To Maximize Income Later, Now Is the Time to Plan Tax Strategy

And there are some exceptions to the rule. Roth IRAs aren't subject to required withdrawals. And if you have a 401(k) with an employer for which you are still working when you turn 70 1/2 , you don't have to begin withdrawals until you retire from that company (unless you own 5 percent or more of it).

· State taxes. Once you are retired you may find it possible or even desirable to pack up and move to another part of the country. If you do, you may be able to cut your taxes considerably. And you don't always have to go very far. A District resident, for example, can cut his or her top state income-tax rate from 8.5 percent to 5.75 simply by moving across the river into Virginia. By moving farther -- to Florida, Texas or one of the half dozen states with no income tax -- you can cut the rate to zero.

Further, if you are lucky enough to have an old-fashioned pension, note that many states have special breaks for pension income, or for senior citizens in general. Government pensions qualify for complete state income-tax exemptions in a number states.

· Social Security. Although the Social Security Administration says that fewer than one-third of current Social Security benefit recipients pay taxes on their benefits, that is undoubtedly changing. The benefits are taxable if your income exceed certain thresholds, which were set in the1980s and '90s and have not been indexed for inflation. If the sum of one-half of your Social Security benefits plus other income you have, including interest on tax-exempt bonds, exceeds $25,000 for a single person or $32,000 for a married couple, then 50 percent of your benefits is taxable. If the sum of one-half of your benefits plus all your other income is more than $34,000 ($44,000 for married couples), up to 85 percent of your benefits is taxable.

Note that while distributions from traditional IRAs are included in figuring whether your Social Security benefits are taxable, distributions from Roth IRAs are not.

The interplay of Social Security benefits, other income, taxes, and the fact that the longer you wait to collect Social Security (up to age 70) the larger those benefits become makes for a very complex stew of choices for retirement.

For example, if you receive income that is a combination of Social Security benefits and distributions from a traditional IRA, it's likely your benefits will be 50 or even 85 percent taxable and your distributions fully taxable. But suppose early in retirement you defer collecting Social Security and draw more from your IRA until at age 70 your IRA is exhausted. You then begin drawing Social Security benefits. Since you've waited, your benefits will be quite a bit larger than they would have been at age 62 or even 65, and if they are your only income they may well be tax-free. Further, future Social Security cost-of-living adjustments will be calculated off your higher benefits, giving you bigger COLA boosts later on.