When it comes to retirement income planning, taxes matter, a lot. Yet tax planning is often overlooked or oversimplified. The truth is, your clients’ tax exposure in retirement doesn’t just depend on how much they withdraw each year, but how and from where those withdrawals happen.
As financial advisors, we’re in a unique position to guide clients through the complex interaction of income sources and tax rules. With the right tools and a solid process, we can help them avoid unpleasant surprises and make the most of every retirement dollar.
The Hidden Layers of the Tax Code
Most retirees don't realize how interconnected their income streams are when it comes to taxes. Capital gains, IRA distributions, Social Security benefits, they all affect one another. And because of that, a client's effective marginal tax rate can be far higher than their bracket suggests.
For example, pulling funds from a traditional IRA might not just increase taxable income, it could also make more of their Social Security benefits taxable and bump up their Medicare premiums. That’s why a withdrawal strategy isn't just a distribution plan, it’s a tax strategy.
Timing Social Security: More Than Just Age
Social Security decisions aren’t just about when benefits start. They’re also about how those benefits interact with other income. By taking a full-picture view of a client’s finances, you can help them avoid unnecessary taxation on Social Security benefits, and in some cases, reduce their lifetime tax liability substantially.
This is where modeling comes in. Showing clients how their benefits might be taxed based on different claiming strategies helps them see the value of waiting or starting early, with eyes wide open.
Watch Out for Medicare IRMAA
One of the most commonly missed tax traps in retirement planning is IRMAA, Medicare’s Income-Related Monthly Adjustment Amount. Just one poorly timed withdrawal can push a client into a higher premium tier, significantly increasing healthcare costs for the year.
Planning ahead, especially in the early years of retirement, gives you room to control modified adjusted gross income and keep clients below IRMAA thresholds. Sometimes, that means drawing more from Roth IRAs or taxable accounts, even when it might seem counterintuitive. All of these interactions can be easily demonstrated using Covisum's Tax Clarity®.
Withdrawal Order: A Tactical Approach to Taxes
The traditional advice, spend taxable money first, then tax-deferred, then tax-free, doesn’t always lead to the best outcomes. Instead, it’s often about blending withdrawals in a way that keeps the client’s effective marginal rate as low as possible over time.
That’s where Covisum’s Income Insight® software can make a real difference. By mapping out the tax impact of different income strategies, it helps you visually explain to clients why you’re recommending a particular approach. It’s not just helpful, it’s empowering, for both advisor and client.
Planning in a Shifting Landscape
With the possibility of an expiring Tax Cuts and Jobs Act, or a Big Beautiful Bill with new tax provisions, smart advisors want to be prepared for what is likely to be one of the most important conversations for the rest of this year and into next. Because Covisum tools are intentionally designed to create a map of key tax interactions as they apply to your client specifically, you can be confident in your ability to change with a changing landscape.
The Bottom Line: Be the Tax-Aware Advisor
Taxes touch every part of a retirement income plan. The advisors who deliver the most value are those who take tax planning seriously, not just at tax time, but throughout the retirement journey.
By leveraging tools like Tax Clarity and Income InSight, staying on top of legislative changes, and crafting thoughtful withdrawal strategies, you can help your clients keep more of what they’ve saved—and live more comfortably because of it.
Explore our software to see how a more tax-efficient retirement can start with a better conversation.
Share this article
.svg)
