Only 30% of Americans have a plan to minimize the taxes they pay on their retirement savings — how to keep your hard-earned cash away from Uncle Sam when you stop working

Many people have a retirement age in mind, along with a number as their retirement savings goal. They then focus on savings and investment strategies to amass this amount, as well as the method they’ll use to determine the size of their annual withdrawals (such as the 4% rule) in retirement.

One thing that’s easy to forget, however, is developing a strategy to minimize the taxes they’ll pay on their retirement savings.

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In 2022, the median income for a householder aged 65 or older in the U.S. was $50,290, according to the Census Bureau. If this is your retirement income, and it all comes from taxable sources, then a good chunk of it will find its way into government coffers. And this is only federal taxes. Depending on where you live, state and local taxes can substantially increase this amount.

It may come as a surprise, then, that only 30% of Americans have a plan to minimize the taxes they’ll pay on their retirement savings, according to Northwestern Mutual’s Planning & Progress Study 2024.

Roth IRAs can minimize retirement taxes

For many of those Americans with a plan, Roth individual retirement accounts (Roth IRAs) are an important part of a strategy to minimize the impact of taxes during their golden years.

When you contribute to a Roth IRA, you contribute with after-tax income, which means you don’t pay tax on withdrawals in retirement. This is most beneficial if you think your tax rate in retirement will be higher than the tax rate when you make your Roth IRA contributions or if you don’t have a retirement plan through work.

Beyond a Roth IRA, Americans can minimize their retirement tax bill by strategizing when they’ll take withdrawals from their traditional retirement accounts and when they’ll take withdrawals from their Roth IRA.

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Roth IRAs don’t have required minimum distributions (RMDs), so it can make sense, depending on your circumstances, to live off Social Security and the RMDs from your traditional accounts first, all while letting the investments in your Roth IRA grow tax-free for longer before you begin withdrawing from that account.

If you don’t have a Roth IRA and think you would benefit from one, you might want to consult a financial adviser on whether a Roth conversion might be right for you. This involves transferring funds from a traditional IRA or 401(k) into a Roth IRA. You’ll have to pay taxes on the money you transfer, but you won’t pay taxes on withdrawals in retirement. And you may be able to reduce the tax hit of the conversion by doing it in pieces over several years.

Giving to charity can help you while helping others

Another popular tax minimization strategy among those who have a plan is to make qualified charitable distributions (QCDs). These allow people over 70-and-a-half to transfer up to $100,000 of their IRA per year to a qualified charity.

It’s not counted as income, and you may be able to count this distribution toward your RMD. While you won’t be taxed on the distribution, you won’t be able to claim it as a charitable deduction. It’s a complicated program with many rules, so you may want to consult a tax professional first.

While they’re not the only options for minimizing taxes on retirement savings, Roth IRAs and QCDs are two of the most popular among those with a plan, according to Northwestern Mutual, and it’s worth speaking to a financial adviser about both. If possible, do this long before you retire: tax planning should be part of your overall retirement strategy, along with saving, investing and planning withdrawals.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.