When people think about retirement, they usually focus on investment growth or income. But one of the biggest factors in how long your money lasts is often overlooked: taxes.
A tax-efficient retirement isn’t about paying zero taxes. It’s about making smart, proactive choices that minimize what you owe, maximize what you keep, and give you the freedom to live the life you’ve worked for.
Here are four strategies that can help.
1. Asset Location: Putting the Right Investments in the Right Place
Not all accounts are created equal. Where you hold your investments matters just as much as what those investments are.
- Stocks often generate growth with lower annual income, so holding them in a taxable brokerage account may allow you to take advantage of lower long-term capital gains tax rates.
- Bonds, on the other hand, generate steady income that’s taxed as ordinary income. Keeping them in a tax-deferred account (like a 401(k) or IRA) can help delay taxes until you withdraw.
Think of it like tuning up an engine: the parts may all work on their own, but putting them in the right place makes the machine run more efficiently.
2. Timing Taxes: Pay Now or Pay Later?
Retirement planning always comes down to one big question: When’s the best time to pay taxes?
If your tax rate today is lower than what it’s likely to be in the future, it can make sense to accelerate some taxes now to save more later. That’s where Roth conversions can be powerful.
- The early years of retirement—before Required Minimum Distributions (RMDs) and Social Security kick in—are often a sweet spot for converting pre-tax assets to Roth at lower rates.
- By using taxable accounts for income during this time, you may also keep your taxable income low, creating more room for strategic Roth conversions.
Think of it as “buying out” your silent partner (the IRS) at the lowest possible price.
3. Healthcare & Tax Credits: Don’t Overlook the Premium Tax Credit
If you retire before age 65, healthcare can feel like one of the biggest hurdles. The Premium Tax Credit (a subsidy under the Affordable Care Act) can dramatically lower premiums for those who qualify.
- If your income is below certain thresholds, you may qualify for thousands of dollars in subsidies.
- By carefully controlling withdrawals, delaying Social Security, or tapping taxable assets first, you may be able to keep your income within the qualifying range.
This isn’t a strategy for everyone, but for early retirees, it can make a meaningful difference in bridging the gap until Medicare.
4. Harvesting Gains: Sometimes 0% Really Means 0%
One of the least-talked-about opportunities in retirement is the ability to sell investments at a 0% capital gains tax rate.
- If your taxable income falls under certain limits, you may be able to realize gains—locking in profits—without paying any tax on them.
- The key is coordinating this with your other income sources. Large withdrawals from tax-deferred accounts, for example, can accidentally bump you into a higher bracket.
Done right, gain harvesting not only reduces your tax bill but also resets your cost basis, giving you more flexibility down the road.
Final Thoughts: A Smarter Way to Retire
Paying less in taxes doesn’t just happen. It takes planning. The good news? The earlier you start, the more options you have.
At Redwood Advisory Group, we believe a tax-smart retirement isn’t about complexity—it’s about clarity. By using our Redwood Retirement Framework—Spend, Grow, Secure—we help clients line up their investments and income in ways that reduce taxes, extend retirement savings, and bring confidence to every decision.
Because retirement isn’t just about having enough. It’s about having control.