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Have you thought about how much taxes can really shape your retirement savings? Many people underestimate just how big the impact can be. Whether you’re using a 401(k), an IRA, or even life insurance, taxes can either slow down your growth or, if you’re intentional, help you keep more of your hard-earned money.
Some accounts grow tax-deferred, others can grow tax-free, and knowing the difference changes everything. It’s not just about where you save, but also how and when you take money out. These choices directly affect how long your money lasts and how much you get to keep.
At BetterWealth, we work with clients to build intentional strategies that give them more control over taxes now and in retirement. When you understand how taxes shape your savings, you can plan ahead instead of getting blindsided by the IRS later.
In this blog, we will talk about:
Let’s break down the essentials to retire more confidently and keep more of what you’ve worked for.
Taxes touch everything about your retirement savings, how your money grows, and what you take home. Knowing the basics about account types, growth, and contribution rules arms you to make decisions that actually fit your goals (not just what someone else says you should do).
There are a few main retirement accounts, each with its own tax rules:
Which account is “best” depends on your current tax rate, what you think your tax rate will be in retirement, and your savings goals. And yeah, there are limits on how much you can put in each year.
How your money grows depends on the type of account, and understanding the difference helps you plan smarter for retirement.
Feature
Tax-Deferred Growth
Tax-Free Growth
How It Works
Taxes are postponed—you pay when you withdraw in retirement
Taxes are paid upfront, but withdrawals and growth are tax-free later
Examples
Traditional IRAs, 401(k)s
Roth IRAs, Overfunded Whole Life Insurance
Compounding Advantage
Money compounds faster in the short term since no annual taxes are taken out
Long-term growth is protected from future tax increases
Tax Timing
Taxes due at withdrawal, often at retirement tax rate
No taxes on qualified withdrawals if the rules are followed
Best For
Those who expect to be in a lower tax bracket in retirement
Those who want a hedge against higher future taxes
Understanding these differences helps lower your tax burden as retirement approaches and allows you to choose the right mix of accounts for flexibility and protection.
The way your contributions are taxed depends on the account:
The IRS sets yearly contribution limits, and some accounts have income limits for eligibility. Knowing how contributions are taxed helps you decide if you want to save on taxes now or kick the can down the road.
When you finally start taking money out in retirement, taxes can take a bigger bite than you’d think. Each account type gets taxed differently, and there are rules about how much you have to withdraw that can mess with your tax bill. Getting a grip on these details lets you plan withdrawals that don’t wreck your finances.
Traditional IRAs and 401(k)s use pre-tax dollars. You skip taxes when you put money in, but every withdrawal gets taxed as ordinary income at whatever your tax rate is then. If you tap these accounts before age 59½, you’ll probably owe a 10% early withdrawal penalty, plus the usual income tax. After 59½, no penalty, but you still pay regular income tax.
It’s worth watching your withdrawal amounts so you don’t accidentally bump into a higher tax bracket.
Roth IRAs and Roth 401(k)s flip the script. You pay taxes before you save, but qualified withdrawals are tax-free. To qualify, the account needs to be at least 5 years old, and you’ve got to be 59½ or older. You can pull out your contributions (the money you put in) anytime, tax- and penalty-free, since you already paid taxes on that.
Roth accounts are a solid way to cut your tax bill in retirement and keep more control over your income.
RMDs kick in at age 73 for most retirement accounts, Traditional IRAs, 401(k)s, and the like, but not Roth IRAs. The IRS figures out your RMD based on your age and account balance. Skip an RMD? The penalty’s steep: 50% of what you should’ve withdrawn.
RMDs boost your taxable income, so you’ll want to factor them into your plan. Some folks use Roth conversions or strategic withdrawals to keep the tax hit manageable. We can help you map out a withdrawal plan that balances taxes and keeps more of your money working for you.
Taxes don’t hit your retirement savings the same way at every age. Your income, account choices, and withdrawal timing determine your pay. Knowing how these pieces fit together helps you keep more of your money.
While you’re working, you’re probably putting money into 401(k)s or IRAs. These lower your taxable income now and let your investments grow tax-deferred, no taxes on the gains while the money stays put. If you use a Roth IRA, you pay taxes on contributions now, but you can withdraw money tax-free later. This difference can save you serious cash depending on your income and tax bracket.
Some life insurance policies offer tax advantages, too. For example, whole life insurance with cash value can grow tax-deferred. BetterWealth often discusses using these to balance growth with tax savings.
As you get closer to retirement, taxes start to matter even more. It’s a good time to think about moving money into accounts that treat withdrawals more kindly. Try to estimate your future tax bracket; nobody likes surprises. Required Minimum Distributions (RMDs) start at age 73 for traditional accounts, forcing you to pay a minimum each year, which counts as taxable income. That can bump up your tax bill.
Diversifying between taxable, tax-deferred, and tax-free accounts gives you more control over taxes when you finally retire. A tax planner can help you get this balance right.
Once you’re retired, the way you withdraw money really matters for taxes. Social Security benefits can be partly taxable, depending on your income. Withdrawals from traditional IRAs and 401(k)s count as taxable income, so timing and amount are key. Pulling from Roth accounts can help, since those withdrawals are tax-free after 59½ and if the account is old enough. Permanent life insurance policies can also provide tax-free cash through policy loans or withdrawals.
Planning withdrawals carefully can help your money last longer. A lot of retirees work with BetterWealth to blend life insurance and retirement accounts for better tax efficiency.
Want to pay less tax on your retirement savings? You’ll need a few tricks: moving money between accounts, planning withdrawals, and using losses to offset gains. These strategies help you hang onto more of what you’ve saved.
A Roth conversion is when you move money from a traditional IRA or 401(k) into a Roth IRA. You pay taxes on the amount converted now, but future Roth withdrawals are tax-free. This works well if you think you’ll be in a higher tax bracket later or want to dodge RMDs. Timing is everything; converting in a low-income year means less tax pain upfront.
Don’t go overboard, though. Converting too much can push you into a higher bracket. Spreading conversions out over several years keeps things smoother. Roth IRAs don’t make you withdraw during your lifetime, which is a big plus for long-term tax planning.
The order in which you withdraw money from your accounts in retirement can make a big difference. The usual playbook is to start with taxable accounts, then tax-deferred accounts, and then Roth IRAs. First, you sell investments in taxable accounts, which might trigger capital gains taxes, but if you’ve held them over a year, the rate’s lower. Next, tap tax-deferred accounts like traditional IRAs and 401(k)s (taxed as ordinary income).
Letting Roth accounts grow as long as possible means more tax-free growth. This approach can help keep your taxable income in a lower bracket and stretch your nest egg.
Harvesting tax losses is when you sell investments that have dropped below what you paid, using those losses to offset gains elsewhere. That lowers your taxable income from capital gains and can shrink your overall tax bill. Losses offset gains dollar for dollar. If you have more losses than gains, you can use up to $3,000 per year to reduce ordinary income, and roll the rest forward.
Watch out for the "wash sale rule," which says you can’t buy the same security within 30 days before or after selling it at a loss. This strategy requires some attention, but it can be a handy tool for your retirement planning.
Social Security benefits can change your tax picture in retirement. Knowing the rules lets you plan your income and withdrawals to pay less tax and stretch your savings further.
Up to 85% of your Social Security benefits might get taxed, depending on your total income. The IRS examines your combined income (wages, pensions, interest, and half your Social Security benefits).
Here’s the formula:
So, your total income, not just Social Security, matters. Planning to keep your income below these levels can help you pay less tax.
When you take Social Security and pull money from retirement accounts, the timing really changes your tax situation. If you take out big chunks early from things like traditional IRAs, your income jumps, which can push more of your Social Security into taxable territory.
Sometimes it makes sense to hold off on Social Security and withdraw from your tax-deferred savings first. Doing this can trim your taxes and even bump up your lifetime benefits. It’s not always straightforward, but it’s worth considering.
Tips to keep in mind:
We can help you sort out the right mix of withdrawals and Social Security for tax-smart retirement income.
Your state plays a big role in what you’ll owe on retirement income. Some states skip income taxes altogether, while others have all sorts of exceptions and special rules for retirement accounts. Knowing these differences can make a big dent in how much you keep.
Right now, nine states don’t charge state income tax:
Retiring in one of these states means you skip state income tax on Social Security, pensions, and retirement account withdrawals. That’s a nice boost to your retirement cash flow. But don’t forget, some of these states make up for it with higher sales or property taxes. Moving to a no-income-tax state could save you money, but weigh all the living costs before you pack up.
States really run the gamut when it comes to taxing IRAs and 401(k)s. Some tax every dollar, others only part of it, and a bunch offer deductions or exemptions for certain kinds of retirement income.
For instance, a handful of states leave Social Security alone, while others let you deduct some pension income. It’s a patchwork, honestly.
A few things to check:
BetterWealth can help you untangle these rules so your retirement income plan is as tax-efficient as possible. Knowing your state’s policies really affects what you keep.
Taxes can eat into the retirement assets you hope to leave behind. To plan wisely, you must know how these accounts get taxed after you’re gone. Your heirs don’t always get the full amount; they face certain tax rules when inheriting these assets.
If you leave someone an IRA or 401(k), taxes will shape how much they actually receive. Most inherited retirement accounts require the person inheriting to pay income tax on what they withdraw. Unlike other inheritances, there’s no step-up in basis, so taxes kick in on the entire withdrawal. Spouses usually get more options; they can roll the inherited account into their own, which lets them delay taxes. Non-spouses? They generally have to drain the account within about 10 years, and every withdrawal is taxable.
Want to soften the tax hit for your heirs? Planning ahead helps. For example, converting a traditional IRA to a Roth IRA while you’re still around could mean fewer taxes for your beneficiaries down the line.
Inheriting retirement accounts or life insurance comes with unique tax rules that beneficiaries should understand.
With the proper planning, heirs can minimize taxes and preserve more of what you intended to pass on.
Tax laws change, sometimes fast, sometimes in ways nobody expects. That unpredictability means you really want to plan ahead. Keep an eye on current tax proposals. If you know what’s coming, you can tweak your retirement strategy before it’s too late. A shift in tax rates or withdrawal rules can totally change what makes sense for your savings.
What can you do?
We help people build plans that can flex if tax laws shift. We work with you to create strategies that give you options and protect your future income. Regular check-ins with your financial planner aren’t a bad idea either. That way, you can adjust quickly if the rules change. A little preparation now? It can make retirement finances way less stressful later.
Taxes on retirement savings depend on your account types and how you take money out. Smart moves can shrink your tax bill. Learning how federal and state taxes hit your income and how withdrawals change what you owe is worthwhile.
You can spread income out over several years to avoid big tax hits. Using Roth accounts or making the most of tax-deferred accounts helps, too. Some folks use life insurance with cash value, since it grows tax-deferred and can give you tax-free money when needed.
Withdrawals from traditional IRAs and 401(k)s get taxed as ordinary income. Social Security might be taxable, depending on your total income. Roth IRA withdrawals are usually tax-free if you follow the rules.
It’s possible. If you keep your income under certain limits, your tax bill could be tiny or even zero. Careful withdrawal planning and using tax-free income sources, like some life insurance benefits, can help you avoid taxes altogether.
State rules are all over the place. Some don’t tax pension income, some do. Check your state’s rules, your tax bill might change once you retire or if you move.
Pulling money from tax-deferred accounts adds to your taxable income, which can push you into a higher bracket. Taking out too much, too soon, can mean paying more than you need to. Timing really does matter.
Absolutely, a retirement calculator gives you a ballpark idea of what your future tax bill might look like, depending on how much you’ve saved and how you plan to withdraw those funds. You can play around with different scenarios and see how your choices could impact your taxes and the money you’ll actually have in retirement. If you’re looking for a place to start, BetterWealth has tools and advice that might make the process less overwhelming.
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