We’re in our 60s with $9 million saved for retirement — excited but worried about the large tax liability coming up

One of the trickier obstacles to handle when retiring with a sizable nest egg is dealing with taxes. Finally getting to enjoy the fruits of years of scrimping, saving, and sacrifice is a prospect few would pass up, but a strategy to minimize taxes ensures the government takes only what it is legally entitled to and not a dollar more.

Paying One’s Fair Share of Tax, Not More

Planning ahead to handle taxes can benefit retiring couples in a host of ways, from their finances, to their long term health care.

A 62-year-old and his 58-year-old wife recently posted on Reddit with this exact problem. He enjoys his job, which pays a $180,000 annual salary. His employer contributes $22,000 per year to his traditional 401(k), and he contributes $30,000 annually to his personal Roth 401(k). His wife retired in 2021 with a $70,000 per year pension and her own 401(k). Two rental properties round out the picture, generating a net $2,000 per month in passive income.

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He would like to join his wife in retirement at 63, but tax concerns are holding him back. His financial planner does not advise on taxes, which leaves the couple navigating a complex picture on their own. His traditional 401(k) stands at $4.3 million, his Roth 401(k) at $400,000, and his wife’s 401(k) at $2.2 million. On top of that, $2.5 million in liquid investments sits untouched. Between his $180,000 salary, the wife’s $70,000 pension, and their $24,000 in annual rental income, their earnings consistently outpace their spending. The financial planner has even urged them to spend more, and the couple has responded with pricier vacations and new luxury cars.

A snapshot of their assets, earnings, and liabilities shows the following:

Some Tax Strategies To Use While Enjoying Life

Depending on the couple’s long-term goals, several strategies are available to them. Each addresses a different piece of the tax puzzle, and most can be combined for greater effect.

• Relocation: Retirees often move to states like Florida not only for the warmer climate, but because Florida, Texas, Nevada, and several others levy no state income tax. For couples living in California or New York, state and local taxes take a massive bite from income. Some retirees go further and relocate abroad to countries with a lower cost of living, such as Greece, Thailand, or Portugal, though the logistics and tax implications of expatriation deserve their own dedicated discussion.
• Maximize an HSA: The couple currently has no Health Savings Account. An HSA is triple tax-advantaged: contributions go in pre-tax, the balance grows tax-deferred, and qualified medical withdrawals are tax-free. For 2025, the IRS allows up to $4,300 for self-only coverage or $8,550 for family coverage, with an additional $1,000 catch-up contribution available to those 55 and older. To contribute, the husband must be enrolled in an HSA-eligible high-deductible health plan (HDHP), and eligibility ends upon Medicare enrollment at 65. Given that he is 62, there is a narrow window remaining to build this account before retirement age reduces or eliminates eligibility.
• Turn a Hobby Into a Business: If either spouse pursues a hobby that could legitimately qualify as a business, the tax benefits are meaningful. Business-related expenses including transportation, materials, and promotion become deductible and can be pooled with other 1099 passive income to reduce the net taxable base. Establishing an active business before full retirement also creates a documented income history that can justify a lower bracket in subsequent years. One useful rule: the IRS generally allows a company to take losses in three out of five consecutive years before it is reclassified as a hobby, giving a five-year window to assess whether the venture should be continued or wound down.

Portfolio Considerations

With $6.5 million sitting in tax-deferred accounts and a decade or more before required distributions kick in, the couple has a genuine planning window. A few moves are worth considering now.

• Municipal bonds: While the husband is still employed and the $2.5 million in liquid investments remains untouched, shifting a portion of that portfolio into tax-free municipal bond funds is worth exploring. Municipal bond coupon payments are exempt from federal income tax, and for couples residing in a high-tax state, a state-specific muni fund or bond portfolio can be double or even triple tax-free. The benefit is most powerful for high-income years, exactly the situation this couple faces now.
• Roth conversion ladder: With $6.5 million in pre-tax retirement accounts, the couple faces a significant future tax liability once required minimum distributions begin. One way to reduce that liability is to begin converting portions of the traditional 401(k) balances into Roth accounts after retirement. Because there is no annual dollar cap on Roth conversions (only on direct contributions), the couple can convert strategically each year during the gap between retirement and age 73, when RMDs begin, paying ordinary income taxes on each converted amount. The goal is to convert enough in lower-income years to reduce the eventual RMD burden without pushing into a higher bracket. Each converted amount must remain in the Roth account for five years before it can be withdrawn tax-free and penalty-free, so starting conversions promptly after retirement maximizes the benefit.
• Withdrawal order: In retirement, if funds are needed, the Roth 401(k) balance should generally be tapped before the pre-tax accounts, since those withdrawals are tax-free. The liquid taxable investments come next, where long-term capital gains rates typically apply. The traditional 401(k) and the wife’s 401(k) should be left to grow as long as possible, consistent with the Roth conversion strategy above.
• Required minimum distributions: Under the SECURE 2.0 Act, required minimum distributions from traditional 401(k) accounts now begin at age 73, not the previously applicable age of 72. Notably, Roth 401(k) accounts are no longer subject to RMDs during the owner’s lifetime as of 2024, a change that gives the couple’s $400,000 Roth 401(k) additional flexibility. Mandatory RMDs on the large pre-tax balances will, when they arrive, likely push the couple into a higher bracket, making pre-retirement and early-retirement Roth conversions all the more valuable.

This article should be considered as opinion only. Those seeking retirement planning and tax advice should consult a qualified financial or accounting professional.

Editor’s note: This article was updated to correct the required minimum distribution age from 72 to 73 under the SECURE 2.0 Act, add current 2025 HSA contribution limits ($4,300 self-only, $8,550 family), clarify that Roth 401(k) accounts are no longer subject to lifetime RMDs as of 2024, and add context on Roth conversion ladders as a strategy for reducing the couple’s deferred tax liability.