A few months ago, I was with a friend of the family who had just sold part of his company. He leaned back in his chair and said:

“Chris, I can’t wait to retire. No more payroll. No more IRS headaches. And best of all… no more big tax bills.”

I smiled. Not because he was wrong for wanting that. But because I’ve had this exact conversation dozens of times.

Here’s the truth most people don’t realize until it’s too late: retirement does not mean your taxes disappear. In many cases, your tax rate can actually go up.

That surprises people. After all, you’re not working anymore. There’s no salary. So how could your taxes be higher?

The answer lies in how retirement income is taxed — and more importantly, in the order and strategy behind how you withdraw it.

Let me walk you through how this really works.

The Retirement Tax Illusion

When most business owners plan for retirement, they focus on one number — how much money they have saved.

They look at their 401(k), IRA, brokerage account, maybe some real estate, and they add it up. If the total feels big enough, they breathe easier.

What they often ignore is the tax character of that money.

A traditional 401(k) or IRA is not all yours. A portion belongs to the IRS. You just haven’t paid them yet.

The Internal Revenue Code makes that clear. Under IRC Section 401 and 408, contributions to traditional retirement accounts are generally deductible when made. That deduction feels great in your peak earning years. However, when you pull money out later, those withdrawals are taxed as ordinary income.

In other words, the IRS deferred the bill — they didn’t forgive it. That distinction matters.

If you retire with most of your wealth sitting inside tax-deferred accounts, you may have built a future tax problem without realizing it.

How Social Security Is Actually Taxed

Let’s talk about something even more misunderstood: Social Security.

Many retirees assume Social Security benefits are tax-free. After all, they paid into the system their whole lives. Surely that income is theirs without strings attached.

Not quite.

Since 1984, Social Security benefits can be taxable under IRC Section 86. The taxation depends on something called “provisional income.” That includes half of your Social Security benefits plus other income such as withdrawals from IRAs, pensions, and even tax-exempt municipal bond interest.

If your provisional income crosses certain thresholds, up to 85 percent of your Social Security benefits become taxable.

For 2025, if you are married filing jointly and your combined income exceeds $44,000, up to 85 percent of your Social Security can be included in taxable income. For single filers, that top threshold is $34,000.

Notice how low those numbers are.

I’ve seen retirees with $60,000 to $80,000 of IRA withdrawals accidentally push themselves into a situation where most of their Social Security becomes taxable. They thought they were pulling out “just enough” to live on. Instead, they triggered a tax chain reaction.

Now their IRA withdrawals are taxed. Their Social Security is partially taxed. And in some cases, their Medicare premiums increase due to IRMAA surcharges.

That’s not a small oversight. That’s a planning failure.

Traditional Retirement Accounts — The Tax Time Bomb

Traditional 401(k)s and IRAs are powerful tools. I use them strategically with many business owners.

But here’s the catch.

Every dollar you withdraw is taxed as ordinary income. Not capital gains. Not special rates. Ordinary income.

If you’ve built a $2 million traditional IRA and you need $120,000 per year to live comfortably, that full $120,000 stacks on top of your other income and pushes you through tax brackets.

Some retirees assume they’ll automatically be in a lower bracket after they stop working. That can happen. However, it doesn’t always.

Imagine this scenario.

You retire at 67, start pulling Social Security and begin Required Minimum Distributions at age 73 under the SECURE 2.0 rules. Those RMDs are mandatory withdrawals calculated using IRS life expectancy tables. You cannot skip them.

Now you have forced income whether you need it or not.

Add pension income, some rental income, and some dividends from a brokerage account.

Suddenly, you’re back in a bracket that looks a lot like your working years.

I’ve had clients tell me,

“Chris, I feel like I deferred taxes at 32 percent just to pay them at 32 percent later.”

That’s not strategic tax planning. That’s tax timing without foresight.

Roth Accounts — The Power of Paying Tax on Your Terms

Roth accounts flip the script.

Under IRC Section 408A, Roth IRA contributions are made with after-tax dollars. There’s no upfront deduction. That can feel painful in high-income years.

However, qualified withdrawals are tax-free.

No ordinary income, there is no stacking effect, and zero increase to provisional income for Social Security calculations. No Required Minimum Distributions during your lifetime for Roth IRAs.

That’s control.

I often tell business owners this: you’re not choosing between paying tax or not paying tax. You’re choosing when to pay tax and at what rate.

Roth conversions can be especially powerful in early retirement years. Suppose you retire at 62 but delay Social Security until 70. During that window, your income might be temporarily low. That can be an ideal time to convert portions of a traditional IRA to a Roth at lower tax brackets.

You voluntarily pay tax now so that future withdrawals — and future RMDs — are reduced or eliminated.

That’s strategic. That’s intentional.

Brokerage Accounts — The Often Overlooked Advantage

Taxable brokerage accounts don’t get the same marketing as retirement plans, but they offer flexibility.

Capital gains are generally taxed at preferential rates. For 2025, long-term capital gains rates are typically 0 percent, 15 percent, or 20 percent depending on income levels. Qualified dividends follow similar rules.

That’s very different from ordinary income rates.

Let’s say you need $80,000 in retirement. Pulling that from a traditional IRA could be fully taxable. Selling appreciated investments from a brokerage account might result in only a portion being taxed, and at a lower rate.

Even better, you control the timing. You can harvest gains strategically. You can also harvest losses to offset gains. In some cases, retirees with moderate income can realize capital gains at 0 percent.

That surprises people.

Diversifying across account types — tax-deferred, tax-free, and taxable — gives you levers to pull. Without that diversification, you’re stuck with whatever tax outcome your account mix dictates.

The Order of Withdrawals Matters More Than You Think

Here’s where planning becomes an art.

There is no universal rule that says always withdraw from this account first. Instead, I look at the entire tax picture year by year.

Sometimes it makes sense to draw from taxable accounts first to allow tax-deferred accounts to grow. Other times, it’s smarter to intentionally draw down traditional IRAs before RMD age to reduce future forced income.

In early retirement, I often evaluate filling up lower tax brackets with strategic withdrawals or Roth conversions. The goal is not to minimize tax in one single year. The goal is to minimize lifetime tax. That distinction changes everything.

If you only focus on this year’s bill, you might skip a Roth conversion that costs 22 percent today but would have avoided 32 percent later. If you obsess over avoiding tax today, you may be building a bigger bill tomorrow.

Retirement tax strategy requires looking forward 10, 20, even 30 years.

Why Some Retirees Pay More Than Expected

So why do so many retirees end up paying more tax than they thought?

First: they relied too heavily on traditional tax-deferred accounts.

Second: they didn’t understand how Social Security taxation interacts with other income.

Third: they ignored Required Minimum Distributions until they were forced into higher brackets.

Fourth: they failed to coordinate withdrawals with Medicare premium thresholds.

None of these issues are mysterious. They are simply overlooked.

I’ve reviewed retirement plans where the investment strategy was flawless but the tax strategy was nonexistent. The portfolio was optimized for return but not for after-tax income.

Retirement isn’t just about how much you earn on your money. It’s about how much you keep after the IRS takes its share.

A Simple Example to Bring It Together

Let’s imagine a married couple, both 70 years old.

They receive $50,000 combined from Social Security. They need another $90,000 to live comfortably.

If they pull that entire $90,000 from a traditional IRA, that amount becomes ordinary income. It increases the portion of Social Security that is taxable. which may push them into higher brackets. This strategy could even increase Medicare premiums.

Now imagine instead they have a mix.

They withdraw $40,000 from a brokerage account with mostly basis and long-term gains taxed at 15 percent. And then they pull $30,000 from a Roth IRA tax-free. Finally, another $20,000 from a traditional IRA.

The taxable income profile looks completely different. Same lifestyle. Different tax result.

That’s the power of structure.

Planning Before Retirement… Not After

The biggest mistake I see is waiting until retirement to think about retirement taxes.

By then, most of the decisions have already been made.

If you’re still in your 40s or 50s building wealth, this is the window where strategy matters most. Decisions about S-Corp compensation, profit distributions, retirement plan contributions, and even entity structure all shape your future tax picture.

I’ve worked with business owners who maximized deductions every single year without thinking about what that meant for 30 years down the road. They were so focused on lowering today’s bill that they ignored tomorrow’s.

Smart tax strategy balances both.

That’s what I mean when I say taxes are not just compliance. They are design.

The Conversation You Should Be Having Now

If you’re a business owner reading this, I want you to ask yourself a few honest questions.

• Do you know how much of your retirement savings is tax-deferred versus tax-free?
• Have you projected what your Required Minimum Distributions will look like at 73?
• Do you understand how your Social Security will be taxed based on your current savings mix?
• Have you evaluated Roth conversions in low-income years?

If the answer to most of those is no, you’re not alone. But ignoring them doesn’t make them disappear.

Retirement should feel freeing. It shouldn’t feel like a surprise tax audit every April.

I’ve built my career helping business owners think ahead. The earlier you understand how these pieces fit together, the more control you have.

You worked too hard building your business to hand over more than necessary simply because no one walked you through the tax mechanics of retirement.

If this sparked questions for you, that’s a good thing. That means you’re thinking strategically.

You can schedule a free consultation with me and we’ll walk through your specific numbers. No guesswork. No generic advice. Just a clear plan built around your goals.

Retirement income is not automatically low-tax income. But with the right structure, it can be far more efficient than most people realize.

Welcome to the New Age of Accounting. Let’s begin.

P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here