With markets performing well and bond yields remaining attractive, 2026 may have some investors taking a closer look at whether retirement is within reach. But deciding when to retire involves more than evaluating your investment returns. Taxes can play a major role in determining how much of your retirement savings you actually get to keep.
For individuals approaching retirement, a strong market can provide an opportunity to review not only investment allocations, but also the tax consequences of transitioning from earning a paycheck to drawing from retirement accounts.
A Strong Market Can Create Tax-Planning Opportunities
After periods of strong stock performance, your portfolio may look very different from the allocation you originally intended. Investors who started with a traditional 60% stock and 40% bond portfolio, for example, may now find themselves holding a significantly larger percentage in stocks.
Rebalancing can reduce investment risk as retirement approaches, but selling appreciated investments may also generate capital gains taxes.
Before making large portfolio changes, consider:
- How much unrealized capital gain is in your taxable accounts
- Whether gains will be taxed at short-term or long-term capital gains rates
- Whether realizing additional income could trigger the 3.8% Net Investment Income Tax
- How investment income could affect your overall taxable income
- Whether spreading sales across multiple tax years could produce a better result
The investment decision and the tax decision should ideally be considered together.
Your Tax Picture May Change Significantly in Retirement
Retirement often means moving from relatively predictable wage income to several different sources of income, each with its own tax treatment.
Retirement income might include Social Security benefits, pensions, traditional IRA or 401(k) distributions, Roth distributions, interest, dividends, and capital gains.
Traditional retirement-account withdrawals are generally taxable as ordinary income, while qualified Roth distributions may be tax-free. Social Security benefits may also become partially taxable depending on your other income.
That makes the years immediately before and after retirement particularly important for tax planning.
Consider Roth Conversions During Lower-Income Years
For some retirees, the period after leaving work but before Required Minimum Distributions (RMDs) begin can create a valuable tax-planning window.
If your taxable income falls after retirement, converting a portion of a traditional IRA to a Roth IRA may allow you to recognize that income at a potentially lower tax rate today. Although the converted amount generally creates taxable income in the year of conversion, future qualified Roth withdrawals can be tax-free.
A carefully planned series of partial Roth conversions may also help reduce future traditional IRA balances and, consequently, future RMDs.
However, converting too much in a single year can push income into a higher tax bracket and may have other consequences, so the amount and timing matter.
Capital Gains Deserve Special Attention
A strong stock market can leave longtime investors sitting on substantial unrealized gains.
Long-term capital gains generally receive preferential federal tax rates compared with ordinary income, and taxpayers with lower taxable incomes may qualify for a 0% federal long-term capital gains rate on some gains.
For someone whose income declines after retirement, this can create opportunities to strategically realize gains while remaining within a favorable tax bracket.
Tax planning may therefore influence not just what investments you sell, but when you sell them.
Don’t Forget Medicare and Social Security
Higher retirement income can affect more than your income-tax bill.
Large IRA distributions, Roth conversions, or realized capital gains may increase modified adjusted gross income and potentially result in higher Medicare Part B and Part D premiums in future years.
The timing of Social Security benefits also deserves consideration. Depending on your other income, a portion of your Social Security benefits may be subject to federal income tax.
These interactions are one reason retirement tax planning should ideally take place before major transactions occur.
Retirement Planning Is Also Tax Planning
Investment performance can help determine whether retirement is financially possible, but taxes help determine how much of those assets are ultimately available to support your lifestyle.
Before retiring or making major changes to your portfolio, consider reviewing your expected income for the next several years. Coordinating retirement-account withdrawals, capital gains, Roth conversions, Social Security benefits, and other income may help reduce unnecessary taxes and make your retirement savings last longer.
If you’re considering retirement or recently retired, now may be a good time to review your tax strategy. A proactive tax projection can help identify planning opportunities before year-end and give you a clearer picture of what your retirement income will look like after taxes.
This article is for general informational purposes only and should not be considered individualized tax, investment, or financial advice. Tax consequences vary based on individual circumstances.