesn't influence overall tax rates but rather how withdrawals are structured from different accounts to minimize tax impact.

2. Understanding Investment Accounts and Their Tax Implications

James explores various investment accounts, detailing how each is taxed both during contribution and withdrawal phases.

a. Standard Brokerage Accounts

James highlights that while standard brokerage accounts don't offer tax benefits upon contribution, they do provide opportunities to realize gains at favorable tax rates.

“There is a 0% tax bracket for the gains in the qualified dividends that you could potentially receive from that account.”
[00:02]

For 2025, married couples filing jointly can realize up to $96,700 in taxable income with long-term gains taxed at 0%. Single filers have a threshold of $48,350. James illustrates this with an example:

“If you're married filing jointly and you just take the standard deduction, $96,700 of taxable income means your actual adjusted gross income was $126,700.”
[00:10]

By strategically selling investments within these thresholds, retirees can step up their cost basis, reducing future tax liabilities.

b. 401(k) Plans and Roth 401(k)s

James discusses the choice between traditional and Roth 401(k) contributions, stressing the importance of comparing current versus expected future tax brackets.

“The decision of where do you put funds comes down to what is your tax bracket today compared to what would be that same tax bracket when you're pulling those funds out in retirement.”
[00:23]

He also notes nuances regarding employer matches, which are typically pre-tax even if contributions are Roth.

c. Health Savings Accounts (HSAs)

HSAs are presented as a powerful tool for tax-efficient retirement planning. James outlines the triple tax benefits:

1. Tax Deduction on Contributions
2. Tax-Free Growth
3. Tax-Free Withdrawals for Qualified Medical Expenses

“Money that you put in is a tax deduction today at the federal level and at the state level in 48 states.”
[00:35]

He explains how HSAs can also serve as a supplemental retirement account post-65, allowing tax-free medical withdrawals and tax-deferred withdrawals for other expenses.

3. Impact of Inheritances on Taxes and Retirement

Inheritance can significantly affect one's tax situation. James differentiates between non-retirement and retirement account inheritances.

a. Non-Retirement Inheritances

Assets like stocks or real estate receive a step-up in basis, meaning they're valued at their market price at the time of inheritance, eliminating past capital gains.

“It's tax free to you. Now, if you sell that home, that $2 million is completely tax free because of that step up in basis.”
[00:50]

b. Retirement Account Inheritances

Inherited retirement accounts, such as traditional IRAs or 401(k)s, require full distribution within 10 years, impacting tax brackets.

“If you inherit a traditional IRA, for example, from your parents who passed away, you have 10 years to fully distribute that account.”
[00:58]

James advises careful planning to spread withdrawals evenly or strategically to avoid high tax years.

4. Social Security and Its Taxation

Social Security benefits are a crucial income source in retirement, with specific tax implications based on provisional income.

“At the federal level, somewhere between 0% and 85% of your Social Security benefit is going to be taxable.”
[01:10]

James explains how provisional income determines the taxable portion and advises considering these factors when deciding when to start benefits.

“Your decision of do you collect early, do you collect later? Part of that is driven by maximizing income, but another part of that is driven by maximizing the tax savings.”
[01:15]

5. Crafting a Tax-Optimized Withdrawal Strategy

James ties together the discussion by emphasizing the importance of a cohesive withdrawal strategy that leverages the tax characteristics of each account type.

“When you know these details, you can start to put together the right portfolio withdrawal strategy, the right retirement plan that's going to help you maximize the income you have while minimizing your tax liability over the course of your retirement.”
[01:25]

He encourages listeners to consult with financial and tax professionals to tailor strategies to their unique circumstances.

Key Takeaways

• Strategic Withdrawals: By understanding the tax implications of each account type, retirees can sequence withdrawals to minimize tax burdens.
• Utilize Brokerage Accounts: Take advantage of the 0% tax bracket for long-term gains and qualified dividends.
• Maximize HSA Benefits: Use HSAs for medical expenses and as a supplemental retirement account.
• Plan for Inheritances: Recognize the tax benefits of stepped-up basis and the distribution requirements of inherited retirement accounts.
• Optimize Social Security: Consider provisional income and timing of benefits to reduce taxation on Social Security.

Conclusion

James Knoll provides a comprehensive guide to navigating the complex landscape of retirement taxes. By mastering the tax characteristics of various investment accounts, understanding the impact of inheritances, and strategically planning Social Security benefits, retirees can significantly enhance their financial well-being and enjoy a secure retirement.

For more insights and personalized retirement strategies, visit Root Financial Partners and schedule a consultation with one of their advisors.