Tax Planning: Why It Should Be a Year-Round Priority
For many, taxes are only top-of-mind when it’s time to file a return. But effective tax planning isn’t a once-a-year activity—it’s a year-round effort that can save you money, mitigate stress, and help you make the most of your financial resources. This is especially true if you’re nearing or already in retirement, as strategic tax planning has the potential to significantly impact your financial security during your retirement years.
The Case for Year-Round Tax Planning
Filing your tax return is just one step in what should ideally be a continuous process. Throughout the year, financial decisions—such as selling investments, donating to charity, or adjusting your withholding—can affect your tax situation. By adopting a proactive approach, you can:
Minimize surprises. Waiting until tax season to review your finances could result in an unexpected bill. Year-round planning helps you anticipate and mitigate potential tax liabilities.
Maximize deductions and credits. Tracking deductible expenses, such as medical costs or charitable contributions, throughout the year ensures you don’t overlook opportunities to reduce your tax bill.
Align with your financial goals. Tax strategies often intersect with broader financial planning, such as saving for retirement, managing investment income, or leaving a legacy for loved ones.
Avoid a Big Tax Bill Checklist
Tax planning is more than just filing your return—it’s about making strategic moves to lower your taxable income and
keep more of your wealth.
Special Considerations for Pre-Retirees
If you’re nearing retirement, tax planning becomes even more critical. Your income sources are likely to change, and with them, your tax obligations. Consider these strategies:
Plan for required minimum distributions (RMDs). Once you turn 73, the IRS requires you to take minimum withdrawals from most retirement accounts, such as traditional IRAs or 401(k)s. The IRS taxes RMDs as ordinary income, and failing to take them can result in hefty penalties. Planning ahead can help you manage the tax impact.
Leverage Roth conversions. Converting a portion of your traditional IRA or 401(k) to a Roth account before retirement can spread your tax liability over several years and reduce taxable income during retirement. This strategy is advantageous if you’re in a lower tax bracket now than you expect to be in later.
Consider healthcare expenses. Pre-retirees often face increased medical costs as they transition to Medicare. If you’re still working, maximizing contributions to a Health Savings Account (HSA) can provide a triple tax advantage: contributions are deductible, growth is tax-free, and withdrawals for qualified expenses are tax-free.
Tax Strategies for Retirees
Retirement brings unique tax challenges and opportunities. Without a regular paycheck, your income sources—Social Security, pensions, investments, and retirement accounts—require careful management to avoid unnecessary tax burdens. Here are a few key considerations:
Manage Social Security taxation. Up to 85% of your Social Security benefits can be taxable, depending on your income. Keeping your taxable income below certain thresholds can help reduce or eliminate taxes on these benefits.
Use tax-efficient withdrawal strategies. The sequence in which you withdraw from different accounts—taxable, tax-deferred, or tax-free—can affect how much you pay in taxes over time. For example, tapping taxable accounts first may allow tax-deferred investments to grow longer, but the best strategy depends on your unique circumstances.
Capitalize on charitable giving. If you don’t itemize deductions, consider a qualified charitable distribution (QCD) from your IRA. QCDs allow you to donate up to $108,000 directly to charity in 2025, satisfying your RMD requirements while keeping the distribution tax-free. (Source: IRS)
Staying Ahead of Tax Changes
Tax laws and regulations evolve regularly, so staying informed or working with a tax professional is essential. For example, several Tax Cuts and Jobs Act provisions are set to expire after 2025, and other changes could be on the horizon, potentially affecting tax rates for many taxpayers. Understanding these changes now can help you adjust your strategy.
Partnering with a Professional
Tax planning can feel overwhelming, but you can partner with a financial advisor who can help. Your financial advisor can collaborate with your tax professional and CPA to help you understand available strategies and significant tax law changes. They can help you:
- Develop a tax-efficient retirement income plan.
- Optimize investment strategies for tax savings.
- Adjust your plan in response to life changes or new legislation.
Taking a proactive approach to tax planning year-round lets you stay ahead of potential challenges and take advantage of opportunities to help maximize wealth. Whether you’re preparing for retirement or already enjoying it, thoughtful tax planning is one of the most impactful ways to help prepare for your financial future.