Key Takeaways:
- Your final working years are a valuable window for tax planning. Income, savings, account balances, retirement timing, and future withdrawals are close enough to model.
- Review your income timing and working-year benefits before retirement. Bonuses, equity compensation, deferred compensation, severance, business income, workplace contributions, HSAs, and taxable savings can all affect the tax years around your retirement date.
- The goal is long-term tax flexibility. Strong planning connects today’s tax choices to future RMDs, Medicare premiums, Roth conversion opportunities, charitable giving, survivor needs, portfolio design, and your broader financial future.
As you enter your final 5 to 10 working years, the financial pressure can start to feel different. Retirement is close enough that decisions feel more real, but there may still be enough time to adjust how income, savings, taxes, and future cash flow work together.
At this stage, tax planning should become more intentional. The goal is not simply to reduce this year’s tax bill, but to make better decisions before retirement income, required withdrawals, healthcare costs, and account withdrawals become harder to control.
Map the Tax Years You Still Have Before Retirement
The last stretch of your career is not one uniform planning period. A peak earning year, a phase-down year, and the first year after work ends can each create a very different tax situation.
A strong plan should account for when income may be highest, when deductions may be most useful, and when lower income years may create room for Roth conversions, investment sales, or other planning moves.
Identify the Planning Windows That Matter Most
As retirement gets closer, timing starts to matter more. The goal is to understand which decisions are best at each stage of your transition. Whether you’re just starting to think about retirement or counting down the months (or years), here are the planning windows you should pay close attention to:
Peak earning years: Salary, bonuses, equity compensation, business income, or consulting work may keep taxable income high. These years may be a good time to review deductions, pre-tax contributions, deferrals, and other strategies to help manage your current-year tax bill.
Phase-down years: Reduced hours, lower business income, partial retirement, or changes in deferred compensation may create more room before retirement fully begins. These years can be useful for Roth contributions, Roth conversions, taxable investment decisions, or other planning moves that may not fit as well during peak income years.
Early retirement years: The years after work stops but before Social Security, pensions, or required minimum distributions (RMDs) begin may create a different tax situation. Earlier choices regarding account mix, cash reserves, and tax diversification can affect your flexibility during this window.
Medicare lookback years: Medicare premium exposure can be affected by modified adjusted gross income (MAGI) from two years earlier, so large taxable events near enrollment deserve attention. Roth conversions, capital gains, severance, or deferred compensation payouts may need to be reviewed before they create future premium pressure.
RMD years: Required withdrawals generally begin at age 73 for many retirement account owners, which can make some future income less optional. 1 Planning before this point may help you evaluate whether Roth conversions, measured withdrawals, or different savings choices could reduce future tax pressure.
Tax Benefits to Use While You Are Still Working
A paycheck can give you access to tax benefits that may not work the same way after retirement. Things like workplace contributions, Roth options, HSAs, and taxable savings can all affect how much taxable income you create now and how much flexibility you have later.
These working-year planning options should be reviewed before your paycheck stops:
- Pre-tax workplace contributions, such as those made to a traditional 401(k), reduce taxable income during high-earning years.
- Roth workplace contributions are worth reviewing when future tax flexibility is prioritized over the current-year deduction, especially if you expect higher taxable income later.
- Catch-up retirement contributions let you save extra in certain workplace plans once you turn 50. Some plans may also allow even higher catch-up contributions for participants ages 60 to 63.²
- Eligible health savings accounts (HSAs) may provide tax advantages now while creating a potential source of funds for future healthcare expenses.
- Some workplace retirement plans let you save extra after-tax money that may later be moved into a Roth account, giving you more tax-free flexibility in retirement.
- Building non-retirement savings can provide flexibility before other income sources begin, potentially reducing pressure on retirement accounts and IRAs during the transition.
Manage Income and Investments Before Work Ends
As retirement nears, it’s important to consider how major income events and investment decisions may impact your tax plan. Final compensation, stock events, consulting income, and taxable account sales can all create tax consequences that deserve review before retirement begins.
This part of the plan focuses on income levers you may still be able to pull. Reviewing them before a payout, sale, or retirement date is finalized can help you avoid decisions that are hard to unwind later.
Strategies for Work-Related Income Before Retirement
Before you sail off into the retirement sunset, review how your work-related income may show up on your return and how taxable investments may affect your retirement plan.
These income-related strategies should be reviewed as you plan for retirement:
- Coordinate bonus and commission timing: If you have some control over when bonus or commission income is paid, timing can matter. Extra income in a peak earning year may affect your tax bill differently than income received in a lower-income year.
- Plan around equity compensation events: RSUs, stock options, ESPPs, or employer stock can create taxable income when shares vest, options are exercised, or stock is sold. Reviewing these events before retirement can help you avoid a surprise tax bill.
- Review deferred compensation payouts: Deferred compensation is income earned earlier but paid later. A financial advisor can help compare your payout schedule with your retirement date, projected taxable income, and future cash flow needs.
- Prepare for final pay or severance: Retirement packages, unused vacation payouts, bonuses, or severance can push final-year income higher than expected. Planning can help you understand the tax impact before those payments arrive.
- Shape business or consulting income: Business owners and consultants may have flexibility around when income is received, when deductible expenses are paid, how depreciation is handled, and whether retirement fund contributions still make sense.
Strategies for Taxable Investment Decisions
Taxable investment accounts can give you flexible cash outside of retirement accounts. They can also create capital gains, dividends, interest, or losses that affect your tax bill.
These taxable investment choices may support better tax efficiency before retirement:
- Tax-loss harvesting: You can take advantage of tax-loss harvesting when you sell an investment for less than you paid for it and use the loss to help offset taxable gains elsewhere.
- Selective gain harvesting: You may find it worth it to sell certain investments in lower-income years. Depending on your taxable income and filing status, you can receive preferential federal tax treatment on long-term capital gains.
- Concentrated positions: If one stock, employer stock, or investment type makes up too much of your portfolio, you may need a tax-aware plan for selling shares before retirement.
- Gradual rebalancing: You can reduce portfolio risk over time instead of waiting until one large taxable sale becomes necessary.
- Dividend and interest exposure: You should review portfolio income before retirement because dividends and interest may affect future tax brackets, Medicare premiums, or withdrawal flexibility.
Please Note: Tax-loss harvesting may allow excess losses to offset up to $3,000 of ordinary income annually, while any remaining losses can generally be carried forward. However, the loss may not count if the wash-sale rule applies. This can happen when you buy the same or a substantially identical security within the 30-day window before or after selling.³
Prepare for the Tax Decisions That Begin in Retirement
Retirement changes how income is reported on your return. Instead of one paycheck, your cash flow may come from a mix of pre-tax accounts, taxable investments, Roth accounts, cash reserves, Social Security, pensions, or charitable strategies.
That mix matters because each source can affect your tax picture differently. The goal is to understand which future decisions may create taxable income, which ones may preserve flexibility, and which ones deserve attention before retirement fully begins.
Strategies for Future RMD and Withdrawal Pressure
Pre-tax retirement accounts can be powerful savings tools, but they come with a tradeoff. Money in traditional IRAs, 401(k)s, and similar accounts usually has not been taxed yet, which means future withdrawals may increase taxable income.
These planning strategies may help reduce future retirement account pressure:
- Project future RMDs: Estimating future RMDs can help show whether your pre-tax accounts may create more taxable income than you actually need later.
- Review Roth conversion opportunities: A Roth conversion moves pre-tax retirement money into a Roth account, with taxes paid now. In the right years, it may reduce future RMD pressure and add more tax-free flexibility later.
- Consider measured pre-tax withdrawals: After work income drops, but before RMDs begin, controlled pre-tax withdrawals may help spread taxable income across more years instead of waiting until RMDs force larger withdrawals later.
- Design a flexible withdrawal plan: A strong withdrawal plan looks at which accounts to use first, including taxable, pre-tax, Roth, cash, and HSA accounts. The goal is to avoid leaning too heavily on one account type in a single tax year.
- Account for survivor tax risk: If one spouse passes, the survivor may eventually file as a single taxpayer. That can make the same household income more tax-sensitive, which is why some couples review whether reducing large pre-tax balances earlier could help.
Strategies for Medicare, Social Security, and Charitable Giving
Some retirement tax decisions extend beyond the withdrawal order. Medicare premiums, Social Security taxation, and charitable giving can all interact with the income you create from retirement accounts and taxable investments.
These areas are worth reviewing before retirement because they can affect future premiums, taxable benefits, deductions, and giving options:
- Review Medicare income thresholds: Medicare premiums can increase when income crosses certain levels. Before creating a large taxable event, it can help to review whether that income could affect future premium exposure.
- Model future Social Security taxation: Social Security benefits are not always tax-free. Other income, such as IRA withdrawals, pensions, investment income, or part-time work, can cause up to 85% of your benefit to become taxable.⁴
- Coordinate charitable bunching: Charitable bunching groups multiple years of gifts into one tax year. This may help your charitable giving create a larger deduction than it would if gifts were more spread out.
- Use appreciated asset giving: Donating assets that have appreciated can support charitable goals while reducing the need to sell the investment and recognize the gain yourself.
- Plan for qualified charitable distributions (QCDs): QCDs allow eligible IRA owners to transfer funds directly to a qualified charity. A QCD can also satisfy RMD obligations without increasing taxable income like regular IRA withdrawals.
Tax Planning Strategies for Your Final 5-10 Working Years FAQs
1. What tax planning should I do in the final 5-10 years before retirement?
Start by mapping your expected tax years from now through the first few years after work ends. That means estimating salary, bonuses, equity compensation, business income, deferred compensation, investment income, planned retirement date, savings rate, and future withdrawal needs.
2. Should I make pre-tax or Roth contributions before I retire?
The right move depends on your current tax situation, future tax brackets, cash-flow needs, mix of accounts, and future planning flexibility. Pre-tax contributions may be more valuable in peak earning years, while Roth contributions may help if you want more tax-free withdrawal options later.
3. Are Roth conversions worth considering before retirement?
Roth conversions may be worth reviewing if you expect a lower-income window before Social Security, pensions, or RMDs begin. The decision should compare the tax paid today with the potential benefit of reducing future pre-tax balances and improving withdrawal flexibility.
4. How can taxable investment accounts affect my retirement tax plan?
Taxable accounts can provide flexible retirement income because you control what to sell and when to sell it. They can also create dividends, interest, capital gains, or realized losses that affect brackets, Medicare premiums, and withdrawal decisions.
5. Why do RMDs matter before I actually have to take them?
RMDs matter early because large pre-tax balances can create future income you may not need but still have to recognize. Estimating future RMDs can help you decide whether Roth conversions, measured withdrawals, or different savings choices may reduce pressure later.
6. How can Medicare premiums affect pre-retirement tax planning?
Medicare premiums can be affected by income before or near enrollment, making the final working years especially important. Large bonuses, Roth conversions, severance, equity compensation, business income, or capital gains may raise future premium exposure.
Get Help Building a More Tax-Efficient Retirement Plan
The final chapter of your career can be a valuable tax-planning window because current income, future retirement income, account balances, and timing decisions are converging. Better decisions during this period can affect today’s tax savings, tomorrow’s withdrawal flexibility, and the way your retirement income plan works over time.
Our team can help you evaluate contribution choices, compensation timing, taxable investment strategy, Roth conversion opportunities, RMD exposure, Medicare thresholds, charitable giving, and future withdrawal flexibility. We can also coordinate these decisions with your broader financial plan, so each move supports the larger picture.
If you want help building a more tax-efficient retirement plan for your final working years and beyond, schedule a complimentary consultation call with our team.
Resources:
1. Retirement Plan and IRA Required Minimum Distributions FAQs
2. Retirement Topics – Catch-Up Contributions
3. Maximize Your Tax Savings with Tax-Loss Harvesting
4. Must I Pay Taxes on Social Security Benefits?
