After spending years growing your savings, you want to retain as much of your money as possible. Tax-efficient retirement withdrawal strategies can help you minimize the taxes you pay when you receive your funds. 

Tax planning for retirement is about supporting your long-term financial stability. Read on to learn about taxes in retirement and tips to maximize your savings. 

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Understanding how retirement income is taxed

To plan your retirement effectively, it’s essential to understand the IRS rules for different asset classes and how they affect your investments. 

Traditional 401(k)s and IRAs 

The IRS taxes withdrawals from 401(k)s and traditional IRAs as ordinary income. That means you pay federal income taxes on the amount you withdraw, just as you would on your salary during your working years. Depending on where you live, your withdrawals may also be subject to state income tax.

Roth IRAs

Withdrawals from Roth IRAs are tax-free if you’re 59½ or older and have held the account for at least five years. Unlike traditional IRAs and 401(k)s, Roth IRAs are not subject to required minimum distributions (RMDs). That means your money can continue growing tax-free for as long as you like, giving you more flexibility in retirement. 

Social Security

If your total income exceeds certain thresholds, a portion of your Social Security benefits may be taxable as ordinary income. The IRS uses combined income to determine how much of your benefits are subject to tax. Combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Here’s how Social Security taxation works:

• Single filer with a combined income of $25,000–$34,000: You pay taxes on up to 50% of your Social Security benefits. 
• Single filer with a combined income over $34,000: You pay taxes on up to 85% of your Social Security benefits.
• Joint filer with a combined income of $32,000–$44,000: You pay taxes on up to 50% of your Social Security benefits. 
• Joint filer with a combined income over $44,000: You pay taxes on up to 85% of your Social Security benefits.

Annuities 

The way annuities are taxed depends on whether they’re qualified or non-qualified:

• Qualified annuities: These are tax-deferred insurance products you buy with pre-tax dollars. The IRS taxes 100% of your payments as ordinary income. 
• Non-qualified annuities: You purchase non-qualified annuities with post-tax money. Since you’ve already paid taxes on the principal, the IRS only taxes your interest earnings.

Investment income 

The IRS taxes your investment income differently depending on how long you hold an asset and the type of income it produces:

• Long-term capital gains (over one year): If you sell an investment (like stocks, mutual funds, or real estate) after holding it for more than one year, any profit is taxed at the long-term capital gains rate. This is either 0%, 15%, or 20%, depending on your taxable income. 
• Short-term capital gains (less than one year): If you sell a capital asset after holding it for one year or less, any gains are taxed as ordinary income based on your tax bracket. 
• Other investments: The interest you generate from certificates of deposit (CDs), savings accounts, and bonds is taxed as ordinary income, regardless of how long you hold the account or security. 

Retirement tax: Taxable, tax-deferred, and tax-free buckets

A smart savings strategy will focus on minimizing taxes in retirement. Organizing your savings across taxable, tax-deferred, and tax-free options gives you more flexibility and control over your retirement withdrawals. Here’s how that might look:

• Taxable accounts: Taxable investment accounts include savings accounts, CDs, and brokerage accounts. The earnings are taxable in the year they’re realized. 
• Tax-deferred accounts: These accounts let you invest with pre-tax dollars, allowing your money to grow without being taxed until you withdraw it. These include traditional IRAs, 401(k)s, and qualified annuities. 
• Tax-free accounts: You fund tax-free accounts with after-tax dollars, including Roth IRAs, Health Savings Accounts (HSAs), and some municipal bonds. While you don’t get an upfront tax deduction (except in the case of HSAs), qualified withdrawals are tax free.

How to reduce taxes in retirement with a withdrawal strategy

Effective retirement tax strategies can reduce your tax liability and extend the life of your retirement savings. Many use the following withdrawal order:

1. Taxable accounts: Withdraw from taxable accounts before tapping into tax-advantaged accounts. Using these funds first helps preserve accounts that offer ongoing tax benefits. 
2. Tax-deferred accounts: Next, turn to tax-deferred accounts. Keep in mind that RMDs start at age 73.
3. Tax-free accounts: Finally, use tax-free accounts. You want to allow these investments to grow for as long as possible. 

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Tax-free investments for retirees

Tax-free investments can boost your retirement income but often have strict requirements. Here are the most common tax-free investments you can make.

Roth IRAs

Roth IRAs are a cornerstone of tax-free retirement income. Qualified withdrawals, after age 59½ and a five-year holding period, are tax-free. 

Municipal bonds

Interest from municipal bonds is typically exempt from federal income tax. If you buy bonds issued within your home state, you may also avoid state and local taxes. 

HSAs

These accounts offer three tax advantages:

• Tax deductible contributions reduce your taxable income.
• Tax-deferred growth on interest, dividends, and capital gains.
• Tax-free withdrawals when used for qualified medical expenses at any age.

After age 65, you can also use HSA funds for non-medical expenses without penalty, though they’re taxed as ordinary income if not used for healthcare. 

Tax-free loans from life insurance

Some permanent life insurance policies allow you to borrow against the accumulated cash value. These loans are typically not considered taxable income as long as the policy remains in force. 

Turn your retirement plan into reality with Gainbridge

Annuities can play an important role in your retirement strategy. With Gainbridge, you can purchase a tax-deferred annuity using qualified funds from a traditional IRA or 401(k), letting your money continue growing while creating a predictable stream of income in retirement. With competitive rates, flexible terms, and no hidden fees, you can invest in Gainbridge annuities with confidence. Explore your investment options with Gainbridge today.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

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