As you plan for retirement, one crucial aspect that should not be overlooked is the impact of taxes on your savings. Many retirees tend to ignore the tax implications until they start withdrawing funds from their pretax accounts, which can lead to significant financial setbacks. According to a study by Northwestern Mutual, only 3 in 10 Americans have a plan in place to reduce taxes on their retirement savings.

One effective strategy to minimize the tax burden on your retirement savings is the “bucket strategy,” as recommended by certified financial planner Sean Lovison, founder of Purpose Built Financial Services. By strategically managing your income in lower-earning years to fill different “buckets” or federal tax brackets, you can significantly reduce your lifetime tax liabilities.

Roth conversions can be a valuable tool in reducing your pretax balances and optimizing your tax situation. By converting funds from a pretax or nondeductible IRA to a Roth IRA, you can avoid taxes on future withdrawals. While you will have to pay taxes on the converted balance upfront, this trade-off can result in substantial tax savings down the line.

For instance, if you find yourself in the 12% tax bracket before starting to collect Social Security, it might be advantageous to consider Roth IRA conversions to take advantage of lower tax rates. By strategically converting enough funds to put yourself in the 22% or 24% tax bracket, you can avoid higher tax rates once Social Security and required minimum distributions (RMDs) come into play.

According to CFP Judy Brown at SC&H Group, tax planning should not be an afterthought but an integral part of your retirement savings strategy. Instead of waiting until retirement to address tax implications, it is essential to focus on tax planning during the “accumulation phase” as you grow your nest egg. Diversifying your accounts across pretax, Roth, and brokerage accounts can provide flexibility and tax advantages in managing your adjusted gross income in retirement.