Managing taxes in retirement can be more complex than many people expect. During your working years, most of your income comes from a paycheck and taxes are automatically withheld. But once you retire, your income may come from several different sources, such as retirement accounts, investment accounts, and savings, each with its own tax rules.

Because retirees have more control over where their income comes from each year, they also have more opportunities to manage their tax bill. Understanding how different accounts are taxed and when to withdraw from them can help retirees keep more of their money and make their savings last longer.

Why can taxes be harder to manage in retirement?

During your working years, most of your income comes from a paycheck and taxes are automatically withheld. In retirement, income often comes from several sources – such as retirement accounts, investments, and savings. Because you choose where to withdraw money from each year, there’s more flexibility to manage taxes, but also more complexity. Retirees are also often responsible for paying estimated quarterly taxes on withdrawals.

What are the main types of retirement accounts and how are they taxed?

Retirees typically withdraw from three types of accounts:

• Roth accounts: Withdrawals are generally tax-free if rules are followed, and these accounts aren’t subject to required minimum distributions (RMDs)
• Traditional tax-deferred accounts: Withdrawals are taxed as ordinary income
• Taxable brokerage accounts: Investment income may be taxed annually, but long-term investments sold after a year are usually taxes at the lower capital gains rate.

Why are taxable accounts often used first for living expenses?

Cash and low-earning investments in taxable accounts often generate minimal taxes. Using these funds first can help limit tax impact while allowing retirement accounts to continue growing.

What should you do if you have investments with a very low cost basis?

Selling them could trigger significant capital gains taxes. In some cases, it may make sense to hold these assets longer, since heirs may receive a step-up in cost basis if they inherit them.

When might withdrawals from traditional retirement accounts make sense?

The early years of retirement – before Social Security begins and before RMDs start – can be a lower-tax window. Some retirees use this time to withdraw or convert funds from traditional accounts while their tax rate may be lower.

Should Roth accounts always be used last?

Not necessarily. Because Roth withdrawals are typically tax-free, they can be helpful in years when you want to keep taxable income lower.

How do Health Savings Account (HSAs) fit into retirement?

HSAs can be used tax-free for qualified healthcare expenses. Many retirees choose to use these funds during their lifetime since the tax advantages generally disappear if a non-spouse inherits the account.

Do retirees need professional advice for withdrawal strategies?

Tax planning in retirement can become complicated quickly. Working with a financial or tax professional can help create a withdrawal strategy that minimizes taxes over time.

Still have questions about how to better manage your taxes in retirement? Get in touch with our Private Wealth team today!

This article was adapted from content originally published on Morningstar.com.