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Taxes in Retirement: 5 Things Your Clients Need to Know

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Due to uncertainty surrounding compliance issues, many financial advisors are hesitant to address the topic of taxes. Lumping anything tax-related into “tax advice,” however, does a disservice to the client. Taxes can have a significant impact, especially for your clients in or near retirement. 

You may feel that many of the considerations outlined below don’t apply to your clients because of their asset levels, but there are opportunities if you know where to look. The interesting thing about retirement income planning is the level of flexibility you can have in some years to make your clients appear “poor on paper.” Understanding some of the tax benefits at lower income levels can add enormous value — even if your clients won’t qualify for them in most years. Here are five considerations that might influence which accounts your clients should withdraw from at which points in retirement. 

1. Zero Percent Capital Gains Tax Brackets

The 0% capital gains bracket can create unique planning opportunities. The standard deduction for those who are married and filing jointly is $25,100. Those who are married and over age 65 or blind receive an additional $1,350. A married couple filing jointly, both over 65, could have $108,600 of capital gains and pay no federal income tax at all, as long as the gain is the only thing on the return. Understanding the interaction between different types of income like capital gains, ordinary income and Social Security is essential to maximizing this opportunity. 

2. New RMD Tables

The IRS released new required minimum distribution (RMD) tables that become effective in 2022. The minimum distribution amount is reduced by roughly two years based on changes to life expectancy. The lifetime table had 27.4 years as the distribution period for age 70 on previous tables. Now at age 72 it has 27.4 years. Further out, the ages get closer and closer together, but it is a reduction in the amount that the client would have to take at any given age. A later start date coupled with new distribution factors will inevitably create confusion among clients. Communicating early on the topic will create opportunities for deeper planning discussions around which accounts to use at which points in retirement.

3. Social Security Taxation

As your clients’ taxable income increases, the potential tax they have to pay on Social Security benefits can also increase quickly. The combination of Social Security income with other taxable income could result in clients being subject to an effective marginal tax rate as high as 49.95% on a portion of their income. Delaying Social Security benefits increases the monthly benefit  your clients are entitled to receive and gives them more time to withdraw from pretax retirement accounts without creating an overlap between the two income sources.

4. Medicare Premiums

Advisors need to be on the lookout for pitfalls, such as unnecessary Medicare expenses. Medicare Part B and Part D premiums are based on modified adjusted gross income. For clients who are older than 65 or within two years of enrolling in Medicare, beware that Roth conversions can trigger premium surcharges. Understanding these thresholds will help you identify how much you should convert to the Roth. 

5. Homestead Exemptions for Property Taxes

Explore whether your client qualifies for a homestead exemption in their state. In my financial planning practice in Omaha, Nebraska, we see what’s called a homestead exemption that allows someone with lower income to avoid paying property tax. Some clients may be only slightly over the threshold because of their required minimum distributions.

Moving money from a traditional retirement account into a Roth IRA might bring down the required minimum distributions for future years and allow them to qualify. Note that the homestead exemption varies state by state and even county by county.

So much of the financial planning literature focuses on tax strategies for high-income people, but understanding the impacts of making a client “poor on paper” for just a few years can flip the strategies that you might have considered on their heads.


Joe Elsasser developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Joe later founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk. In January 2019, Covisum launched Income InSight, an income planning tool.

Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors.