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Saving for retirement often comes with an upfront tax break when funneling money into pretax accounts. But it’s also critical to manage taxes on future withdrawals, experts say.
If you don’t need the money, you may delay taking funds from retirement plans until your mandatory yearly withdrawals, known as required minimum distributions, or RMDs, kick in.
However, a looming tax law change in 2026 may make earlier withdrawals more appealing for retirees.
“We’ve got this window of low taxes here,” said certified financial planner Dan Galli, owner at Daniel J. Galli & Associates in Norwell, Massachusetts.
Former President Donald Trump‘s signature tax overhaul temporarily shifted individual income tax brackets by reducing the rates and applicable income levels.
Prior to 2018, the individual brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. But through 2025, five of these brackets are lower, at 10%, 12%, 22%, 24%, 32%, 35% and 37%.
We’re actually encouraging retirees to pull money out of the 401(k), so it’s only taxed at 12%, and then maybe 22% if they’re willing, depending on how much income there is.
Dan Galli
Owner at Daniel J. Galli & Associates
Since pretax account withdrawals incur regular income taxes, Galli is encouraging clients age 59½ or older to consider taking out money prior to 2026 to leverage the lower rates.
“The traditional wisdom used to be to try and delay taking money out of that 401(k) as long as possible because it’s taxed,” he said. “We’re actually encouraging retirees to pull money out of the 401(k), so it’s only taxed at 12%, and then maybe 22% if they’re willing, depending on how much income there is.”
Generally, retirees must begin RMDs by a specific age to avoid a penalty. RMDs apply to both pretax and Roth 401(k) plans and other workplace plans, along with most individual retirement accounts.
Prior to 2020, RMDs started at age 70½, and the Secure Act of 2019 increased the beginning age to 72. In 2022, Secure 2.0 raised the age to 73, which starts in 2023.
“It’s a fascinating time to look at how you want to blend or sequence your income in retirement,” Galli added.
Consider your ‘lifetime tax bill’ with these strategies
Managing retirement plan withdrawals is “absolutely huge” for your portfolio’s longevity, said CFP Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
If you’re 59½ or older, you can start taking withdrawals from pretax retirement plans without incurring a penalty. While you’ll still owe regular income taxes, those rates may be lower through 2025, he said.
You can use the withdrawn funds to reduce your future cost of living, such as paying off your mortgage or other types of debt, which may save money later, Watson said.
People think tax planning is a year-to-year exercise, but it’s really about your lifetime tax bill.
Anthony Watson
Founder and president of Thrive Retirement Specialists
You may also consider so-called Roth conversions, which incur upfront levies to transfer pretax funds to a Roth account for future tax-free growth. “People think tax planning is a year-to-year exercise,” Watson said. “But it’s really about your lifetime tax bill.”
While multiyear tax planning can be difficult for do-it-yourself investors, Watson said the process begins with understanding your current income and how the future law change may affect your tax liability. (The brackets use “taxable income,” which you can find on line 15 of your 2022 tax return.)
