By Frank Legan

Ask someone what excites them about retirement, and you’ll rarely hear their answer include the words “tax optimization.” Taxes tend to live in a box labeled “April,” then disappear from our radar until the next filing deadline. But maintaining this out-of-sight, out-of-mind relationship with taxes during retirement, when every dollar counts and you’re withdrawing rather than contributing, means missing valuable opportunities to help preserve your wealth. Consider these five tax-efficient retirement strategies to help reduce what you owe and optimize what you keep.

1. Limit Your Exposure to the 3.8% Medicare Surcharge Tax

If you have a higher income and have investment income, you should be aware of the 3.8% Medicare surcharge tax. This tax applies to individuals and couples whose earnings exceed certain limits, meaning they contribute more to Medicare and help support the healthcare system for everyone. Here’s how it works:

If you’re single and make more than $200,000, or if you’re married and together make more than $250,000, this 3.8% tax may apply to you. These income limits are based on your Modified Adjusted Gross Income (MAGI)—that’s your usual income with some deductions added back in, such as tax-free foreign income, IRA contributions, and student loan interest. 

The surcharge tax affects what you earn from investments such as stocks, bonds, and real estate (which includes interest, dividends, annuities, gains, passive income, and royalties). The IRS calculates this tax on whichever is less: your total net investment income or the amount by which your income goes over those $200,000 or $250,000 thresholds.

If your MAGI is near or above the thresholds, there are steps you can take to limit your exposure. First, you will want to review the tax efficiency of your investment holdings. It may be worthwhile to move less efficient investments into tax-deferred accounts and capitalize on tax-loss harvesting. Other moves you can make include investing in municipal bonds, which have tax-free interest, and taking capital losses to offset gains. Installment sales can spread out large gains and help reduce your adjusted gross income, and real estate like-kind exchanges can also defer gains and their taxability.

2. Utilize Roth IRA Conversions

Distributions from Roth IRAs are tax-advantaged, so they are a great tool to have in retirement. However, many people cannot contribute directly to a Roth IRA because of income limitations. Instead, you can convert traditional IRA funds to a Roth account by paying the related income taxes. You can take advantage of low-income years, such as when you have stopped working but are not yet collecting Social Security, to convert your funds to a Roth IRA so you’ll have tax-advantaged income later. 

It is important to be mindful of tax brackets when you do conversions so you don’t inadvertently push yourself into higher tax rates. As we mentioned above, be sure to consider the impact of that 3.8% Medicare surcharge tax. Another crucial item to be aware of is the Income-Related Monthly Adjustment Amount (IRMAA), which increases your Medicare premiums if your income is above a certain limit. For 2025, if your Modified Adjusted Gross Income (MAGI) from 2023 is over $106,000 as an individual filer or $212,000 as a couple filing jointly, your premiums will increase. The higher your income, the higher the premium. This is where careful planning can help you manage these additional costs and make the most of your IRA conversions—without unexpected expenses.

3. Take Advantage of the 0% Rate on Long-Term Capital Gains

If the Medicare surcharge tax is irrelevant to you because your income is lower, then you may be able to take advantage of the 0% long-term capital gains rate. Profits on the sales of assets owned over a year are tax-advantaged if your 2025 taxable income is below $48,350 for singles or $96,700 for married couples filing jointly. Once you exceed those thresholds, long-term capital gains are taxed at 15% until your taxable income for 2025 gets above $533,400 for singles or 600,050 for couples, at which point the tax rate goes up to 20%.

Claiming more deductions or making deductible IRA contributions can help keep your taxable income within the 0% capital gains tax range while also providing their usual tax benefits. However, you will want to be strategic about taking tax-free gains as they can raise your adjusted gross income and affect the taxability of your Social Security benefits. Also, taking those gains may incur state tax liabilities as well.

4. Be Strategic About Inherited IRAs

The IRS clarified rules for inherited IRAs in July 2024, addressing concerns about the 10-year rule introduced in 2020. Non-spousal beneficiaries must now take required minimum distributions (RMDs) annually if the decedent had already started RMDs. Additionally, the inherited IRA must be completely depleted by the end of the 10th year following the account holder’s death.

Key exceptions to the 10-year rule remain unchanged. These include surviving spouses, minor children, disabled or chronically ill beneficiaries, and those less than 10 years younger than the deceased. These groups can continue to use the stretch IRA approach, taking distributions over their life expectancy.

For beneficiaries of account holders who passed away before their RMD age (currently 73), there is more flexibility. In these cases, beneficiaries are not required to take RMDs in years 1 through 9, allowing for strategic tax planning during the 10-year period.

Being strategic about timing withdrawals is crucial to managing tax implications and helping reduce overall tax liability.

5. Donate Effectively

If you are charitably inclined, one way to save on taxes is through donations. You may be able to get a tax deduction on donations up to 60% of your adjusted gross income. If you have appreciated assets, the tax break could be even greater. When you donate an appreciated asset that you have owned for over a year, such as stocks, to a charity, you do not have to pay capital gains taxes on the appreciation, but you still get to claim the full value for your deduction. This can allow you to avoid the capital gains tax altogether. If your assets have declined in value, it may be beneficial to sell them yourself and donate the proceeds so you can claim the loss when filing your taxes.

Another strategy to consider is the use of a charitable lead annuity trust or a donor-advised fund, which allows you to take an up-front write-off that can help offset other income, such as from a Roth IRA conversion or withdrawal from an inherited IRA. 

Tailored Tax-Efficient Retirement Strategies for Your Goals

While tax-efficient retirement strategies can help you keep more of your money, they’re not one-size-fits-all. Your income sources, timing, and personal circumstances all influence which strategies work best for you. Rather than navigating these complex decisions alone, consider partnering with an experienced advisor who focuses on tax-efficient retirement strategies and can customize a plan for your needs.

If you’d like to discover how tax-efficient retirement strategies could strengthen your retirement plan, I invite you to connect with our team at Signature Estate and Investment Advisors. We can help you understand your options and move forward with clarity. Take the first step toward your ideal retirement by reaching out to us at 440-683-9213 or flegan@seia.com or schedule a complimentary introductory call online!