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Taxes

Millionaires Low Taxes in Retirement: Strategies That Often Work

Rachel Kim Rachel Kim / / TAXES / 9 MINS

Low taxes in retirement is not an accident for many millionaires – it is usually the result of planning how income shows up on a tax return years before they stop working.

Contents
24 sections


  1. Why millionaires can have low taxes in retirement


  2. Build three tax buckets (and know what each one does)


  3. Decision rule: if you only have one bucket, taxes are harder to control


  4. Low taxes in retirement: the withdrawal order that often reduces lifetime taxes


  5. Watch the "hidden" tax costs


  6. Roth conversions: a common millionaire move (with a simple rule)


  7. A practical rule for deciding how much to convert


  8. Asset location: put the right investments in the right accounts


  9. Decision rule: start with the "worst taxed" income


  10. Use capital gains planning to control taxable income


  11. Delay or coordinate Social Security and pensions with your tax plan


  12. Real-number scenarios: what this can look like in practice


  13. Scenario 1: Early retiree couple, $1,500,000 portfolio, spending $90,000 per year


  14. Scenario 2: Retiree with a pension, $2,200,000 portfolio, spending $140,000 per year


  15. Scenario 3: High taxable wealth, $3,000,000 portfolio, spending $120,000 per year


  16. Timeline decision rules: under 1 year, 1 to 3 years, 3 to 7 years, 7+ years


  17. Under 1 year (near-term spending)


  18. 1 to 3 years (bridge years and flexibility)


  19. 3 to 7 years (pre-RMD planning)


  20. 7+ years (legacy and long-run tax control)


  21. Checklist: steps to pursue lower taxes without nasty surprises


  22. Tools and resources to verify rules and protect yourself


  23. Common mistakes that raise retirement taxes


  24. How to turn this into an action plan this month

Retirees with high net worth often have multiple “tax buckets” (taxable, tax-deferred, and tax-free), flexible income sources, and a plan for when to recognize income. The goal is not to avoid taxes forever. The goal is to control timing, keep taxable income in a preferred range, and reduce surprises like Medicare premium surcharges or higher taxation of Social Security.

Why millionaires can have low taxes in retirement

Two retirees can spend the same amount and pay very different taxes. The difference is often where the money comes from and how it is reported.

  • Some cash flow is not taxable income. Examples include qualified Roth withdrawals, return of principal from a taxable account, and certain municipal bond interest.
  • They can choose their income. A household living mostly on Social Security and dividends may show less taxable income than a household taking large IRA withdrawals.
  • They manage “income stacking.” Ordinary income (like IRA withdrawals) can push other items into higher brackets or trigger phaseouts.
  • They plan around cliffs. Medicare IRMAA surcharges and the taxability of Social Security can jump when income crosses thresholds.

Build three tax buckets (and know what each one does)

Low taxes in retirement article image about tax deductions, credits, and filing strategies
A closer look at Low taxes in retirement and what it means for tax planning and filing decisions.

A common millionaire pattern is to hold assets across three buckets so they can choose which one to draw from each year.

Bucket Common accounts How it is taxed Why it helps Main tradeoff
Taxable Brokerage account, CDs, money market funds Interest and non-qualified dividends usually taxed as ordinary income; qualified dividends and long-term gains often taxed at preferential rates; selling can create capital gains High flexibility, can manage gains, can harvest losses Ongoing taxes on interest and dividends; capital gains when you sell
Tax-deferred Traditional IRA, 401(k), 403(b) Withdrawals generally taxed as ordinary income Tax break up front, often large balances for high earners Required minimum distributions (RMDs) can force taxable income later
Tax-free Roth IRA, Roth 401(k) Qualified withdrawals generally tax-free Great for controlling taxable income in retirement Contributions may be limited; conversions can create taxes now

Decision rule: if you only have one bucket, taxes are harder to control

If most of your money is in a traditional 401(k) or IRA, retirement income can become “forced” later due to RMDs. If most is in taxable accounts, interest and dividends can keep income elevated. A mix gives you options year by year.

Low taxes in retirement: the withdrawal order that often reduces lifetime taxes

There is no single best order for everyone, but many higher-net-worth retirees use a flexible version of this sequence:

  1. Use taxable assets first (especially cash and lots with low capital gains), while doing controlled Roth conversions.
  2. Use tax-deferred next (traditional IRA/401(k)), aiming to fill lower tax brackets rather than spike income.
  3. Use Roth last for large one-time expenses, late retirement, or as a “tax control” lever.

Why this can work: it can reduce the size of future RMDs, keep taxable income steadier, and preserve Roth dollars for years when you want to avoid pushing into higher brackets.

Watch the “hidden” tax costs

  • Social Security taxation. More IRA withdrawals can make more Social Security taxable.
  • Medicare IRMAA. Higher income can increase Medicare Part B and Part D premiums.
  • Net Investment Income Tax (NIIT). Higher investment income can trigger extra tax for some households.

Roth conversions: a common millionaire move (with a simple rule)

Roth conversions move money from tax-deferred to Roth. You pay tax on the conversion now, but future qualified Roth withdrawals are generally tax-free. Millionaires often use conversions in years when taxable income is temporarily lower, such as early retirement before Social Security starts or before RMDs begin.

A practical rule for deciding how much to convert

  • Pick a target bracket. Many people aim to “fill up” a bracket they consider acceptable rather than jumping into a higher one.
  • Convert up to that ceiling. Estimate other income (pensions, dividends, part-time work) and convert the amount that keeps you under your target.
  • Re-check Medicare and other thresholds. A conversion can raise modified adjusted gross income and affect Medicare premiums.

For IRS guidance on retirement accounts and distributions, use IRS retirement plan resources.

Asset location: put the right investments in the right accounts

Millionaires often focus not only on what they invest in, but where they hold it. Asset location means placing tax-inefficient holdings in tax-advantaged accounts and tax-efficient holdings in taxable accounts.

Investment type Often more tax-efficient in Why What to watch
Broad stock index funds and ETFs Taxable Lower turnover can mean fewer taxable distributions; long-term gains may get preferential rates Dividends still taxable; selling creates gains
Taxable bonds and bond funds Traditional IRA/401(k) Interest is usually taxed as ordinary income Future withdrawals taxed as ordinary income
REIT funds Traditional or Roth Distributions can be tax-inefficient in taxable accounts Roth space is valuable; compare priorities
Municipal bonds Taxable (for some investors) Interest may be exempt from federal income tax Not always tax-free at the state level; credit risk still matters

Decision rule: start with the “worst taxed” income

Ordinary interest is often taxed less favorably than long-term capital gains. If you hold a lot of bond interest in a taxable account, your tax bill may be higher even if your spending is modest.

Use capital gains planning to control taxable income

Taxable brokerage accounts can be powerful for low-tax retirement because you can choose what to sell and when. Two key tools are:

  • Tax-gain harvesting. In some years, you may be able to realize long-term gains at favorable rates depending on your taxable income.
  • Tax-loss harvesting. Realizing losses can offset gains and potentially reduce taxes, while keeping your portfolio allocation similar (following wash sale rules).

These tactics are detail-heavy. If you use them, keep clean records and confirm the tax rules for your situation.

Delay or coordinate Social Security and pensions with your tax plan

Social Security timing is not only about the monthly benefit. It is also about how it interacts with other income.

  • Early retirement window. If you retire before claiming Social Security, you may have years with lower income that are ideal for Roth conversions or realizing capital gains.
  • Pension start dates. A pension can raise your baseline taxable income. That can change how much you should convert to Roth or withdraw from IRAs.

To understand how benefits and income fit together, it helps to map a year-by-year income plan from retirement through your 70s.

Real-number scenarios: what this can look like in practice

Below are three sample allocations and withdrawal approaches. These are simplified examples to show the mechanics. Real plans should account for your filing status, state taxes, deductions, healthcare costs, and portfolio risk.

Scenario 1: Early retiree couple, $1,500,000 portfolio, spending $90,000 per year

Portfolio allocation by tax bucket (adds up to $1,500,000):

  • $450,000 taxable brokerage and cash
  • $850,000 traditional 401(k)/IRA
  • $200,000 Roth IRA

Plan idea (ages 60 to 67): Spend mostly from taxable assets while converting $20,000 to $60,000 per year from traditional to Roth (amount depends on other income and target bracket). This can reduce future RMD pressure and build a larger Roth bucket for later.

Scenario 2: Retiree with a pension, $2,200,000 portfolio, spending $140,000 per year

Portfolio allocation (adds up to $2,200,000):

  • $700,000 taxable
  • $1,200,000 traditional IRA/401(k)
  • $300,000 Roth

Income reality: A $60,000 pension plus dividends can keep taxable income high even before RMDs. In this case, Roth conversions may be smaller or targeted to years with unusual deductions (large charitable gifts, high medical expenses, or a year with lower investment income). The retiree may also focus on managing capital gains and using Roth for one-time expenses to avoid jumping into higher brackets.

Scenario 3: High taxable wealth, $3,000,000 portfolio, spending $120,000 per year

Portfolio allocation (adds up to $3,000,000):

  • $2,100,000 taxable (index funds, some muni bonds, cash)
  • $600,000 traditional IRA/401(k)
  • $300,000 Roth

Why taxes can be low: If spending comes from a mix of qualified dividends, long-term capital gains, and return of principal, taxable income may be lower than the lifestyle suggests. This retiree might do modest Roth conversions to shrink future RMDs, but the main lever is careful capital gains management and asset location.

Timeline decision rules: under 1 year, 1 to 3 years, 3 to 7 years, 7+ years

Tax planning works best when it matches your time horizon for spending.

Under 1 year (near-term spending)

  • Keep a cash buffer for bills and taxes.
  • If you need to sell investments, consider selling lots with lower gains to reduce taxable income.
  • Plan for quarterly estimated taxes if you have significant investment income or conversions.

1 to 3 years (bridge years and flexibility)

  • Consider a “Roth conversion window” if you are retired but not yet taking Social Security or RMDs.
  • Coordinate withdrawals to avoid big income spikes that can raise Medicare premiums later.

3 to 7 years (pre-RMD planning)

  • Project your first RMD year and estimate how large it could be.
  • If projected RMDs look large, explore gradual conversions or higher withdrawals earlier to smooth taxes.

7+ years (legacy and long-run tax control)

  • Think about which assets you want to leave to heirs and how they will be taxed.
  • Review beneficiary designations and keep them consistent with your plan.
  • Revisit charitable goals and whether qualified charitable distributions (QCDs) may fit once eligible.

Checklist: steps to pursue lower taxes without nasty surprises

Step What to do Why it matters Common mistake
Inventory income sources List pensions, Social Security, dividends, rental income, IRA/401(k) balances Shows what income is “fixed” vs controllable Ignoring dividends and required distributions
Estimate RMDs Project account growth and future required withdrawals Helps prevent forced high-income years Waiting until RMD age to plan
Plan withdrawal order Decide which bucket funds baseline spending and which funds one-time expenses Controls taxable income year to year Taking all spending from traditional accounts
Check Medicare thresholds Before large conversions or gains, estimate impact on premiums Income can raise Part B and Part D costs Converting a large amount in one year without modeling
Coordinate with giving If charitably inclined, compare itemizing, donor-advised funds, and QCDs Can reduce taxable income efficiently Donating cash without checking the most tax-efficient method

Tools and resources to verify rules and protect yourself

  • For tax rules, retirement distributions, and Roth conversions, start with the IRS.
  • To understand how banks and deposit insurance work for cash holdings, review FDIC guidance.
  • For help spotting and reporting scams that target retirees, see the FTC consumer resources.

Common mistakes that raise retirement taxes

  • Relying on only one account type. A single-bucket plan limits your ability to manage taxable income.
  • Large one-time withdrawals. Big IRA withdrawals for a remodel or car can push you into higher brackets and affect Medicare premiums.
  • Ignoring state taxes. State rules for retirement income vary widely and can change the best withdrawal strategy.
  • Holding tax-inefficient assets in taxable accounts. High-interest holdings can create a steady tax drag.
  • Not planning for RMDs. RMDs can turn a low-tax early retirement into a higher-tax later retirement.

How to turn this into an action plan this month

  1. Pick your target spending number (for example, $80,000 to $150,000 per year) and estimate how much is fixed (pension, Social Security) vs flexible (withdrawals).
  2. List your balances by bucket: taxable, traditional, Roth.
  3. Run a simple 5-year projection of taxable income under two approaches: no Roth conversions vs gradual conversions.
  4. Choose a withdrawal policy: which account funds baseline spending, and which account is reserved for large purchases.
  5. Schedule an annual tax checkup before year-end so you can adjust conversions, harvesting, and withholding while you still have time.

Millionaires often get low taxes in retirement by building flexibility, then using that flexibility deliberately. If you focus on tax buckets, withdrawal order, and the timing of income, you can often reduce taxes over time while keeping your plan resilient.