Contributed by: Logan Dimitrie, CFP®
Why is Tax Planning Important?
Tax planning in retirement is important because you are no longer accumulating … you are now in the distribution phase … or “paying yourself.”
There are tax-efficient ways to do this. There are even some pitfalls to watch out for.
Introduction: A Different Lens on Retirement Income
At our firm, one of our core values is Commitment to Financial Planning. That means going beyond investment returns and focusing on after-tax outcomes.
In retirement, taxes don’t disappear; they become more complex.
The real opportunity lies in coordinating income sources, timing decisions, and understanding how different buckets are taxed.
Today, we’re going to explore:
Why dividend-heavy strategies can backfire
The power of capital gains brackets
Roth conversion opportunities (and pitfalls)
How Social Security taxation quietly increases your effective tax rate
Why product decisions, like annuities, can limit flexibility
1. Not All “Income” Is Created Equal
One of the biggest misconceptions we see is the idea that dividends are inherently tax-efficient.
While qualified dividends can receive favorable tax treatment, they still:
Add to your total taxable income
Interact with other income sources (Social Security, IRA withdrawals, new OBBBA enhanced senior deduction thresholds)
Can push you into higher tax brackets or increase Social Security taxation
Meanwhile, other strategies (like capital gain realization) can be more controllable and tax-efficient.
The Key Distinction:
Ordinary income: IRA withdrawals, annuities, and non-qualified dividends could be taxed up to 37%
Capital gains / qualified dividends: taxed at 0%, 15%, or 20% depending on income
Bottom line … tax treatment matters.
2. Capital Gains Brackets: A Huge Planning Opportunity
The tax code gives retirees a powerful planning window through preferential capital gains rates.
2026 Federal Capital Gains Thresholds (Taxable Income)
Married Filing Jointly:
0% rate: up to $98,900
15% rate: $98,900 to $613,700
Single filers:
0% rate: up to $49,450
15% rate: $49,450 to $545,500
These brackets sit on top of ordinary income.
Important nuance:
Your ordinary income fills the bracket first, and capital gains stack on top.
Planning opportunities:
Tax-gain harvesting at 0%
Coordinating withdrawals across pre-tax, after-tax, and Roth accounts
Avoiding unnecessary dividend income that fills these brackets
3. Why Dividend Investing Can Actually Hurt You
Dividend investing is often marketed as “safe income,” but from a planning perspective, it can reduce flexibility.
The problem:
Dividends are:
Forced income
Taxable every year
Not easily turned off in high-income years
Compare that to:
Selling appreciated assets (you control timing)
Using Roth funds (tax-free)
Managing bracket exposure
Real planning issue:
Dividends can:
Push you out of the 0% capital gains bracket
Increase Social Security taxation
Reduce your ability to execute Roth conversions efficiently
This is where our company value of Education and Personal Growth matters. We want clients to understand that “income” is not always optimal.
4. Roth Conversions: Filling the 12% Bracket Strategically
One of the most valuable retirement strategies is Roth conversion planning.
2026 Ordinary Income Anchors (MFJ):
12% bracket top: $100,800 taxable income
This creates a window to:
Convert IRA assets at relatively low rates
Reduce future RMDs
Improve long-term tax diversification
Enhanced Senior Deduction Opportunity
OBBBA adds:
$6,000 per person age 65+ (up to $12,000 MFJ)
Begins phase-out at $150,000 MAGI (MFJ)
Planning opportunity:
Convert income up to that phase-out threshold
Capture deductions & low brackets simultaneously
5. The Hidden Trap: Effective Tax Rates & Social Security
This is where planning becomes critical.
Social Security taxation creates a “tax torpedo” effect:
0% taxable at low income
Up to 50% taxable
Up to 85% taxable once thresholds are exceeded
2026 Key Thresholds (MFJ):
$32,000 … taxation begins
$32,000–$44,000: up to 50% taxable
Over $44,000: up to 85% taxable
These thresholds are based on the provisional income calculation for Social Security.
Why this matters:
Every additional $1 of income can:
Trigger more SS becoming taxable
Create an effective marginal rate far higher than 12%
Example: A “12% bracket” Roth conversion may actually feel like:
18%
22%
Or higher after SS inclusion
It’s not about your marginal bracket. It’s about your effective rate on the next dollar.
This is where our other company value, Teamwork and Collaboration, matters. The analysis must be coordinated across:
Tax projections
Retirement income sources
Timing of Social Security
For many retirees, the most attractive window for Roth conversions is the period after you retire but before you begin Social Security. During those years, income is often temporarily lower and easier to control. Once Social Security begins, the analysis becomes more complex, and it is important to evaluate whether conversions still make sense based on your effective tax rate.
6. Annuities & Their Flexibility Trade-Off
Annuities can serve a purpose, but they come with a planning cost.
The issue:
Income is typically fully taxable as ordinary income
Payments are often fixed and inflexible
Little control over timing
Planning consequences:
Fills up lower tax brackets
Reduces room for Roth conversions
Can increase Social Security taxation
Amplifies the widow’s penalty
Widow’s penalty risk:
Surviving spouse moves to single brackets
Same income, but at higher rates
Fixed annuity income leaves no adjustment flexibility
Flexibility is a tax asset.
7. Bringing It Back to CENTER
This is where our team’s values come to life:
Commitment: We go beyond surface-level strategies
Education: Helping clients understand tax mechanics
Nice & Kind: Explaining complex topics simply
Teamwork: Coordinating tax, investment, and retirement plans
Energy: Proactively identifying opportunities
Real: Honest conversations about trade-offs
Conclusion: Tax Planning Is the Strategy
Retirement is not just about generating income; it’s about controlling how that income shows up on your tax return.
The difference between a good plan and a great plan often comes down to:
Timing
Tax characterization
Coordination across income sources
Every decision … income, investments, products … should be evaluated through a tax lens.
If you have any questions or would like to discuss how these strategies may affect your financial plan, please use this link to schedule a complimentary introductory call with me.
Logan Dimitrie, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Logan specializes in Financial Independence, Early Retirement, Financial Planning for caregivers and Longevity Planning. Logan has been featured on the Caffeinated Conversations podcast.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Logan Dimitrie, CFP® and not necessarily those of Raymond James.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.