If you put money into a 401(k) with every paycheck for thirty years, you did your future self a big favor. You also built a pile of savings that gets taxed as it comes out. Required withdrawals start at 73 or 75, depending on the year you were born, so if a pension and Social Security cover your bills, it can be easy to leave the account alone until then. Over a twenty- or thirty-year retirement, the untouched balance keeps growing, and so does the tax that comes with it.

Tax planning in retirement works best when you look at your whole lifetime at once, and sometimes past it, if part of your savings is meant for your kids or grandkids. Paying as little as possible this April can end up costing you more over the rest of your retirement.

Russell Rogers, CFP^®, uses a picture with clients that makes this easy to see. Think of your income as a river that starts as a small stream with your first job. Every raise and job change widens it, and you pay tax on the water as it flows past. Somewhere along the way, you build a dam. Each dollar you put into a 401(k), 403(b) or traditional IRA is water held back in the reservoir behind it, and the contributions and growth stay untaxed while they sit there. After a few decades the reservoir has become a lake, and it often holds most of a family’s savings.

Once you retire, you’re the one controlling the gates on the dam, and your taxes follow whatever you let through. Because of how tax brackets are built, the tax climbs faster than the water does. Double what comes out in a year and the tax on it can more than double. So the goal is a steady, fairly even flow year after year. Big gushes push you into higher brackets, and years where you barely open the gates waste the room you had in the lower ones.

The IRS treats every dollar that leaves a pre-tax account as income, whether you spend it on a kitchen remodel or move it into a Roth IRA. If your other income covers the bills, a Roth IRA is a good place to put it, since qualified withdrawals come out tax-free later. If the remodel happens that year, skip the conversion and spend the money.

Let’s put some numbers on it with a hypothetical couple who both retire at 65. A pension and two Social Security checks cover everything they need, the house is paid off, and the $1.6 million in their 401(k)s and IRAs sits untouched. Eight years go by. By the time required minimum distributions begin at 73, the balance has grown to about $2.4 million. Their first RMD is roughly 3.77% of the account, around $90,000, stacked on top of the pension and Social Security.

The required percentage goes up every year, and the account keeps growing alongside it. At returns of around 6% to 7%, growth stays ahead of the withdrawals until roughly age 87 or 88. By 93, about 10% of the balance has to come out each year. Their taxable income rises year after year whether they need the money or not.

Eventually, one of them passes away. The smaller Social Security check stops, and the survivor can roll their spouse’s account into their own, so the RMDs keep coming on the combined balance. Taxes change too, since the survivor now files as a single taxpayer. The standard deduction is cut roughly in half and the lower brackets are about half as wide, so similar income produces a noticeably higher tax bill. Whatever remains passes to the children, who face their own tax bill on inherited pre-tax money.

In hindsight, they should have started opening the gates at 65. Taking withdrawals or doing Roth conversions in the quieter years before RMDs would have used up the lower brackets while they were cheap and shrunk the reservoir, so every RMD after that would have been smaller. Mapped out over their lifetime, their tax bill would have stayed close to level from 65 on.

In practice, this is a year-by-year exercise. We estimate a household’s taxes each year and settle on how much to draw from pre-tax accounts, then revisit the number when something shifts, like a home sale or a change in spending. The stretch between retirement and the first RMD is usually the lowest-income window you’ll get, so it’s the natural time to start.

If you'd like to look at how much should be flowing out of your own accounts, Summit offers a complimentary introductory conversation. You can also watch the full video on our YouTube channel, where Russell sketches out the river and reservoir example and maps this couple's taxes year by year.
 

Frequently Asked Questions about Tax Planning in Retirement

When should I start taking money out of my 401(k) in retirement?
Usually in the years between retirement and the start of required minimum distributions. Income tends to be lower then, so withdrawals or Roth conversions can be taxed at lower rates and reduce future RMDs. Running tax estimates each year helps set the right amount.

At what age do required minimum distributions start?
Under current law, RMDs begin at age 73 for people born between 1951 and 1959, and at age 75 for people born in 1960 or later.

Why do RMDs keep getting bigger as I age?
The percentage you’re required to withdraw rises every year, from about 3.77% at age 73 to roughly 10% by age 93. If your account grows faster than you withdraw, the balance keeps climbing too, and both push your taxable income higher.

What is the widow’s penalty?
When one spouse passes, the survivor usually files as a single taxpayer starting the year after the death. The standard deduction is roughly cut in half and the lower brackets are about half as wide, while RMDs continue on the inherited accounts. Similar income can be taxed at noticeably higher rates.

Do I have to spend the money I withdraw?
You can convert it to a Roth IRA instead. You’ll pay income tax on the converted amount that year, and after that, qualified withdrawals come out tax-free. Roth IRAs also have no required minimum distributions during the original owner’s lifetime.