Retirement taxes present a complex challenge that often necessitates professional financial guidance, according to a leading tax expert. The retirement landscape has undergone significant transformation in recent years, with growing concerns about financial security among Americans. A 2025 survey from Clever Real Estate indicates that the average retiree believes they require $823,800 to retire comfortably, yet they have saved only approximately $288,700. This substantial gap of $535,100 has prompted many older workers to remain in the workforce, contributing to a rise in the average U.S. employee age from 40.5 years to 42 years over the past three years.
Navigating Retirement Tax Strategies
Given these financial pressures, developing a robust tax strategy for retirement is essential to maximize finances when leaving the workforce permanently, emphasized CPA Armine Alajian, CEO of the Los Angeles-based accounting firm Alajian Group Inc. Alajian, who possesses over two decades of experience advising companies and clients on tax and finance matters at major U.S. firms, shared her key insights with The Independent.
"You need someone to help you be aware of what impact your financial decisions have on your retirement," Alajian stated. "In my experience, it's assumed that everyone knows how to handle retirement taxes and has the right strategies, but not everybody does. Some individuals haven't built a tax strategy that will benefit them in retirement, and they may overlook changes to tax rules."
Consulting a Professional
This lack of planning and awareness can lead to significant issues at retirement age, potentially resulting in higher-than-expected tax payments. Professionals assist in understanding how financial decisions affect retirement income. It is preferable to have at least an estimate of that financial impact rather than facing an unpleasant surprise later. Before making a major tax-related decision, such as selling a significant asset, initiating retirement, or another substantial life event, consult with an accountant who can analyze the numbers and demonstrate the outcomes.
For instance, if someone is choosing between retirement accounts that require tax payments upon contribution or upon withdrawal, an accountant can illustrate how each option influences post-retirement income. With clear numerical presentations and expert explanations, individuals can make more informed decisions.
Required Minimum Distributions
Many retirement accounts, including 401(k)s and traditional IRAs, feature "required minimum distributions." Generally, the IRS mandates that withdrawals from these accounts begin between ages 72 and 75, depending on birth year. This requirement applies to retirement accounts that do not collect tax upon deposit, such as 401(k)s and traditional IRAs.
As retirement planning progresses, remember that you will be obligated to take withdrawals from a 401(k) or traditional IRA upon reaching a specific age. These withdrawals are typically taxed as income at the federal level and, in some cases, at the state level, necessitating funds set aside to cover tax liabilities when filing the following year.
State Tax Considerations
Much of the retirement tax discussion centers on federal taxes, but retirees frequently neglect state taxes. The tax liability on income can be shocking if unanticipated, particularly in states like California and Hawaii, where income tax rates exceed 10 percent.
Alajian advises future retirees to consider their retirement location. If planning to reside in a state with income tax, factor this into retirement income calculations. For those open to relocating, eight states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Depending on the size of retirement distributions, moving to a state without income tax could save thousands annually.
Current retirees should ascertain their state income tax rate and ensure sufficient funds are reserved to cover tax bills when filing. Reaching out for professional assistance is one of the most crucial steps retirees can take when confronting tax challenges, ensuring financial stability in their later years.
