Tax planning should play an important role in your retirement strategy to maximize your retirement income and ensure your future is financially secure. Without a plan, your tax liability could diminish your savings and cause significant financial strain. It’s best to work with an experienced tax professional who can assist you with creating a tailored plan that will help you meet your financial goals for retirement.

Here are some basic tax planning tips to keep in mind when it comes to your retirement strategy:

Know That Retirement Accounts are Taxed in Different Ways

Each type of retirement account has different tax implications, and it’s crucial to understand the tax consequences to maximize your savings. With tax deferred accounts, contributions are generally tax-deductible and grow tax-deferred. Although tax-deferred accounts reduce your taxable income in the year you contribute, withdrawals made during retirement are taxed as ordinary income.

Tax-deferred accounts include:

• Traditional IRAs
• 401(k)s
• 403(b)s
• 457(b)s

In contrast, contributions into tax-exempt accounts such as Roth IRAs and Roth 401(k)s are made with money you’ve already paid taxes on. While you don’t get a tax break on your contributions, your savings can grow tax-free — and you are not taxed upon withdrawal, as long as you meet certain criteria.

Maximize Your Tax-Advantaged Contributions

Maximizing tax-advantaged contributions is a critical component of retirement planning. This can help reduce your taxable income and support your financial security in the long-term. Some strategies you may consider can include:

• Contributing as much as possible to your employer-sponsored retirement plan – The maximum an individual under 50 can contribute to their retirement plan is $23,500 annually. You should also take advantage of employer matching contributions.
• Utilizing catch-up contributions – If you’re 50 or older, you can make additional catch-up contributions beyond the regular limit. In 2025, you can contribute an additional $7,500 to a 401(k) and an additional $1,000 to an IRA.
• Making contributions to different types of retirement accounts – By making contributions to different types of retirement accounts, you can have greater control over your taxes in retirement.
• Opening a Health Savings Account (HSA) – An HSA offers a “triple tax advantage.” It is funded with tax-deductible contributions, they grow tax-free, and withdrawals for medical expenses are tax-free. These accounts can also function as a type of additional retirement account if the funds are invested strategically.

It’s essential to be mindful of tax implications when selling an investment. If you hold an investment for one year or less, gains are considered short-term capital gains and taxed at your ordinary income tax rate. You may consider maximizing contributions in tax-advantaged retirement accounts to help defer or eliminate capital gains tax.

Understand and Plan for RMDs

Certain types of retirement accounts are subject to required minimum distributions beginning at age 73. If an RMD is not taken on time, a penalty of 25% of the amount not taken will be imposed. However, if the RMD is corrected within two years, the penalty can be reduced to 10%. It’s also important to be aware that withdrawing funds before age 59 ½ can trigger a 10% early withdrawal penalty.

Since RMDs are treated as ordinary income, they can push you into a higher tax bracket — and potentially impact Medicaid eligibility. It’s vital to have a plan in place to avoid the penalties and tax consequences that can come with RMDs. Notably, qualified charitable distributions made directly from an IRA can count toward your RMDs without being added to your taxable income.

Consider Diversifying Your Sources of Income

In addition to funding your retirement account, you might want to consider holding a portion of your income in accounts with more flexibility, such as:

• Brokerage accounts
• Certificates of deposit
• High-yield savings accounts
• Money market accounts

While these types of accounts are funded with money that has already been taxed, you may owe additional taxes on the income generated. Nevertheless, you may be able to avoid early withdrawal penalties or RMDs. A skillful tax professional can work with you to create a strategy that will meet your financial needs and minimize your tax burden.

Contact an Experienced Tax Professional

A knowledgeable tax advisor can help you plan your financial strategy for retirement and ensure you minimize your tax burden — while maximizing your savings. Based in Fairfield, Connecticut, Rolleri & Sheppard CPAs, LLP offers skillful guidance and customized solutions for tax planning matters. Contact us online or call (203) 259-CPAS to schedule a consultation.