Tax Bracket Optimization: How to Control Your Retirement Taxes

Here's a truth most retirees discover too late: your taxes in retirement are largely within your control.

Unlike your working years — when your salary determined your tax bracket — retirement offers flexibility. You can choose when to take income, from which accounts, and how much. Done strategically, you can save tens of thousands in taxes over your retirement.

Consider the Hendersons, who retired at 62 with $1.5 million in Traditional IRAs. For their first decade of retirement, they lived modestly on a small pension and savings, barely touching the IRAs. Their taxable income those years was about $40,000 — comfortably in the 12% bracket with lots of room to spare.

Then RMDs hit at 73. Suddenly the IRS demanded they withdraw $57,000 annually from accounts they'd barely touched. Combined with Social Security, their income jumped to $95,000, pushing them into the 22% bracket. Medicare IRMAA surcharges added another $2,000 per year. And 85% of their Social Security became taxable.

The Hendersons had wasted a decade of low-bracket space. All those years at $40,000 when they could have been at $94,000 — the top of the 12% bracket — represented hundreds of thousands of dollars in missed conversion opportunities. They'd pay taxes on that money eventually, but at 22% instead of 12%.

The lesson isn't complicated. Tax brackets are buckets. Empty space in a low-rate bucket is opportunity. Fill it, or lose it forever.

How progressive taxation actually works

The U.S. tax system is progressive, meaning you don't pay one rate on all your income — you pay increasing rates on successive portions.

Think of it like filling a series of containers. Your first dollars of income go into the 10% container. Once that's full, additional income spills into the 12% container. Then 22%, then 24%, and so on up to 37%.

For married couples filing jointly in 2024, the 10% container holds $23,200. The 12% container is much larger — it holds another $71,100, stretching from $23,201 to $94,300. That's a substantial range at a modest rate. The 22% container then holds income from $94,301 to $201,050.

The jump from 12% to 22% is the sharpest increase in the entire bracket structure — nearly doubling your marginal rate. An extra $10,000 of income at 12% costs $1,200 in federal taxes. The same $10,000 at 22% costs $2,200. That $1,000 difference on $10,000 becomes significant when multiplied across decades of retirement income.

Single filers face narrower brackets at each level. The 12% bracket ends at just $47,150 instead of $94,300. This creates the "widow's tax penalty" — when a spouse dies and the survivor shifts from Married Filing Jointly to Single, the same income suddenly gets taxed at higher rates.

The problem with traditional retirement planning

Conventional wisdom says to defer taxes as long as possible. Max out your 401(k). Don't touch the IRA until you have to. Let it grow tax-deferred.

This advice works during accumulation. But it creates problems in retirement.

The typical pattern goes like this: In your early 60s, you retire but delay Social Security and IRA withdrawals. Your taxable income is low — maybe just a small pension or part-time work. You're in the 10% or 12% bracket with enormous room to spare.

Then everything hits at once. Social Security starts. RMDs kick in at 73. Your taxable income doubles or triples. You're suddenly in the 22% or 24% bracket, paying Medicare IRMAA surcharges, and watching 85% of your Social Security become taxable.

The irony is painful. You deferred taxes when you were in low brackets, only to pay them later in higher brackets. The opposite of optimization.

The solution: income smoothing

Tax bracket optimization starts with a simple concept — smooth your income across years rather than having some years very low and others very high.

If you know you'll be in the 12% bracket from 62-72 and the 22% bracket from 73-90, why not shift some of that future 22% income into the current 12% years? You'll pay the same total dollars in taxes either way (actually less, as we'll see), but at lower rates.

The primary tool for this is Roth conversions. In low-income years, you convert Traditional IRA money to Roth, paying taxes at current low rates. This reduces the Traditional IRA balance, which shrinks future RMDs, which keeps future income lower, which keeps you in lower brackets.

But the concept extends beyond conversions. Any controllable income can be shifted: capital gains realization, discretionary IRA withdrawals, timing of when you start Social Security.

Filling the 12% bracket

For most retirees, the 12% bracket is the sweet spot. It's low enough to be attractive, large enough to be useful, and accessible to most middle-income retirees.

The strategy is straightforward. Calculate your taxable income for the year from sources you don't control — Social Security (taxable portion), pension, required distributions if applicable, investment income. Subtract that from $94,300 (for married couples) or $47,150 (for single filers). The remainder is your "bracket space."

Fill that space with Roth conversions. If your baseline income is $50,000, you have $44,300 of space in the 12% bracket. Converting $44,000 from Traditional to Roth costs about $5,280 in federal taxes. But that $44,000 will now grow tax-free, come out tax-free, and never push future income higher.

The Hendersons could have done this. At $40,000 of income, they had over $54,000 of space in the 12% bracket every year for a decade. Ten years of $50,000 conversions would have moved $500,000 to Roth at 12%. Instead, that money stayed in Traditional IRAs and eventually came out at 22%.

The difference in tax rates alone: $50,000 more paid over time. And that doesn't count the IRMAA surcharges, Social Security taxation, and other knock-on effects they triggered by having higher income in their 70s and 80s.

Avoiding the 22% jump

The leap from 12% to 22% deserves special attention because it's the largest percentage increase in the bracket structure.

At 12%, each $1,000 of additional income costs $120 in federal taxes. At 22%, the same $1,000 costs $220. That $100 difference per thousand adds up fast.

If you're near the boundary — say, $90,000 of taxable income as a married couple — think carefully before taking actions that push you over. An $8,000 Roth conversion keeps you at 12%. A $12,000 conversion puts the last $4,000 into 22% territory.

Sometimes pushing into 22% makes sense — if you'd otherwise be paying 24% or higher in future years, 22% now is still a win. But crossing the line accidentally, without realizing it, costs money needlessly.

The same principle applies at other bracket boundaries, though the jumps are smaller. The 22% to 24% transition is a two-percentage-point increase. The 24% to 32% jump is larger — eight percentage points. Each boundary deserves awareness.

When the 22% bracket makes sense

Staying in 12% isn't always optimal. Sometimes you should deliberately fill the 22% bracket too.

If you have large Traditional IRA balances — say, over $1.5 million — and you're approaching RMD age, filling only the 12% bracket might not move enough money to Roth before RMDs begin. Aggressive conversions into the 22% bracket might be necessary to meaningfully reduce future RMDs.

If you expect tax rates to rise in the future — a reasonable assumption given federal deficits and historical patterns — paying 22% now might beat 24% or 28% later. The current rate structure has been favorable by historical standards; betting on its permanence is risky.

If you're planning for the surviving spouse, the calculus changes. After one spouse dies, the survivor files as Single with much narrower brackets. Income that's in the 22% bracket today for a married couple might be in the 32% bracket for the surviving spouse. Converting at 22% now could save 10% or more on each dollar later.

The 22% bracket is wide — it holds over $106,000 of income for married couples. Filling part or all of it, strategically, can make sense even though 12% would be preferable all else being equal.

Capital gains brackets: a parallel opportunity

Long-term capital gains have their own bracket structure, separate from ordinary income. For 2024, married couples pay 0% on gains up to $94,050 of total taxable income, 15% up to $583,750, and 20% above that.

The 0% rate on capital gains represents one of the most underused opportunities in the tax code. If your taxable income (including gains) stays below $94,050, you pay nothing on realized long-term gains.

This creates a "gain harvesting" opportunity opposite to the familiar loss harvesting. In years when you have room in the 0% bracket, sell appreciated investments, pay no federal tax on the gains, and immediately repurchase. Your cost basis resets to the current price. Future appreciation starts fresh, and the gains you've already "harvested" will never be taxed.

The same married couple with $50,000 in baseline income has room to realize nearly $44,000 in long-term capital gains at 0% federal tax. Over a decade of doing this, hundreds of thousands of dollars in gains can be permanently removed from taxation.

The coordination opportunity is significant: you can fill your ordinary income bracket with Roth conversions and simultaneously harvest gains in the 0% capital gains bracket, doubling the tax optimization in a single year.

The widow's tax preparation

Statistically, one spouse will die before the other. When that happens, the survivor shifts from Married Filing Jointly to Single, and the bracket structure changes dramatically.

The 12% bracket that held income up to $94,300 now holds income only up to $47,150. The same $80,000 income that was entirely in the 12% bracket for a married couple puts a single filer solidly into 22% territory.

This isn't just academic. A widow or widower with $80,000 in income pays roughly $10,800 in federal taxes. The same income for a married couple: about $8,000. That's $2,800 more per year, potentially for 20+ years of surviving alone.

The preparation happens while both spouses are alive. Aggressive Roth conversions using the wide married brackets create tax-free income sources for the survivor. Reducing Traditional IRA balances shrinks the RMDs that will eventually hit the surviving spouse at narrower single brackets.

Picture it as buying insurance against higher future rates. The premiums you pay (conversion taxes at married rates) protect against claims (higher taxes at single rates). The longer one spouse might survive alone, the more valuable that insurance becomes.

Putting it together: a sample optimization

Mary and John are 65, just retired. They have $1.2 million in Traditional IRAs, will claim Social Security at 67, and need about $80,000 annually to live.

Without optimization, their trajectory looks like this: Ages 65-66, very low income (just investment dividends), 10-12% bracket with enormous unused space. Ages 67-72, Social Security adds $48,000, pushing them to moderate income, but still well under the 12% ceiling. Ages 73+, RMDs add another $47,000, combined income exceeds $100,000, they're in the 22% bracket with IRMAA surcharges.

With optimization, they restructure: Ages 65-66, fill the 12% bracket with aggressive Roth conversions — $90,000 per year, paying $10,800 annually. Ages 67-72, continue conversions at reduced levels ($40,000/year) as Social Security creates baseline income. Ages 73+, Traditional IRA balance has dropped from $1.2M to perhaps $700K, RMDs are $27,000 instead of $47,000, combined income stays around $90,000, they remain in the 12% bracket.

The optimized approach pays more in taxes upfront — about $95,000 in total conversion taxes. But it avoids roughly $150,000 in future taxes at higher rates, plus years of IRMAA surcharges, plus the surviving spouse's higher single-filer rates. Net savings: $100,000 or more over the couple's lifetime.

The tools at your disposal

Several levers control retirement income in ways that affect bracket positioning.

Social Security timing shifts income between years. Claiming at 62 adds benefits (and taxable income) early. Delaying to 70 removes that income from early years, creating more space for conversions, and adds it later when you might have less control.

IRA withdrawal timing (before RMDs) is entirely discretionary. You can take nothing, or take large amounts for conversion. Use this flexibility to fill brackets you'd otherwise leave empty.

Roth conversions transform income from future mandatory (RMDs) to present voluntary, at rates you choose rather than rates you're forced into.

Capital gains realization can happen in any year. Match gains to years with low ordinary income to access the 0% bracket.

Which account you spend from affects taxable income. Roth withdrawals don't count. Traditional IRA withdrawals do. If you're near a bracket edge, choose your source wisely.

The bottom line on bracket optimization

Tax bracket optimization isn't about avoiding taxes — it's about paying the lowest possible rate on each dollar of retirement income.

The key insights are simple: Fill low brackets in low-income years rather than wasting them. Avoid unnecessary bracket jumps, especially the 12% to 22% transition. Plan for the surviving spouse's narrower single-filer brackets. Coordinate ordinary income brackets with capital gains brackets for maximum efficiency.

The Hendersons' mistake was inaction — letting decade of low-bracket years pass without using them. The opportunity cost was enormous, and once RMDs began, it was too late to recover.

The decisions you make in your 50s and 60s determine your tax burden for the next 30+ years. Start planning early, run the numbers annually, and make deliberate choices about when and how you recognize income.

Your taxes in retirement don't have to be a surprise. They can be a choice.

Want a personalized tax optimization strategy for your retirement? Connect with a retirement advisor who can model scenarios and maximize your after-tax income.