For many working professionals, a hefty tax bill is an unavoidable part of life. However, retirement opens the door to numerous legal strategies to significantly reduce what you owe to the government. The recent changes in tax law have made it easier than ever for older Americans to manage their income and keep more of their hard-earned savings.
Leveraging New Tax Laws and Low-Income Years
A key change in the new tax law is the permanence of lower tax rates and an expanded standard deduction from the 2017 legislation. Crucially, it introduced a $6,000 deduction specifically for individuals aged 65 and older. This benefit begins to phase out for single filers with a modified adjusted gross income (MAGI) over $75,000 and for married couples filing jointly over $150,000.
When combined with the standard deduction, this means a retired married couple could have up to $46,700 in taxable income for the 2025 tax year without paying any federal income tax. Sean Mullaney, a certified public accountant and co-author of "Tax Planning To and Through Early Retirement," provides a compelling example. He calculates that a couple collecting $100,000 in Social Security benefits and taking $50,000 from a 401(k) would owe only $6,351 in federal taxes.
"People worry about taxes in retirement," Mullaney notes. "But retirees, even those who haven't optimized their finances for tax efficiency, tend to be lightly taxed."
The early years of retirement, especially if you delay Social Security until age 70, often present a "golden period" of low or no income tax. The smart move is not just to enjoy this period but to use it strategically. By filling up your lower tax brackets through withdrawals from Individual Retirement Accounts (IRAs) or small Roth conversions, you can reduce larger tax burdens later when Required Minimum Distributions (RMDs) kick in.
Strategic Moves for Different Wealth Levels
The approach to Roth conversions—moving money from a tax-deferred account to a tax-free Roth IRA—should be tailored to your financial situation. For middle-income retirees who don't anticipate being in a high tax bracket later, it's wise to convert only enough to fill the lower brackets, perhaps up to 12%. It's crucial to have cash outside the IRA to pay the conversion tax and to avoid conversions so large they push you into a higher bracket or disqualify you from the $6,000 senior deduction.
For wealthier individuals with large IRAs or 401(k)s, more aggressive action is recommended. Without proactive planning, massive RMDs later in retirement can spike income, pushing them into higher tax brackets and increasing Medicare premiums. Starting Roth conversions before RMDs begin is the fix. A single person using the standard deduction can convert up to $121,100 in taxable income and remain in the 22% bracket. Doing this for five years could shift over $600,000 out of tax-deferred accounts, a smart move for those who expect future RMDs to be taxed at 24% or higher.
Minimising Taxes on Social Security and Charitable Giving
How much of your Social Security benefit is taxed depends on a formula involving your adjusted gross income plus half your benefit. High earners will likely see 85% of their benefit taxed. Middle-class retirees can reduce this hit by doing Roth conversions before collecting Social Security and investing brokerage money in tax-efficient assets like stocks, rather than high-income generators like CDs or REITs.
The new tax law also makes itemising deductions more attractive for some, allowing up to $40,000 in annual deductions for property and state/local income taxes. David Frisch, a CPA in Melville, N.Y., advises clients to also track medical expenses exceeding 7.5% of AGI, including Medicare premiums and mileage to doctors.
Charitable giving offers another tax-saving avenue. Instead of annual donations, consider "bunching" them into alternating years to exceed the standard deduction and itemise, as suggested by CPA Ann Reilley. For those aged 70½ or older with large IRAs, a Qualified Charitable Distribution (QCD) is optimal. This allows you to donate directly from your IRA to a charity; the amount counts toward your RMD but is never included in your taxable income. "You almost want to get a checkbook for your IRA—just for charitable purposes," Frisch says.
By understanding these principles—using low-tax years wisely, tailoring Roth conversions, managing Social Security income, and strategically itemising deductions and charitable gifts—retirees can ensure they keep more of their wealth for themselves and their heirs.
