Don't Let the IRS Be Your Silent Retirement Partner: Tax Basics for Pre-Retirees

Taxes can quietly take a bigger bite out of retirement than many people expect. This educational guide walks pre-retirees through the common retirement account types, the tax "gotchas" that can turn the IRS into an unintended partner, and a few realistic case studies to show how planning choices can change outcomes.

Quick reminder (important): This is general education, not tax advice. Rules vary by income, state, and account details, and they continue to change from year to year. A qualified tax professional can help you apply these concepts to your specific situation.

Know How Your Accounts Are Taxed

Every retirement dollar you have saved carries its own tax character, and that character determines how much of it is really yours. A Traditional 401(k) or Traditional IRA is typically funded with pre-tax contributions that grow tax-deferred, which means withdrawals in retirement are generally taxed as ordinary income. A Roth 401(k) or Roth IRA works in the opposite direction: contributions are made with after-tax dollars, so qualified withdrawals are generally tax-free, as long as certain rules around age and account age are met. A taxable brokerage account sits in a third category entirely, where dividends and interest can be taxed annually and selling an investment can trigger capital gains, taxed differently depending on whether you held it for the short term or the long term. Understanding which bucket your money sits in today is the first step toward understanding what you will actually get to keep tomorrow.

The Tax Multipliers That Surprise Pre-Retirees

Even when spending stays steady in retirement, taxes can quietly rise if multiple income sources stack up in the same year. Required minimum distributions are one of the most common surprises. Once you reach age seventy-three, the IRS requires you to begin withdrawing a minimum amount from most tax-deferred accounts each year, whether you need the income or not, and those withdrawals count as taxable income that can push you into a higher bracket than expected. Social Security benefits add another layer, since depending on your total income, anywhere from none to as much as eighty-five percent of your benefit can become taxable. And income above certain thresholds can increase what you pay for Medicare through a surcharge commonly known as IRMAA, which is based on a two-year lookback at your income. None of these are new taxes exactly, but together they can turn a retirement that felt carefully planned into one where the IRS quietly takes a larger seat at the table than anyone intended.

One recent change is worth knowing about if you are sixty-five or older. Starting with the 2025 tax year and running through 2028, a new senior bonus deduction allows qualifying individuals to deduct up to an additional six thousand dollars, or twelve thousand dollars for a married couple where both spouses qualify, on top of the existing extra standard deduction for seniors. It phases out for higher earners, so it will not apply to everyone, but for many pre-retirees and retirees it is a meaningful, if temporary, opportunity worth factoring into a tax plan.

A Few Realistic Case Studies

Consider a couple we will call James and Linda, both sixty-four, who built the bulk of their savings in a Traditional IRA over a long career. Looking ahead to required minimum distributions at seventy-three, they realize those forced withdrawals would land on top of Social Security and push them into a higher bracket than they want to be in for the next twenty years. Rather than wait for the IRS to set the terms, they work with their advisor on a multi-year Roth conversion strategy, moving a deliberate slice of the Traditional IRA into a Roth IRA each year while they are still in a lower bracket, paying the tax now at a rate they can control. Done carefully, over several years rather than all at once, this shrinks their future required withdrawals, gives them a pool of tax-free income to draw on later, and leaves more flexibility for how income shows up on their return in retirement. The tax bill on the conversion is real, but it is a bill they chose the timing and size of, rather than one the IRS handed them later at a moment not of their choosing.

Consider also someone we will call David, a real estate investor in his late fifties who owns a residential rental property purchased and substantially renovated a few years ago. Normally, that property depreciates in equal amounts over twenty-seven and a half years. Through a cost segregation study, an engineer identifies specific components of the building and site, such as flooring, cabinetry, and certain site improvements, that qualify for a much faster depreciation schedule. Reclassifying those assets allows David to accelerate a significant portion of his depreciation into the current tax year rather than spreading it out over decades. For David, that acceleration becomes a meaningful offset against other taxable income in a high-income year, all for a modest study fee relative to the tax savings it unlocks. It does not create new deductions out of thin air; it simply changes when he gets to use deductions he was always entitled to, at a moment when that timing matters most to him.

Finally, consider a business owner we will call Patricia, who runs a small but profitable company and has spent years paying whatever her CPA's software calculated each spring. Sitting down with a tax strategist for the first time, she learns that entity structure, retirement plan design for herself and her employees, and the timing of equipment purchases and business income can all be shaped proactively rather than reported on after the fact. Small adjustments, made early enough in the year to matter, add up to a meaningfully lower effective tax rate without changing how she runs her business day to day. For Patricia, the lesson is less about any single strategy and more about the difference between tax preparation, which looks backward, and tax planning, which looks forward and gives her a say in the outcome.

A Faith-Forward Perspective

"The plans of the diligent lead surely to abundance..." (Proverbs 21:5). Wise planning includes understanding taxes, so that you can steward what you have been given well, and give generously from a place of clarity rather than guesswork.

Next Step

If you are within ten years of retirement, it is worth sitting down and reviewing where your income will come from, how each source will be taxed, and what levers you actually have available to manage taxes over time. A qualified tax professional can help you apply these concepts to your specific situation, and our team is always glad to be part of that conversation.