What changes about taxes when you stop working

Your tax situation shifts the moment you retire. You no longer have an employer withholding taxes from a paycheck, so you become responsible for paying taxes on your own schedule. Your income sources change too — instead of wages, you now draw from Social Security, pensions, retirement accounts, and possibly investments. Each source is taxed differently, and the order in which you withdraw money matters.

The goal of tax planning in retirement is not to avoid taxes — you owe what you owe — but to arrange your income so you pay the least amount legally required. A difference of a few thousand dollars in how you structure withdrawals can mean hundreds or thousands in taxes you do not have to pay.

Key Takeaways

  • Social Security becomes taxable once your combined income (adjusted gross income plus half your Social Security) exceeds certain thresholds, which vary by filing status.
  • Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, while Roth IRA withdrawals are tax-free if the account is at least five years old.
  • Required Minimum Distributions from traditional retirement accounts begin at age 73 and can push you into a higher tax bracket if you do not plan ahead.
  • Charitable donations, medical expenses, and property taxes can reduce your taxable income if you itemize deductions instead of taking the standard deduction.
  • Timing large withdrawals, conversions, and income across multiple years can keep you in a lower tax bracket and preserve your Medicare premium rates.

How Social Security income gets taxed

Social Security is not automatically taxed, but it becomes taxable once your combined income crosses a threshold. Combined income means your adjusted gross income plus half your Social Security benefit. For a single filer in 2024, the first threshold is $25,000. For married filing jointly, it is $32,000. These amounts do not change with inflation.

If your combined income exceeds the first threshold, up to 50 percent of your Social Security becomes taxable. If it exceeds the second threshold ($34,000 for single filers, $44,000 for married filing jointly), up to 85 percent becomes taxable. This means delaying other income — or timing withdrawals from retirement accounts — can keep your combined income below the threshold and save you hundreds in taxes on your Social Security.

One common strategy is to delay taking Social Security if you do not need it when ready, because the longer you wait (up to age 70), the larger your monthly benefit becomes. Another is to withdraw from a Roth IRA instead of a traditional IRA in years when your other income is low, since Roth withdrawals do not count toward combined income.

Choosing which retirement account to withdraw from first

Most retirees have money in multiple places: a traditional IRA, a 401(k), a Roth IRA, a taxable brokerage account, or some combination. The order in which you withdraw from them affects how much you owe in taxes.

Taxable brokerage accounts should usually come first. You pay tax only on the gains, not the full amount you withdraw. If you bought a stock for $10,000 and it is now worth $15,000, you owe tax only on the $5,000 gain. Traditional IRAs and 401(k)s come next. Every dollar you withdraw is taxed as ordinary income at your current tax rate. Roth IRAs should come last, because withdrawals are tax-free if the account has been open at least five years and you are at least 59½.

This order assumes you do not have a Required Minimum Distribution (RMD) coming due. If you do, you must take the RMD first — the IRS does not let you choose. But for discretionary withdrawals, this sequence minimizes your tax bill.

Managing Required Minimum Distributions

At age 73, the IRS requires you to withdraw a set percentage of your traditional IRA and 401(k) balances each year. This is your Required Minimum Distribution, or RMD. The percentage increases with age. At 73 it is roughly 3.5 percent; at 80 it is roughly 5.1 percent; at 90 it is roughly 8.9 percent.

The RMD is calculated on December 31 of the prior year and must be withdrawn by December 31 of the current year. If you miss the important date, the penalty is 25 percent of the amount you should have withdrawn (reduced to 10 percent if you correct it within two years). You can take the RMD in a lump sum or spread it across the year.

The challenge is that a large RMD can push you into a higher tax bracket and make more of your Social Security taxable. One strategy is to convert part of your traditional IRA to a Roth IRA in years when your income is low — this counts as income in the conversion year, but it reduces your traditional IRA balance and therefore your future RMDs. Another is to donate your RMD directly to a charity if you are charitably inclined; this counts toward your RMD but does not count as taxable income.

Using deductions to reduce taxable income

Every filer gets a standard deduction — the amount you can subtract from your income before calculating taxes. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. If you are 65 or older, you get an extra $1,850 (single) or $1,500 per spouse (married).

You can instead itemize deductions if your deductible expenses are larger than the standard deduction. Deductible expenses include state and local taxes (capped at $10,000), mortgage interest, charitable donations, and unreimbursed medical expenses above 7.5 percent of your adjusted gross income. If you are 65 or older and your medical expenses are high, itemizing can save you thousands.

A common strategy for retirees is to bunch charitable donations into one or two years instead of spreading them across many years. If you donate $5,000 every year, you never exceed the standard deduction and get no tax benefit. But if you donate $20,000 in one year and nothing the next, you can itemize in the donation year and take the standard deduction in the other year, saving taxes both ways.

Tax-loss harvesting and capital gains management

If you own stocks or mutual funds in a taxable brokerage account, you pay tax on the gains when you sell. But you can offset gains by selling investments at a loss — this is called tax-loss harvesting. If you sell a stock for $8,000 that you bought for $10,000, you have a $2,000 loss. You can use this loss to offset $2,000 in gains from other sales, or up to $3,000 in ordinary income, in the same year.

Unused losses carry forward to future years, so if you have a $5,000 loss and only $2,000 in gains, you can use the remaining $3,000 loss next year. This is especially useful in retirement, when you may have lower income and can absorb losses more easily.

Long-term capital gains (from investments held more than one year) are taxed at lower rates than ordinary income — 0, 15, or 20 percent depending on your income level. Short-term gains are taxed as ordinary income. Holding investments longer before selling can save you money, and knowing your tax bracket helps you decide when to sell.

Roth conversions and tax-bracket planning

A Roth conversion means moving money from a traditional IRA to a Roth IRA. You pay income tax on the amount converted in that year, but the money grows tax-free in the Roth and you never pay tax on withdrawals. This sounds expensive, but it can save money if you convert in a low-income year.

For example, if you retire at 62 and do not claim Social Security until 70, you may have very low income for those eight years. Converting $50,000 from a traditional IRA to a Roth during this period might cost you $7,500 in taxes (at a 15 percent rate), but you avoid taxes on that $50,000 and its growth for the rest of your life. If that money grows to $150,000 by the time you withdraw it, you have saved $45,000 in taxes.

The catch is that a conversion counts as income in the year you do it, which can trigger higher Medicare premiums and make more of your Social Security taxable. You have to run the numbers for your specific situation. Many retirees work with a tax professional to model conversions across multiple years.

Frequently Asked Questions

Do I have to file taxes if my income is below the standard deduction?

No. If your income is below the standard deduction for your age and filing status, you do not have to file a federal income tax return. However, you may want to file anyway if you had taxes withheld from your paychecks or if you are owed a refund or tax credit.

What is the difference between a traditional IRA and a Roth IRA for tax purposes?

Traditional IRA contributions may be tax-deductible in the year you make them, and withdrawals are taxed as ordinary income. Roth IRA contributions are not deductible, but withdrawals are tax-free if the account is at least five years old and you are at least 59½. Roth withdrawals also do not count toward Social Security combined income.

Can I avoid the Required Minimum Distribution?

No. The RMD is mandatory at age 73 for traditional IRAs and 401(k)s. You cannot avoid it, but you can plan for it by converting to a Roth, donating to charity, or timing other income to stay in a lower tax bracket. Roth IRAs have no RMD during the account owner's lifetime.

How do I know if I should itemize or take the standard deduction?

Add up your deductible expenses: state and local taxes (up to $10,000), mortgage interest, charitable donations, and medical expenses above 7.5 percent of your income. If the total exceeds the standard deduction for your age and filing status, itemize. Otherwise, take the standard deduction.

What records do I need to keep for tax planning?

Keep statements from all retirement accounts, brokerage accounts, and Social Security. Save receipts for charitable donations, medical expenses, and property taxes. Keep records of cost basis for investments (what you paid for them) so you can calculate gains and losses accurately. The IRS generally looks back three to seven years.