Retirement and Tax Planning: How Taxes Shape Retirement Income Decisions

Retirement tax planning is the process of coordinating which accounts fund spending, when Social Security begins, and how each income source is taxed. Because withdrawals, Social Security, and Medicare premiums can affect one another, the order and timing of income may matter as much as the amount. Results depend on individual circumstances.

This educational guide is written for households roughly five to ten years from retirement, including those with about $750,000 to $3,000,000 invested. The households described are hypothetical and illustrative only. Each figure carries its government source and an as-of date of October 2, 2026. Rules change, so confirm current amounts with a qualified tax professional.

Retirement and Tax Planning: What Changes at Retirement

During working years, income usually arrives as wages with tax withheld. In retirement, income often comes from several sources taxed differently:

• Withdrawals from traditional IRAs and 401(k) plans are generally taxable income. Qualified distributions from designated Roth accounts generally are not, according to the IRS overview of required minimum distributions (as of October 2, 2026).
• Sales in taxable accounts can produce capital gains or losses, which are treated differently from ordinary income under IRS Topic 409 (as of October 2, 2026).
• Pensions, interest, dividends, and part of Social Security may also be taxable.

A household therefore has more control over taxable income than while employed, and more responsibility for managing it. The IRS 2026 inflation adjustments (as of October 2, 2026) set the 2026 standard deduction at $32,200 for joint filers and $16,100 for single filers. The 22% federal bracket begins above taxable income of $100,800 for joint filers and $50,400 for single filers. Where income falls relative to those edges is one reason withdrawal order can matter.

Which Accounts to Draw From First

Most households hold pre-tax, Roth, and taxable accounts. No single order suits every household. Two approaches are commonly discussed:

• Conventional sequencing: taxable accounts first, then pre-tax, then Roth. This may let tax-deferred balances keep growing, but it can also leave large pre-tax balances and larger required distributions later.
• Blended withdrawals: drawing from more than one account type in the same year to spread income across brackets. This may smooth taxes over time, but it requires multi-year projections.

For 2026, the 0% federal rate on long-term gains applies when taxable income is at or below $98,900 for joint filers or $49,450 for single filers, per IRS Revenue Procedure 2025-32 (as of October 2, 2026). These are taxable-income thresholds, not limits on the size of a gain, and IRA withdrawals count toward them.

Illustrative household A. A married couple in their late 50s expects to stop full-time work in about five years, with most savings in pre-tax accounts. Early in retirement their taxable income may be lower than it was while working. They could compare drawing only from the taxable account with a blended approach. This is not a recommendation and does not reflect any actual client.

Roth timing is covered in the guide to Roth conversions and Medicare IRMAA.

How Social Security Benefits Are Taxed

Federal tax on Social Security depends on "combined income": adjusted gross income, plus tax-exempt interest, plus half of benefits. The base amounts appear in IRS Publication 915 and the IRS Social Security income FAQ (as of October 2, 2026).

"Up to 85%" means that share of benefits may be included in taxable income. It is not a tax rate. An extra dollar of IRA withdrawal can therefore raise income twice: the withdrawal itself, and more of the benefit becoming taxable. This is why Social Security planning for South Jersey households often overlaps with tax planning.

How Social Security and Medicare Premiums Interact With Taxable Income

Medicare Part B and Part D premiums rise for higher-income beneficiaries through the income-related monthly adjustment amount, or IRMAA. For 2026, the first tier applies when modified adjusted gross income exceeds $109,000 on individual returns or $218,000 on joint returns, and Social Security generally uses the return from two years earlier (2024), per its Medicare premium guidance (as of October 2, 2026).

Three effects can therefore move together: ordinary income from withdrawals, the taxable share of Social Security, and Medicare premiums two years later. An estimate that looks only at the federal bracket may miss the other two. Thresholds are adjusted periodically.

Tax Planning to and Through Early Retirement

Households that stop working earlier face additional questions, including health coverage before Medicare eligibility:

• Early withdrawals. Distributions before age 59½ are generally subject to a 10% additional tax. Exceptions include separation from service after age 55 for certain workplace plans and substantially equal periodic payments, per IRS Topic 558 (as of October 2, 2026). The exceptions carry conditions and differ for IRAs.
• A lower-income stretch. The years between earned income and the start of Social Security or required distributions may have lower taxable income. A household might weigh realizing gains or Roth conversions in those years against the current tax cost.

Illustrative household B. A single professional in their late 50s plans to leave full-time work several years before Medicare eligibility, with savings mostly in a traditional 401(k). Before withdrawing, they might compare the early-distribution rules, health coverage costs, and the taxable income each withdrawal creates. This simplified example is not advice.

A broader retirement planning process for South Jersey households places these questions beside spending, reserves, and other income sources.

Required Minimum Distributions: When They Start and Why They Matter

Required minimum distributions (RMDs) must generally be withdrawn each year from traditional IRAs and most workplace plans. The starting age is 73 for people born from 1951 through 1958 and 75 for those born in 1960 or later, under final regulations in IRS Internal Revenue Bulletin 2024-33 (as of October 2, 2026). That text does not state the rule for 1959, so households born that year should confirm their age.

Later distributions are due by December 31. A first distribution may be delayed to April 1 of the next year, but that creates two taxable distributions in one year. A missed or short RMD may face a 25% excise tax, reduced to 10% if corrected within two years, per the IRS RMD guidance (as of October 2, 2026). Roth IRAs do not require withdrawals during the owner's lifetime.

RMDs are taxable income and add to combined income. Large pre-tax balances can produce large distributions, a common reason households review tax planning for retirees well before distributions begin.

Retirement Tax Planning in New Jersey

Households in Voorhees, Cherry Hill, Haddonfield, and nearby communities file under the same New Jersey rules, which differ from federal treatment. Federal Social Security benefits are not taxable for New Jersey income tax, per the NJ Division of Taxation (as of October 2, 2026). Pensions, annuities, and IRA withdrawals are generally taxable, but a pension exclusion may apply under the Division's Retirement Income Exclusions page (as of October 2, 2026).

Eligibility requires age 62 or older (or disability) on the last day of the tax year. The Division's page describes these amounts for the 2025 return, so confirm current-year figures. Because the exclusion ends above $150,000 of total income, a large withdrawal, capital gain, or Roth conversion in one year may reduce or remove it.

Year-End Planning Checkpoints

October through December brings several deadlines to review with a tax professional:

• Medicare open enrollment. For 2027 coverage it runs October 15 to December 7, 2026, per Medicare.gov (as of October 2, 2026).
• Required distributions. The annual RMD is due by December 31 (IRS, as of October 2, 2026).
• Roth conversions. A conversion generally counts as income for the year of the distribution, and conversions after 2017 cannot be recharacterized, per IRS Publication 590-A (as of October 2, 2026). A conversion intended for 2026 generally must be completed by December 31.
• Income projection. Comparing estimated 2026 income with bracket edges, Social Security base amounts, IRMAA thresholds, and the New Jersey $150,000 limit may show how much room exists.
• Gains, losses, and withholding. Realized gains and losses to date, and whether withholding or estimated payments are on track.

Each item has trade-offs that depend on income, filing status, and goals. None is a recommendation.

Frequently Asked Questions

What is retirement tax planning?

Retirement tax planning is the review of how each retirement income source is taxed and how the sources interact. It typically covers withdrawals from different account types, Social Security taxation, Medicare premiums, required distributions, and state taxes. The aim is to understand trade-offs, not to promise a result. Outcomes depend on individual circumstances.

Which accounts are usually drawn first in retirement?

There is no universal order. Some households draw from taxable accounts first and Roth accounts last, while others blend withdrawals across account types in the same year. Each approach has trade-offs involving future required distributions, tax brackets, and Medicare premiums. A projection for the specific household is generally needed to compare them.

Is Social Security taxable in New Jersey?

Federal Social Security benefits are not taxable for New Jersey income tax purposes, according to the NJ Division of Taxation as of October 2, 2026. Benefits may still be partly taxable federally, where up to 85% of benefits can be included in taxable income depending on combined income and filing status.

When do required minimum distributions start?

Under IRS regulations reviewed as of October 2, 2026, the starting age is 73 for people born from 1951 through 1958 and 75 for those born in 1960 or later. The first distribution may be delayed until April 1 of the following year, and later ones are due by December 31. A tax professional can confirm the age for 1959.

Can retirement income affect Medicare premiums?

Yes. Medicare Part B and Part D premiums can increase for higher-income beneficiaries, and Social Security generally uses the tax return from two years earlier. Withdrawals, capital gains, and Roth conversions can all raise modified adjusted gross income. Thresholds change periodically, so current amounts should be confirmed with the Social Security Administration.

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