How to Build a Tax-Efficient Retirement Income Plan

After working hard and saving carefully for so many years, you’re going to want to enjoy the comfortable retirement you deserve.

But even if you’ve amassed sizable retirement savings thus far, it doesn’t necessarily mean it’s all yours. If you’re not careful, Uncle Sam could take a serious crack at your nest egg. But there are a few steps you can take now to make sure taxes don’t deliver a serious blow to your hard-earned retirement savings.

Some advisers recommend you withdraw 4–5 percent from savings in the first year of retirement, and then increase the first year’s withdrawal amount by the rate of inflation each following year.

You can save in taxable accounts like brokerage accounts, tax-deferred accounts like traditional individual retirement accounts (IRAs) and 401(k)s, and tax-free accounts like Roth IRAs and Roth 401(k)s.

Many experts recommend you begin by withdrawing funds from taxable accounts, then tax-deferred accounts, and finally Roth accounts. The idea is that tax-advantaged accounts get the opportunity to grow as much as they can over time. And your Roth account could provide you with tax-free withdrawals later in retirement.

There may also be another plus for some here. If you’re retired and no longer collecting a regular paycheck, chances are you’re in a low tax bracket. If you begin withdrawing from taxable accounts like brokerage accounts, you may owe little to no capital gains taxes, especially if any appreciated investments you sold were held onto for a year or longer. That’s because the favorable long-term capital gains rates are zero percent, 15 percent, and 20 percent, depending on your income and filing status. But overall, these rates are still lower than what would apply to tax-deferred withdrawals which would be based on your applicable income tax brackets. For 2026, those are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent, depending on income and filing status.

But this isn’t by any means a one-size-fits-all strategy.

Some may benefit from a proportional withdrawal strategy. In this case, you set a target amount and withdraw from each account type at once based on their share of your overall portfolio.

And by smoothing out your taxable income, you could possibly pay less taxes on your Social Security benefits and reduce your Medicare premiums.

If you have money sitting in a traditional IRA, you can convert it to a Roth IRA. The amount you convert would be taxed at your applicable income tax rate since the IRS considers it taxable income. But the benefit of tax-free withdrawals in retirement could be very promising.

And because you can convert as little or as much as you want, you could strategically manage the tax impact. Some investors make multiple conversions over several tax years.

Moreover, many advisers suggest there is a sweet spot when it comes to Roth conversions. This is usually between early retirement (bonus if you’re not already collecting Social Security) and before you reach age 73—the age RMDs kick in. RMDs are specific amounts of money you must withdraw annually from tax-deferred accounts like traditional IRAs when you turn 73, regardless if you need it. These withdrawals could push you into a higher tax bracket.

But Roth IRAs don’t involve RMDs. And at this point, it’s possible you’re already in a low income tax bracket as you’re no longer collecting a regular paycheck from an employer and assuming you’re not collecting Social Security yet. So the tax impact on your conversion may not be as severe.

That’s because healthcare expenses could take a serious chunk off your savings in retirement. In fact, a 65 year old retiring today could spend $172,500 on health care in retirement, according to the latest data by Fidelity Investments.

But as long as you have a high-deductible health plan (HDHP), you may pair it with an HSA. Your employer may offer one. And you can also open one through most banks and investment firms.

HSAs offer distinct benefits. Contributions are tax-deductible or made on a pre-tax basis if through your employer. So they could reduce your taxable income. Money in an HSA grows tax-free. And withdrawals are tax-free as long as they’re spent on qualified medical expenses. And that covers a wide range of medical, dental and vision care.