Contrary to popular belief, taxes don’t always decrease during retirement.

Sarah Wotherspoon, principal at San Rafael, Calif.-based firm Private Ocean, says that clients’ situations differ based on how much they are withdrawing from their portfolios and whether those withdrawals are taxable; the amounts of their Social Security and/or pensions and when they start collecting from those accounts; and what gains they may realize on their portfolio or selling assets, such as a second home or rental property.

“Some clients who have saved $3 million think they are in great financial shape,” Wotherspoon says, “but if that $3 million is held in retirement accounts, they have to pay taxes on every $1 that comes out, sometimes as much as 40%,” except for Roth accounts on which taxes have already been paid.

Retirement can mean a lower tax bracket for most when full-time income is replaced with lower Social Security payments. However, there are other sources of income that need to be factored into the tax equation, according to Claudia Mott, principal at Epona Financial Solutions in Basking Ridge, N.J.

Pension income, required minimum withdrawals from IRAs and 401(k)s, non-qualified dividends, and interest income all contribute to the overall figure for taxable income and may cause Social Security to be partially taxed if high enough.

“Looking at the future tax picture well before retirement actually begins enables a client and their adviser to determine if there are options available that can help reduce that burden down the road,” Mott says.

“For example, converting all or part of an IRA to a Roth may cause a tax hit today, but it can lessen the impact down the road, as Roth withdrawals are not considered taxable income,” she says. “Moving taxable assets into a tax-deferred vehicle is another strategy that may be worthwhile to consider.”

Kevin Meehan, regional president of Wealth Enhancement Group in Itasca, Ill., illustrates to clients that the best way to even out or reduce taxes during retirement is to have a variety of income sources from which to draw.

“That way you can choose your tax-free Roth source in years of higher income -- like the year you have to begin taking required minimum distributions and pull from your taxable accounts in the years in which you have lower income -- and therefore are in a lower bracket,” he says.

Retirement can mean a lower tax bracket for most when full-time income is replaced with lower Social Security payments. However, there are other sources of income that need to be factored into the tax equation, according to Claudia Mott, principal at Epona Financial Solutions in Basking Ridge, N.J.

Pension income, required minimum withdrawals from IRAs and 401(k)s, non-qualified dividends, and interest income all contribute to the overall figure for taxable income and may cause Social Security to be partially taxed if high enough.

“Looking at the future tax picture well before retirement actually begins enables a client and their adviser to determine if there are options available that can help reduce that burden down the road,” Mott says.

“For example, converting all or part of an IRA to a Roth may cause a tax hit today, but it can lessen the impact down the road, as Roth withdrawals are not considered taxable income,” she says. “Moving taxable assets into a tax-deferred vehicle is another strategy that may be worthwhile to consider.”

Kevin Meehan, regional president of Wealth Enhancement Group in Itasca, Ill., illustrates to clients that the best way to even out or reduce taxes during retirement is to have a variety of income sources from which to draw.

“That way you can choose your tax-free Roth source in years of higher income -- like the year you have to begin taking required minimum distributions and pull from your taxable accounts in the years in which you have lower income -- and therefore are in a lower bracket,” he says.

This story is part of a 30-30 series on preparing for retirement.