How Will Taxes Impact My Retirement Income?

By Hightower St. Louis on March 24, 2025

Proper tax planning enhances your financial security throughout retirement

Taxes can significantly affect your retirement income, reducing the amount available for spending. Understanding how different income sources are taxed and implementing tax-efficient withdrawal strategies can help minimize tax burdens and maximize savings.

Taxable vs. Tax-Advantaged Income

Retirement income falls into three categories:

• Taxable Income: Withdrawals from traditional 401(k)s, IRAs, pensions, and some Social Security benefits are taxed as ordinary income.

• Tax-Free Income: Roth IRA and Roth 401(k) withdrawals (if held for at least five years and taken after age 59½) are tax-free.

• Partially Taxable Income: Social Security benefits may be partially taxed depending on overall income.

Required Minimum Distributions (RMDs)

Starting at age 73 (as of 2023), retirees must take RMDs from traditional IRAs and 401(k)s, which are subject to income tax. Failing to take RMDs results in a steep 25% penalty on the required withdrawal amount.

To mitigate RMD-related tax burdens, consider:

• Roth Conversions: Converting a portion of traditional accounts to Roth IRAs before RMDs begin to reduce future taxable income.

• Qualified Charitable Distributions (QCDs): Donating RMDs directly to charity to avoid taxation.

Tax-Efficient Withdrawal Strategies

A structured withdrawal plan can reduce tax liabilities:

1. Withdraw from taxable accounts first to allow tax-advantaged accounts to continue growing.

2. Tap traditional retirement accounts next to spread out taxable withdrawals over time.

3. Use Roth accounts last, as withdrawals are tax-free.

State Taxes and Retirement

Some states tax Social Security benefits and retirement income, while others offer exemptions. Before relocating, consider the tax-friendliness of potential states.

Proper tax planning ensures that more of your retirement savings are available for essential expenses, enhancing financial security throughout retirement.

This Week in Music History

July 14

• On this day in music, July 14, 1982, Pink Floyd’s psychological musical drama, The Wall premiered in London at The Empire, Leicester Square. David Gilmour, Roger Waters, and Nick Mason of the band all attended the event, alongside Pete Townshend, Sting, and Queen’s Roger Taylor, among other stars. The film, which starred musician Bob Geldof (The Boomtown Rats), blended live-action with animation, and was based on Pink Floyd’s hit 1979 album of the same name. A commercial success on both sides of the Atlantic, The Wall later earned two BAFTA Awards and remains a cult favorite among fans of the band.

July 15

• In 1958, John Lennon’s mother, Julia Lennon, was hit and killed by a car driven by an off-duty policeman. While John, who was 17 at the time of the tragedy, lived with his aunt Mimi, he was very close with his mother. Julia, in turn, was one of his biggest supporters at Quarrymen shows. The loss inspired several of the artist’s songs, including 1968’s “Julia” (with The Beatles) and his 1970 solo track, “Mother.” John’s first son, Julian, was named for Julia.

July 16

• In 1966, British blues-rock supergroup Cream was formed. The influential power trio, which consisted of guitarist Eric Clapton, singer, and bassist Jack Bruce, and drummer Ginger Baker, only stayed together for two years and four months, but in that time they racked up one gold and two platinum albums.

July 17

• Two jazz legends died on this day in music history.  In 1967, the broadly influential jazz saxophonist and composer John Coltrane died, aged 40, from liver cancer. Born in North Carolina and raised in Philadelphia, Coltrane rose to fame as a member of Miles Davis’ pathfinding quintet in the 1950s and played on several of the trumpeter’s key albums, including 1959’s Kind Of Blue. Coltrane’s stellar solo career, which took flight in the late 50s, saw him push the frontiers of modern jazz with groundbreaking albums like Giant Steps, My Favorite Things, and A Love Supreme, the latter sowing the seeds for the spiritual jazz movement.  And in 1959, legendary jazz singer Billie Holiday died at 44. Born Eleanora Fagan in Philadelphia, “Lady Day” was noted for her plaintive tone as well as her heightened musical sensitivity. Among her signature songs was the Civil Rights anthem, “Strange Fruit,” as well as the self-written “Lady Sings The Blues” and “God Bless the Child.” Despite her success, the influential singer did not have an easy life and struggled with addictions, legal troubles, and several abusive relationships.

July 18

• On this day in music, July 18, 1988, 49-year-old singer, songwriter, model, and actress Nico died in Ibiza. Born Christa Päffgen in Cologne, Germany, she started out as a teenage fashion model before moving into movies and music. Her association with pop-art guru Andy Warhol, who managed The Velvet Underground, led her to appear on the band’s debut album, The Velvet Underground & Nico, in 1967. The same year, she released her solo debut, Chelsea Girl, the first of seven studio albums.

Brian M McGraw, CPWA®, CFP®

Senior Wealth Advisor

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