Approaching retirement with $1 million saved is an impressive milestone, but turning those savings into a sustainable income stream requires careful planning. At age 65, many retirees face the challenge of losing a portion of what they’ve earned to taxes. No matter the size of your nest egg, no retirement income strategy is complete without a tax plan.

Joel Johnson, CFP® joins Retire Wiser with NBC Connecticut to take a closer look at this scenario and share best practices for minimizing taxes in retirement.

Analyze Your Sources of Income

The first step is to take inventory of all your retirement income sources and understand how each is taxed. Social Security, pensions, IRAs, and 401(k)s are all taxed differently, and knowing these distinctions is key to maximizing the income you’ll receive in retirement. For instance, Social Security benefits may be partially taxable based on your total combined income, whereas distributions from traditional IRAs and 401(k)s are typically taxed as ordinary income.

Since not all income sources are created equal, it’s important to assess how they interact within the context of your overall retirement income plan. From there, you can create a strategy that reduces your lifetime tax liability.

Decide How You Want to Leave Your Money

Legacy planning is another key aspect of your tax strategy. If your primary goal is to spend all your savings on yourself, it often makes sense to defer taxes as long as possible. However, if you plan to pass your money on to your kids or other family members, your tax plan may look different. Planning for a tax-efficient wealth transfer could mean paying more taxes now through a Roth conversion – moving a portion of tax-deferred savings from a traditional IRA to a Roth IRA. This allows your beneficiaries to inherit the money tax-free, potentially saving them a significant tax burden.

Determine the Best Order to Spend Your Accounts

If you’re like many of our clients who are diligent savers, you may struggle to shift from saving mode to spending mode in retirement. This is where having a clear retirement income plan comes into play. One of the tax-efficient tactics you and your financial advisor can implement is establishing a strategic withdrawal order. For example, it may be beneficial for some retirees to claim Social Security benefits early to avoid dipping into their 401(k) or other retirement accounts. Seeing this plan in action can give you the confidence to fully enjoy your retirement years.

As we’ve discussed, today’s retirees don’t have to settle for high tax rates. With thoughtful tax planning, your hard-earned savings can provide a comfortable and secure retirement while preserving your wealth for future generations.