Taxes can be confusing on any given day, but in retirement, they require even more attention and understanding. In fact, taxes are at the core of nine out of every ten conversations we have with the people we meet.

This week on Better Money Boston with WCVB Channel 5, Nicholas J. Colantuono, CFP® shares some key points everyone should know when making smart tax decisions in retirement.

Not All Income is Taxed Equal

There are a variety of income sources you can pull from in retirement, and each is taxed differently. There are generally three types of income – taxable, tax-deferred, and tax-free – each with their own specific tax treatment.

For instance, taking money out of a brokerage account, where you might encounter capital gains or interest and dividends each year, is very different from withdrawing from a traditional IRA or a 401(k), where every single dollar counts as taxable income.

Understanding these distinctions can help you make more informed decisions about when and how to withdraw from these accounts to minimize your overall tax burden.

Taxes Are a Huge Expense

Many people believe their tax rate in retirement will be lower than it was during their working years, but this isn’t always the case. No matter how you look at it, taxes are an inevitable expense in retirement. However, having a solid plan in place can significantly reduce their impact.

The ultimate goal is to pay as little in taxes as possible, and it all begins with a tax-efficient strategy. The first step is to consult a financial professional who can help you create and incorporate these tactics into your overall financial plan.

If It’s Tax-Advantaged, Let it Grow

If you have any tax-advantaged accounts, it’s important to take full advantage of them while you still can. Accounts such as Roth IRAs and HSAs offer unique tax benefits, but once you stop working, you can longer make contributions.

While it becomes more challenging over time to facilitate money into these accounts, letting them grow and compound while you’re still able can lead to more tax-free income in the future.