How Taxes Change After You Retire

Tax Planning Strategies Every Long Island Retiree Should Know

In more than two decades of sitting across the table from retirees, I’ve noticed something that surprises almost everyone: retirement marks the end of earning a paycheck, but it doesn’t mark the end of tax planning. If anything, the questions get more complicated, not less.

Retirement often introduces a new set of tax considerations that can affect how much of your savings you ultimately keep. From Social Security and Required Minimum Distributions (RMDs) to Medicare premiums and retirement account withdrawals, the decisions you make throughout retirement can have lasting tax implications.

At Opal Wealth Advisors, we believe retirement planning and tax planning should go hand in hand. While no one can eliminate taxes entirely, thoughtful planning can help you make more informed decisions about where your retirement income comes from, when to withdraw assets, and how to potentially improve tax efficiency over time.

Whether you’re preparing to retire or are already enjoying retirement on Long Island, understanding how taxes change can help you feel more confident about your financial future.

Why Taxes Matter More After You Retire

Many people assume their tax bill will automatically decrease once they stop working. I wish that were true more often than it is. While taxable income may decline for some retirees, others discover that retirement income comes from several different sources, each with its own tax treatment, and those sources rarely work in your favor by accident.

Your retirement income may include:

• Social Security benefits
• Traditional IRAs
• 401(k) plans
• Roth IRAs
• Pension income
• Taxable investment accounts
• Rental properties
• Part-time employment
• Business income
• Annuities

The way these income sources work together can influence your tax bracket, Medicare premiums, and even how much of your Social Security benefits become taxable. I’ve sat with retirees whose total income looked modest on paper, yet they still ended up paying more tax than they expected, simply because of how their withdrawals were sequenced.

Rather than looking at each account separately, it’s important to view your retirement income as part of a coordinated tax strategy.

Are Social Security Benefits Taxable?

One of the most common questions I hear across my desk is:

“Do I have to pay taxes on Social Security?”

The answer is, it depends, and the mechanics behind it catch a lot of people off guard.

The IRS calculates what’s known as your combined income, which includes:

• Your Adjusted Gross Income (AGI)
• Tax-exempt interest
• Half of your Social Security benefits

For a single filer, combined income between $25,000 and $34,000 can make up to 50% of benefits taxable, and above $34,000, up to 85% can be taxable. For married couples filing jointly, those thresholds are $32,000 and $44,000. [1] These figures haven’t been adjusted for inflation since 1984, which is part of why more retirees cross them every year.

Many retirees are surprised to learn that simply withdrawing additional money from an IRA or realizing investment gains can increase the taxable portion of their Social Security benefits. I sometimes call this the tax torpedo: an extra dollar of ordinary income can effectively get taxed twice, once directly and once by pulling more of your Social Security into taxable territory, which can push your real marginal rate well above your stated tax bracket.

This is one reason retirement income planning is about more than deciding how much to withdraw. It’s also about understanding where those withdrawals come from.

How Traditional IRAs and 401(k)s Are Taxed

Traditional retirement accounts allow many investors to save on taxes during their working years. The tradeoff is that withdrawals in retirement are generally taxed as ordinary income, and in my experience, that trade catches people off guard because it feels like a bill they already paid.

Large withdrawals from tax-deferred accounts may affect:

• Your federal income tax bracket
• The taxation of Social Security benefits
• Medicare Part B and Part D premiums
• State income taxes

For many retirees, determining when and how much to withdraw each year can be just as important as deciding where to invest. I’ve worked with clients who could have kept tens of thousands of dollars more over their retirement simply by changing the order in which they tapped their accounts.

Are Roth IRA Withdrawals Tax-Free?

Unlike Traditional IRAs, qualified Roth IRA withdrawals are generally tax-free because contributions were made with after-tax dollars.

This flexibility can make Roth assets a valuable part of a retirement income strategy, and it’s one of the few tools that lets you control your taxable income in a given year almost on demand.

Rather than relying solely on taxable retirement accounts, having a mix of taxable, tax-deferred, and tax-free assets may provide more flexibility when managing taxes throughout retirement.

Required Minimum Distributions (RMDs) Can Increase Your Tax Bill

Many retirees focus on saving for retirement but give less thought to Required Minimum Distributions, and I understand why. For most of your working life, nobody is telling you that you have to take money out.

Once you reach the age established under current IRS rules, generally 73 under the SECURE 2.0 Act and moving to 75 for those born in 1960 or later, you’ll generally be required to begin taking annual distributions from most tax-deferred retirement accounts. [2] I’ve now watched this age move twice over the course of my career, which is exactly why I encourage clients to build flexibility into their plans rather than anchor to whatever the current rule happens to be.

Those withdrawals:

• Increase taxable income
• May push you into a higher tax bracket
• Can increase the taxable portion of Social Security
• May increase Medicare premiums through IRMAA

Waiting until RMDs begin to think about taxes may limit your planning opportunities. Some of the most effective tax planning I do with clients happens in the decade before RMDs start, not after.

Medicare Premiums Are Also Affected by Income

Taxes aren’t the only consideration.

Medicare uses your income, specifically your Modified Adjusted Gross Income from two years prior, to determine whether you’ll pay an Income-Related Monthly Adjustment Amount (IRMAA).

Higher retirement income can lead to higher premiums for Medicare Part B and Part D. At the higher income tiers, that surcharge can add several hundred dollars a month per person, which is a number that tends to change client behavior once they see it in writing. [4]

Large Roth conversions, investment gains, or significant IRA withdrawals in a single year may increase Medicare costs in future years. I’ve had clients call two years after a large withdrawal wondering why their Medicare premium suddenly jumped, not realizing the two-year lookback was the cause.

Understanding these thresholds is another reason retirement tax planning should extend beyond simply preparing your annual tax return.

Retirement Tax Planning Is About More Than This Year’s Taxes

Many people think of tax planning as something that happens each spring, usually in a rush, with a shoebox of receipts.

At Opal Wealth Advisors, we take a broader view.

Effective retirement tax planning means evaluating how today’s decisions may affect your finances over the next 10, 20, or even 30 years.

That may include:

• Determining which accounts to withdraw from first
• Evaluating Roth conversion opportunities
• Managing taxable income before RMDs begin
• Coordinating retirement income with Social Security
• Considering the tax implications of charitable giving
• Planning for future healthcare costs

Every retirement is different, which is why strategies should reflect your personal goals, income needs, and overall financial picture. In two decades of doing this work, I’ve never seen two retirements that looked exactly alike, even among siblings with similar incomes.

What About New York Taxes?

For Long Island retirees, federal taxes are only part of the equation.

New York has its own rules regarding retirement income, pensions, and other sources of income.

New York does not tax Social Security benefits at the state level. [3] Many retirees are also eligible for a pension and retirement income exclusion of up to $20,000 per person for those age 59½ and older, and New York State and local government pensions may qualify for a full exclusion from state income tax. [3]

Whether you’re planning to remain on Long Island or considering relocating in retirement, understanding how state taxes fit into your overall financial plan can help you make more informed decisions.

I’ve had more than one client seriously consider a move to Florida for tax reasons alone, only to find once we ran the actual numbers that Long Island’s treatment of Social Security and retirement income made the math closer than they expected.

Taxes should never be the sole reason to move, but they are an important part of the conversation when evaluating your long-term retirement strategy.

If you’ve spent your career on Long Island, coordinating federal tax rules with New York’s specific treatment of Social Security and pension income is an important part of keeping more of what you’ve saved.

Common Retirement Tax Strategies

While every situation is unique, retirees often consider strategies such as the ones I walk through with clients every week:

Coordinating Retirement Account Withdrawals

Choosing where retirement income comes from each year may help manage taxable income over time.

Evaluating Roth Conversions

Some retirees explore Roth conversions during years when their taxable income is lower to potentially reduce future Required Minimum Distributions. I look for these windows especially in the years between retirement and when Social Security or RMDs begin, when taxable income is often at its lowest point in a client’s retirement.

Managing Investment Taxes

Coordinating capital gains, dividends, and investment withdrawals may improve overall tax efficiency.

Charitable Giving Strategies

Qualified Charitable Distributions (QCDs) may allow eligible retirees to satisfy Required Minimum Distribution requirements while supporting charitable organizations. [5] This is one of my favorite tools to recommend because it’s one of the rare strategies that helps a client’s tax return and the causes they care about at the same time.