Many retirement planners view the period of time between age 59½ and 70½ as a “sweet spot” when it comes to their clients’ taxes. This is because distributions from retirement plans are allowed during this time but not required. Social Security can also be delayed until age 70, and many retirees who opt to do that will find themselves in one of the bottom tax brackets for a few years.

Once age 70 rolls around, however, those who do this may find themselves back in the same tax bracket they were in when they were still working. The reason: they must start taking their Social Security income, and in addition, within six months after reaching 70½, required minimum distributions on most types of tax-advantaged retirement savings accounts.

However, there are a few strategies retirees can use to maximize their tax savings and stay in a lower tax bracket for as long as possible. 

Longevity Insurance

One of the newer options that many retirees may want to consider is the purchase of a longevity insurance policy. These vehicles can best be viewed as “term” annuities that will pay out a straight monthly benefit at a later age without actually accumulating within a tangible contract like traditional annuities.

Payout usually starts at age 80 or 85, but the monthly amount is much higher than the same investment in an immediate annuity contract could yield. However, the insurance company will keep the proceeds that are paid into the contract if the annuitant dies before reaching the age of payout. A return of premium rider is available for an additional cost, but the income from these vehicles will be taxed as ordinary income in the same manner as other types of annuity payments. (Retirement Tips: Pick the Best Longevity Insurance will tell you more about these contracts.)

The tax benefit: money in traditional IRAs and qualified plans that is used to purchase these contracts is then excluded from the RMD calculation, thus reducing the amount of taxable income that the owner must draw and report each year after age 70½. The other side of the coin comes when the payout begins, and a much higher level of income is received and reported.

Roth IRAs

Retirees who have tax credits and deductions that more than cancel out all of their taxable income can use this opportunity to convert some or all of their traditional IRA and qualified plan balances to Roth IRA accounts. This can allow them to use credits and/or deductions that might otherwise go unused. Money in Roth accounts won't add to their income when they later withdraw it. What's more, that money is not subject to RMDs.

For example, if the higher-earning spouse in a couple stops working at age 65, the couple may drop into a lower tax bracket the following year. This may enable them to convert just enough of the spouse’s 401(k) plan to leave them in that lower bracket for that year. They can  keep doing this in subsequent years until the entire amount has been converted to a Roth IRA. Note that the couple will need to pay income taxes on what they convert so they need to figure the amount carefully. (For more, see How a Roth IRA Works After Retirement.)

Charitable Deductions

Taxpayers who are going to have substantial RMDs may want to consider taking qualified charitable distributions (QCDs) that go directly to charity and are excluded from their incomes. This provision allows IRA owners to send up to $100,000 of IRA distributions to charity without having to report the distribution as income. This provision was recently made permanent by Congress, so retirement planners and savers can now plan ahead using this provision.

“A QCD can benefit anyone with taxable income, but a retiree with over $100,000 in taxable income would benefit most, since it will reduce potential Medicare premium increases and Social Security taxation,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.

The Bottom Line

These are just some of the methods that retirement savers can use to manage their taxable incomes before they reach age 70½. Other strategies include taking distributions from retirement plans before 70½ when the taxpayer is in a lower bracket or investing in municipal bonds in order to receive tax-free interest income.

For more information on retirement plan distributions and how they are taxed, download publications 575 and 590 from the IRS website at or consult your tax or financial advisor. (For more, see 5 Tax(ing) Retirement Mistakes and Pay the Lowest Possible Taxes on Retirement Assets.)