Ed Slott’s Retirement Tax-Planning Strategies: Don’t Waste Your Low-Tax Years

Key TakeawaysWithholding taxes from retirement withdrawals can simplify tax payments and help avoid penalties.Retirees should take advantage of lower tax rates in early retirement.The years before required minimum distributions are an ideal time for Roth conversions.Tax-smart withdrawal strategies can improve retirement portfolio efficiency.Managing IRA balances early may help limit future IRMAA costs.

Christine Benz: Hi, I’m Christine Benz from Morningstar, and welcome to a new limited-edition series, Your Tax Playbook for Retirement, with Ed Slott. In the first installment of the series, Ed and I will tackle some of the key questions people have about taxes when they first retire. Ed, thank you so much for being here.

Ed Slott: Great to be back here again. Thanks, Christine.

Should Retirees Withhold Taxes or Pay Quarterly?

Benz: It’s great to have you. We wanted to put together kind of a playbook for people embarking on retirement and thinking about tax matters with respect to their retirements.

I wanted to discuss the logistics of taxes in retirement. If someone is withdrawing money from a retirement account, say a tax-deferred retirement account, are they better off having the taxes withheld when they take the money out or paying quarterly? If it’s their first year of retirement, how do they know how much to withhold or pay in quarterly estimated taxes?

Slott: They really don’t. It’s a big switch. I’ve had clients with this—it was all taken care of for them. They just got their paycheck. Somehow, it was withheld. They either got a refund or they owed. And now, “Wait a minute, now I have to pay? I thought somebody else does this.” So, you have two choices: withholding, like you used to have the company do, where they did it and you didn’t have to do anything, or do quarterly estimates. Most people do the quarterly estimates, but the problem with the quarterly estimates is you have to remember to pay them for years.

And this goes back a while. I don’t think any—well, maybe some people still write checks for quarterly payments, but almost everything is done online through the IRS website, and they have the ID. It’s a whole process to get in. But once you get in, it’s a great system because it tracks and confirms your payment, but you have to remember to make the payments. The reason I brought up the checks is that, for years as a CPA, I used to have clients right at this desk, and I would give them their tax returns. We’d cut out the quarterly coupons. Again, this is years ago, and we’d say, make a check payable, all kinds of instructions. They come in next year. Oh, I forgot. And the penalties are pretty big. It’s an interest penalty.

So I’ll tell you, one guy I had, he had a large IRA, big RMDs, but he didn’t even need the money, which is the case for most people with large IRAs. They generally don’t need the money from the RMDs. They take it because they have to. What happened with this guy is that he was an older guy, but he forgot to make the payments. I spoke to his son, who was an attorney. I said, “Let me send the coupons to you, and you make sure they get paid so he doesn’t get all these penalties.” He forgot to make the payments, too; he was an attorney in New York, too busy.

The next year I said to the guy, “Here’s what we’re going to do. You don’t need the money anyway. Let’s make it 100% withholding on your RMD. Then you never have to worry about anything.” He never needed the money anyway. He took the RMD and put it into a taxable account, as a lot of people do. At the end of the year, that withholding more than covered, because it’s 100% withholding, more than covered his RMD. It covered his other interest, dividends, and capital gains; he never had any penalties. Psychologically, in his mind, he thought he wasn’t paying tax anymore. So, it does help.

The benefit of withholding—and the big benefit, if you don’t do the quarterly estimates—when you have tax withheld from an RMD or a paycheck, withholding is treated as being paid in evenly throughout the year. Even like in the case I just said, let’s say we did that guy’s RMD in December and did 100% withholding, that money, even though he was holding onto it the whole year almost, is treated as having been paid in equally throughout the year, even though he held onto the money, even though it was in December. That’s the advantage because if you do the estimates, you must hit those quarterly estimates.

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How New Retirees Can Estimate Their Tax Bill

Benz: Ed, I want to follow up on that point about how the estimated taxes are a little bit of a guesstimate for people. Can you talk about how they should approach that if they’re in the early retirement years and they’re trying to figure out how much to send to the IRS?

Slott: Yeah. Well, this is when the wages stop, or self-employment or whatever you have, and now you’re on your own to do estimates, but on different kinds of income; maybe it’s IRA distributions or just capital gains, interest, and dividends. Chances are you’d have this dip, and you’d be in a lower bracket. The estimated tax rules say you are required to pay estimates that will be close to what you will actually owe, but you won’t get an estimated tax penalty if you pay in at least last year’s tax, 100% of last year’s tax, or if your income is over $150,000, 110% of last year’s tax. But that won’t be a good guide for you because last year’s tax was probably much higher. You can have a lower amount. You would go under a different rule. As long as you pay in 90% of the projected tax, then you’ll be OK.

You’re going to have to project what your tax will be. As long as you pay in 90% of that and you pay in what you would owe by April 15, then you won’t get a penalty—an estimated tax penalty—which right now is running about 7%. It’s an interest rate, but it’s up to you. You’re going to have to rejigger and say, “Well, I don’t have wages.” But a lot of tax programs, even online, you can put things in, especially as it gets close to year-end, and see how much tax you might owe on your interest, dividends, capital gains, or other income you have besides the job income, which you don’t have anymore.

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Make the Most of Retirement’s Low-Tax Window

Benz: Right. OK, that’s helpful. I would assume if people are working with a CPA and they are filing their annual tax return, you can kind of set that up at the time you do the return.

I wanted to talk about this category of people just embarking on retirement. We’ve talked about this before: This is often a pretty low-tax time in life when you no longer have that working income. You usually haven’t started required minimum distributions if you’re, say, in your mid-60s. And so, you’re in a low tax bracket. Can you talk about any steps that people in that situation at that life stage could consider to take advantage of those very low-tax years?

Slott: That is the biggest softball question. I mean, you know where I’m going with this. Because we’re going to get to Roth conversions, but this is a thing that happens. People retire in certain jobs—not all jobs—at 66, 67, 65, maybe earlier. You have this gap where there’s this dip in income before RMDs kick in, say, at age 73. If you’re in a low bracket, you always take advantage of the low tax rates. You never want to waste a low bracket, especially now with historically low rates and large brackets—12%, 22%, 24% brackets—hundreds of thousands of income can fall under those brackets. If you have a large growing IRA, that’s the opportunity to throw in that Roth conversion. Bring in the Roth conversion and use up, don’t waste, those low brackets.

I had a CPA at a program once. He was so proud of himself. He came up to me and said, “Ed, you’re going to love this. I kept my client in the 12% bracket.” I said, “I’m sorry to hear that. You wasted the 22% and 24%; you should have been doing Roth conversions.” It’s critical to do Roth conversions while you can control the tax rates. Once you hit RMD territory, it’s out of your control, so you can control your rates and use the low brackets.

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Using Low-Tax Years in Retirement to Rebalance Your Portfolio

Benz: Another strategy it would seem is if someone has some highly appreciated asset in a taxable account, maybe it’s more concentrated than they would like; it seems like there’s also an opportunity for them to potentially reduce that position and again, take advantage of that fairly low tax bracket relative to where they might be later in retirement.

Slott: That’s true if they did want to reposition and diversify. But if they were holding for the long term, obviously with highly appreciated stocks, you like to hold—you never know when—until death, to get the step-up in basis for your beneficiaries. But if you are going to do that anyway, yes, take advantage of the long-term capital gains rates, which are also low. Everything’s historically low now.

Creating a Tax-Smart Withdrawal Strategy in Retirement

Benz: OK. Sticking with these new retirees, many of them will be coming into retirement with three different tax silos where they’d have probably the bulk of their money in the traditional tax-deferred account, possibly some Roth, some taxable. We sometimes hear about these sequences of withdrawals that one should use to approach where to go for funds when you need money for living expenses. Do you have any guidance to share on that front? What usually makes sense?

Slott: Well, if you’re talking about different silos, I’d say the Roth is at the top of the chain. I don’t know which way to say it, but that’s the one you want to hit last. That is your most productive asset. It’s growing income-tax-free. Income-tax-free accounts always grow the fastest because they’re not eroded by current or future taxes. The Roth basket you would touch last, obviously, because it’s the best account to own. We talked about the non-IRA accounts—let’s say, the stocks and bonds and things like that you have if you can get out at low rates and you want to diversify. But probably the top source, especially if you have an overweight IRA like lots of people do with the stock market and just contributing to 401(k)s that became IRAs over the years, is if you can get that money out again at low rates, even if you use it for living expenses, if you need it anyway; if you can get money out at low rates, that’s one of my “always” rules.

You probably heard it in all my seminars: Always pay taxes at the lowest rates. If you follow that, you’ll always save the most in taxes. There’s a caveat to that—always pay taxes at the lowest rates, even if that means paying some taxes before they’re required, and that’s the big psychological hurdle nobody can get away from. “But, I don’t have to touch it.” Well, you might want to in order to bring that IRA balance down while rates are low.

Benz: OK, so accelerate the withdrawals from the traditional tax-deferred accounts.

Slott: Yeah, watch your brackets.

Benz: Right.

Slott: A lot of this, what we’re talking about, will have to be done later in the year, which may be the time that, hopefully, you’re watching this program because you have to have a projection of what income’s going to be. You have new tax laws, new deductions. Luckily, you have the 2025 tax return, which is the first return that had the new OBBBA, One Big Beautiful Bill Act, deductions in there. You can use that as a guide to see where you’ll end up for 2026.

A Tax-Smart Plan for In-Retirement Withdrawals in 3 Steps

Understanding One of Retirement’s Biggest Tax Surprises

Benz: OK. I’m wondering if you can discuss some of the tax surprises that might catch people off guard in retirement. You hit on one, which is this idea of being on the hook for taxes; no one is doing this for you. But I’m hoping you can talk about another biggie that I hear about a lot, which is IRMAA. Can you talk about that and also what, if anything, people can do to avoid or at least reduce that income-related Medicare adjustment amount?

Slott: Income-related Medicare, IRMAA accounts. Yeah. These are the surcharges for people on Medicare paying Parts B and D, and they have tiers, and the tiers of income are actually cliffs. If you go over by even $1, it could raise your premiums by hundreds of dollars a month—I don’t know if a month, but over a year, it could go up quite a bit. But here’s the thing, and people are not going to like what I say, that takes second place to the tax brackets. I would look at the tax brackets before the IRMAA brackets. If you can get more money out at 22% or 24%, especially out of your IRA, then IRMAA, you shouldn’t worry about that. You might have to concede that. Because if you can bring down these balances at low rates, you might get hit with an IRMAA one-time charge, but avoiding a one-time IRMAA charge could cost you more IRMAA charges in the future because, by not taking these IRAs, they’re just going to continue to grow and accelerate, and then you’ll be forced to take it out at age 73 or whatever the RMD age is when you begin, and then you’re locked into these IRMAA charges for life.

Yes, it’s important to gauge that and see where you’re going to come in, but if you have an opportunity to get into the 20%, get money out at 22% or 24%, I would say that takes priority over the IRMAA charge. Yes, nobody likes paying a higher IRMAA charge, but this money in the IRA, if you can get it out earlier, and that’s the one that’s going to kick off your IRMAA charge, the big surprise, you say it’s 65 when you start Medicare, but you can actually reduce future IRMAA charges by bringing down IRA balances so that your RMDs when you hit RMDs are lower; and when I say bring it down either for spending or Roth conversions, if RMDs are lower when you start, that will bring down your IRMAA charges for the long term.

Benz: OK, Ed, thank you for your perspective as always.

Slott: Thanks, Christine.

Benz: Ed and I will be tackling other retirement-related tax issues in future episodes of this series, so please stay tuned. Thanks for watching. I’m Christine Benz for Morningstar.

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