4. Learn about taxes on Social Security benefits
What you should do. Learn about Social Security’s rules for provisional income.
Provisional income is a measure used by the IRS to determine whether or not Social Security recipients are required to pay taxes on their benefits.
Retirement income such as interest, dividends, and taxable retirement account distributions, combined with your Social Security income, can cause up to 85 percent of your Social Security income to be taxable.
Since qualified Roth distributions are not taxable, they don’t count toward your provisional income. If you can turn more of your retirement distributions into Roth distributions, you can reduce the possible taxes on your Social Security benefits.
5. Consider a partial Roth conversion
What you should you do. Before you retire, and especially right after you retire, it can make a lot of sense to move some of your retirement money into Roth accounts through what is called a partial Roth conversion.
A Roth conversion involves moving money from a retirement account whose distributions are taxable — such as a 401(k), 403(b), or traditional IRA — into a Roth IRA. The conversion will generally be taxable, and subject to a 10 percent early withdrawal penalty if you’re younger than 59½, unless you follow specific IRS rules .
How this strategy saves on taxes. Once your retirement savings are in a Roth IRA, they’re no longer subject to required minimum distributions. You’ll have to pay taxes on the conversion, but you won’t pay taxes on the withdrawals going forward. This can help smooth out your level of taxable income [in retirement] and potentially drop you into a lower tax bracket.
Bonus tip : Ladder your conversions before RMDs begin. Instead of making one large conversion of 401(k), 403(b), or traditional IRA funds in a single year, which could trigger a large tax bill—especially if you’re still working — systematically convert smaller amounts over several years.
Bottom line
It’s important to preserve your retirement savings by understanding how your decisions about which accounts to withdraw money from and when will affect your tax bill. While taxes are far from the only consideration when dealing with retirement assets, learning the tax rules and savings strategies ahead of time can make a big difference in how much you owe and how much you’re able to keep.