No matter how well you’ve saved for retirement, taxes are an unavoidable part of the process. The good news is that with the proper tax planning, you can minimize this burden and keep more of what you’ve earned.

This week on Retire Wiser with NBC Connecticut, Joel Johnson, CFP® shares some key tax strategies to help you maximize your retirement income.

Understand How Your Income is Taxed

Think of your retirement income as being divided into separate ‘buckets,’ each taxed in a different way. For instance, you might have three buckets: taxable, tax-deferred, and tax-free income. A traditional IRA falls into the tax-deferred bucket, meaning you don’t pay taxes on it until you withdraw. A Roth IRA, on the other hand, is tax-free, meaning you pay no taxes on withdrawals after 59 ½ and having owned the account for at least five years.

The question then becomes: what’s the best order to withdraw from each bucket to minimize your overall tax liability? It’s important to not only understand how each bucket is taxed, but also to consider how each type of income interacts with your overall investment strategy.

Consider a Roth Conversion

As we’ve mentioned, a Roth IRA allows you to pay taxes upfront, so your money can grow and be withdrawn tax-free in the future. If you’re nearing retirement and haven’t yet contributed to a tax-free account, you might want to consider converting funds into a Roth from a traditional IRA or 401(k).

By converting smaller amounts annually, you can spread the tax obligation over several years and avoid being pushed into a higher tax bracket. While a Roth conversion isn’t right for everyone, it can be a smart strategy for some, allowing you to pay taxes now in exchange for the benefit of tax-free withdrawals later.

Stay on Top of Your RMDs

At age 73, you are required to begin taking money out of your retirement accounts through what’s known as required minimum distributions (RMDs). How and when you take these RMDs can create a significant tax burden. It’s important to work with your financial advisor to get the timing right and avoid a potential tax ‘time bomb.’