How to Pay $0 in Taxes in Retirement
Most people assume paying taxes in retirement is inevitable—but what if it wasn’t? With proper planning, it’s possible to structure your finances in a way that minimizes—or even eliminates—your tax burden during retirement.
For architects and engineers in their 30s, 40s, and 50s, now is the ideal time to lay the groundwork for a financially efficient future. By balancing taxable, tax-deferred, and tax-free accounts, you can enjoy greater flexibility and more control over your income when you retire.
Here’s everything you need to know about working toward paying $0 in taxes during retirement.
Why Taxes Are a Big Deal in Retirement
Retirement is supposed to be a time to relax, but taxes can quickly complicate things if you’re not prepared. Even if you’ve saved diligently, the wrong asset mix could mean paying more in taxes than you need to. Here’s why taxes often catch retirees off guard:
Required Minimum Distributions (RMDs): Once you reach age 73, the IRS requires you to start withdrawing from tax-deferred accounts like traditional 401(k)s and IRAs. These required withdrawals can be more than you want to take out and are taxed as ordinary income, which can push you into a higher tax bracket.
Social Security Taxation: If your combined income exceeds $25,000 for individuals or $32,000 for couples, up to 85% of your Social Security benefits could become taxable.
Medicare Premiums: Higher taxable income can trigger IRMAA (Income-Related Monthly Adjustment Amount), increasing your Medicare premiums significantly.
State Taxes: Depending on where you retire, state taxes could further erode your retirement income.
A carefully planned tax strategy can help you avoid these pitfalls and keep more of your hard-earned money.
The Three Tax Buckets
The key to a tax-efficient retirement lies in balancing your assets across three tax categories: taxable, tax-deferred, and tax-free.
Let’s break each one down:
1. Taxable Accounts
Examples: Brokerage accounts, savings accounts, CDs
How they work: Contributions are made with after-tax dollars. Investment gains are taxed annually (dividends, interest) or when assets are sold (capital gains).
Role in retirement: Taxable accounts are versatile and provide liquidity, making them ideal for short-term needs or early retirement before accessing tax-advantaged accounts.
What to watch out for: High turnover in taxable accounts can trigger frequent capital gains taxes, reducing net returns.
2. Tax-Deferred Accounts
Examples: Traditional 401(k), Traditional IRA, SEP IRA
How they work: Contributions are pre-tax, which lowers taxable income today. However, withdrawals are taxed as ordinary income during retirement, and RMDs are required.
Role in retirement: Tax-deferred accounts are excellent for tax savings during your working years, but they can become tax burdens later without proper planning.
What to watch out for: Overloading tax-deferred accounts can lead to high RMDs that increase taxable income and potentially push you into a higher tax bracket in retirement.
3. Tax-Free Accounts
Examples: Roth IRA, Roth 401(k), Health Savings Account (HSA)
How they work: Contributions are made with after-tax dollars, but withdrawals (including growth) are completely tax-free if rules are followed.
Role in retirement: Tax-free accounts are the foundation of a tax-efficient retirement, providing income without increasing your taxable income.
What to watch out for: Contribution limits and income restrictions on Roth accounts require early and consistent planning to maximize this bucket.
Steps to Build a Tax-Free Retirement
1. Maximize Contributions to Tax-Free Accounts
Contribute the maximum allowed to Roth IRAs and Roth 401(k)s.
Roth IRA Limit (2024): $7,000 annually ($8,000 if age 50+).
Roth 401(k) Limit (2024): $23,000 annually ($30,500 if age 50+).
Use an HSA if you’re eligible, as it offers triple tax advantages (pre-tax contributions, tax-free growth, tax-free withdrawals for medical expenses).
2. Roth Conversions
Convert portions of traditional IRA or 401(k) balances into Roth accounts during low-income years.
Example: Converting $50,000 at a 12% tax rate costs $6,000 now but avoids higher taxes on withdrawals later.
3. Optimize Tax-Deferred Contributions
Contribute enough to take full advantage of employer matches on 401(k)s but avoid overloading this bucket.
Consider stopping contributions to tax-deferred accounts once you’ve built a solid foundation and prioritize Roth accounts instead.
4. Leverage Taxable Accounts for Flexibility
Invest consistently in taxable accounts to build a liquid reserve.
Use these funds for early retirement or large expenses to avoid tapping into tax-deferred or tax-free accounts prematurely.
5. Plan Strategic Withdrawals
In retirement, withdraw strategically:
Use taxable accounts first to avoid triggering taxes on tax-deferred accounts.
Withdraw from tax-deferred accounts next, focusing on filling lower tax brackets.
Use tax-free accounts last to avoid exceeding income thresholds for Social Security or Medicare surcharges.
Case Study: Chris and Taylor’s Path to $0 Taxes in Retirement
Chris and Taylor are a married couple, both 42, with a shared goal of retiring by age 65. They want to structure their finances to minimize taxes in retirement while covering their projected annual expenses of $120,000. Here’s where they stand today, their retirement target, and their plan to get there.
Where Chris and Taylor Are Today
Taxable Brokerage Account: $100,000
Tax-Deferred Accounts (401(k)s): $400,000 combined
Tax-Free Accounts (Roth IRAs): $50,000 combined
Social Security Projection: $40,000 annually (combined) starting at age 65
Their current portfolio is heavily skewed toward tax-deferred accounts, which could create a significant tax burden in retirement due to required minimum distributions (RMDs). Their goal is to shift to a more balanced portfolio across taxable, tax-deferred, and tax-free buckets by the time they retire.
Retirement Target (Age 65)
By age 65, Chris and Taylor want their portfolio to look like this:
Tax-Free Accounts (Roth IRAs): $600,000
Provides tax-free income to cover essential expenses.
Tax-Deferred Accounts (401(k)s): $700,000
Allows for strategic withdrawals to fill lower tax brackets.
Taxable Accounts: $300,000
Offers flexibility for early or one-time expenses.
This balance ensures they can withdraw strategically in retirement while keeping taxable income low enough to pay little or no federal taxes.
How This Plan Works in Retirement
Social Security: $40,000 annually (combined). Only $10,000 is taxable, thanks to careful management of their combined income.
Taxable Account Withdrawals: $50,000 annually. Only half ($25,000 in capital gains) is taxable, and it falls within the 0% long-term capital gains tax bracket.
401(k) Withdrawals: $20,000 annually. This is taxed as ordinary income but is offset by the $29,200 standard deduction.
Roth IRA Withdrawals: $10,000 annually. These withdrawals are tax-free and fill the gap to meet their $120,000 expense needs.
Result: Chris and Taylor meet their retirement expenses while keeping their federal tax liability at $0.
Action Plan to Achieve the Ideal Balance
Chris and Taylor need to take several steps over the next 23 years to transition to their target asset mix:
Max Out Roth IRA Contributions
Each contributes the maximum annual limit of $7,000 (or $14,000 total) to their Roth IRAs.
This grows their tax-free bucket significantly by retirement.
Roth Conversions
Over the next 10-15 years, they convert portions of their 401(k) balances to Roth IRAs during lower-income years.
Target: Convert $20,000 annually, ensuring conversions stay within the 12%-22% tax brackets.
Shift Savings Toward Taxable Accounts
Allocate $5,000 annually to their taxable brokerage account for flexibility.
This diversifies their income sources for early retirement needs and one-time expenses.
Strategic 401(k) Contributions
Contribute enough to their 401(k)s to receive full employer matches but avoid overloading this bucket.
This helps manage future RMDs and limits taxable income in retirement.
Invest for Growth
Use a diversified investment strategy across all three buckets to maximize long-term growth.
Projected Results at Age 65
Tax-Free Accounts (Roth IRAs): $600,000 (from contributions, conversions, and growth).
Tax-Deferred Accounts (401(k)s): $700,000 (from growth, reduced by Roth conversions).
Taxable Accounts: $300,000 (from contributions and growth).
This balanced portfolio sets Chris and Taylor up to meet their retirement expenses of $120,000 while minimizing taxes, ensuring financial freedom and flexibility.
Benefits of a Tax-Free Retirement
A tax-free retirement offers more than just financial savings—it provides flexibility and peace of mind. Key advantages include:
No taxes on Roth withdrawals
Reduced Social Security taxation
Lower Medicare premiums
Greater control over your income levels
Less worry about future tax hikes
Why Start Planning Now?
Achieving a tax-free retirement takes time and consistency. Starting early gives you:
More time for compound growth in tax-free accounts.
Flexibility to execute Roth conversions during low-income years.
The ability to maximize contributions to all three tax buckets.
Small actions today—like contributing to a Roth IRA or creating a conversion plan—can lead to significant tax savings and financial freedom later.
Build Your Zero-Tax Retirement
Paying $0 in taxes during retirement isn’t a pipe dream—it’s a realistic goal with the right planning. By balancing your taxable, tax-deferred, and tax-free assets, you can minimize your tax burden and gain greater control over your financial future.
Want to know if you’re on track for a tax-free retirement?
Contact me today to create a personalized plan that sets you up for long-term financial success.
Disclaimer: Information provided for general education only. This is not tax or investment advice. Talk to a professional about your specifics before making any major decisions.
