How Wealthy Retirees Plan to Minimize Taxes in Retirement

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Many Americans wonder how much money they need for a comfortable retirement — or whether retirement will be possible at all. But a retirement study from financial company Northwestern Mutual suggests wealthier people already have those questions answered: they estimate they need $3.9 million, and they expect to retire.

What worries them more, the survey found, is how much of that nest egg could be lost to taxes.

Among affluent respondents — defined as having at least $1 million in investable assets — 61% said they already have a strategy to help reduce the taxes they may owe in retirement.

Northwestern Mutual also identified the most common tax-planning moves cited by high-net-worth respondents. The top 10 were:

1. Strategically drawing from traditional and Roth accounts to stay in a lower tax bracket (44%)
2. Using a combination of traditional and Roth retirement accounts (37%)
3. Timing charitable gifts carefully, such as by bunching itemized deductions (27%)
4. Using a health savings account, or HSA, or another tax-advantaged health care account (24%)
5. Using tax-advantaged products such as permanent life insurance or annuities (24%)
6. Doing Roth conversions before required distributions or Social Security begin (23%)
7. Using qualified charitable distributions from an individual retirement account, or IRA (22%)
8. Contributing to other tax-advantaged accounts such as a 529 plan (17%)
9. Using the basis in the cash value of permanent life insurance to help remain in a lower tax bracket (19%)
10. Using a Qualified Longevity Annuity Contract, or QLAC, to reserve funds for later in retirement (17%)

How these retirement tax moves work

Most of these strategies come down to two basic ideas: making full use of tax-favored accounts and carefully choosing when to take money out so taxable income stays as low as possible in retirement.

Accounts such as the Roth 401(k) and Roth IRA are especially useful for limiting income taxes on retirement withdrawals. That is because Roth contributions are taxed before the money is invested. Later, qualified withdrawals from Roth accounts are tax-free, unlike money taken from other investments, Social Security benefits and traditional 401(k) accounts.

For wealthy savers, Roth conversions are also important because Roth IRAs have income limits that block many high earners from contributing directly. Instead, people with incomes of $161,000 or more for tax year 2024 can move money from traditional retirement accounts into a Roth IRA. They must pay taxes on the converted amount upfront, but they can later benefit from tax-free withdrawals in retirement.

HSAs offer another advantage in retirement beyond simply helping pay medical bills, even though that benefit alone is valuable. Fidelity estimates that a typical 65-year-old will need about $165,000 for health care costs.

Contributing to an HSA can reduce taxable income now while building a tax-free source of money for future medical expenses, as long as the funds are used for qualifying costs such as surgeries, prescriptions and common drugstore purchases like crutches, first-aid supplies and feminine hygiene products. It is also important to invest HSA money while it sits in the account.

After age 65, HSA funds can be withdrawn for any reason. If the withdrawal is not used for an approved medical expense, it is taxed as income.

That flexibility — and the ability to control what counts as taxable income — is what makes these accounts so valuable.