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The Unsung Hero of Your Retirement Plan
Imagine standing at the edge of retirement, papers in hand, but you’re lost in a maze of acronyms. RMDs, IRAs, and something called AGI. You’re not alone. Many pre-retirees feel overwhelmed trying to make sense of it all. But here’s the good news: Understanding one number—your Adjusted Gross Income (AGI)—can help you unlock powerful savings strategies and lower your taxes.
Let’s walk through what AGI really means and how you can use it to make smarter retirement decisions.
Decoding Adjusted Gross Income: What It Is and What It Isn’t
At its core, AGI is simple. It’s your total income minus specific deductions. These deductions are known as “above-the-line” because they come before you calculate your taxable income.
The Basic Formula:
Gross Income – Above-the-Line Deductions = Adjusted Gross Income (AGI)
What counts as gross income?
- Wages, salaries, and tips
- Interest and dividends
- Capital gains
- Retirement account distributions (taxable portions)
- Self-employment or business income
- Other income sources like rental income or alimony received
What are common above-the-line deductions?
- Traditional IRA contributions
- Health Savings Account (HSA) contributions
- Self-employment tax (50% deductible)
- Student loan interest
- Alimony paid (for agreements before 2019)
- Moving expenses (for active-duty military)
And here’s what AGI is NOT:
- It’s not your gross income—that’s before deductions.
- It’s not your taxable income—that comes after other deductions.
- It’s not your net business income—that’s a separate figure for entrepreneurs.
Knowing these distinctions helps prevent costly mistakes on your tax return and gives you a clearer financial picture.
Why AGI Matters Immensely for Your Retirement Journey
Your AGI does more than sit on line 11 of your tax return. It’s the key that unlocks or limits access to critical savings tools and benefits.
AGI and Tax Liability A lower AGI often means paying less in taxes. That’s especially helpful if you’re living on fixed income in retirement. Small shifts in AGI can move you into a lower tax bracket or reduce surtaxes.
Eligibility for Retirement Savings Incentives
- IRA Deduction Limits: If you (or your spouse) are covered by a retirement plan at work, your AGI affects whether you can deduct Traditional IRA contributions. In 2025, the deduction phases out at $123,000–$143,000 for married couples filing jointly.
- Roth IRA Contribution Limits: Your AGI directly determines whether you can contribute to a Roth IRA. For 2025, contributions phase out at $230,000–$240,000 for joint filers.
- Saver’s Credit: This credit helps lower-income savers get a tax break for contributing to retirement accounts. The AGI threshold in 2025 is $76,500 for joint filers.
Even if you’re earning a good income, there may be strategies to reduce your AGI and keep these benefits in reach.
Healthcare Considerations in Retirement
- Medicare Premiums (IRMAA): Medicare looks at your AGI from two years ago to calculate premiums. A high AGI today could increase your Medicare Part B and Part D costs down the road.
- ACA Subsidies: If you retire before age 65, AGI affects whether you qualify for premium tax credits under the Affordable Care Act. Understanding how to reduce AGI can make early retirement more affordable.
Social Security Taxation Your AGI also impacts how much of your Social Security benefits are taxable. If your combined income exceeds $44,000 for joint filers, up to 85% of benefits may be taxed. Strategic income planning helps keep more of those benefits in your pocket.
Strategic Ways to Potentially Lower Your AGI Before and During Retirement
A little planning goes a long way. Here are some smart ways to lower your AGI:
Maximize Pre-Tax Retirement Contributions
- Contribute to 401(k), 403(b), or 457 plans
- Take advantage of catch-up contributions if you’re 50 or older
- Fund a Traditional IRA (if eligible)
Not only do these moves reduce AGI, but they also help build retirement savings.
Utilize a Health Savings Account (HSA) HSAs offer a triple tax advantage: contributions reduce AGI, earnings grow tax-free, and withdrawals are tax-free for medical expenses.
If you’re enrolled in a high-deductible health plan, this is one of the most powerful tools available.
Harvest Investment Losses Sell losing investments to offset capital gains. This strategy, called tax-loss harvesting, can reduce your AGI. You can also deduct up to $3,000 in excess capital losses against ordinary income each year.
Consider Tax-Advantaged Investments While Roth IRA contributions don’t lower AGI now, they allow tax-free withdrawals in retirement—helping you avoid raising AGI later. Municipal bonds are another tool, as the interest is typically excluded from federal taxable income.
Use Qualified Charitable Distributions (QCDs) If you’re 70½ or older, you can donate up to $100,000 from your IRA directly to charity. It satisfies RMDs and keeps income off your tax return, even though it doesn’t reduce AGI directly. This is an elegant way to give back while managing tax exposure.
Planning for the Future: Integrating AGI into Your Retirement Strategy
Looking ahead can make all the difference.
Project Your AGI in Retirement Estimate your income from Social Security, retirement accounts, part-time work, and other sources. Don’t forget about deductions you might still qualify for. Doing this years in advance allows you to shift money between accounts strategically.
Work with a Financial Planner A good advisor can help you time income, make strategic withdrawals, and recommend AGI-lowering moves. We often run multi-year projections to show how AGI planning today affects taxes, Medicare, and savings five to ten years down the road.
Review Your Plan Regularly Tax laws change. So can your financial situation. Check in at least once a year to adjust your strategy. For example, a new job, early retirement, or even inheritance could trigger a different AGI profile.
Run Scenarios Consider best-case and worst-case income years. How might your AGI look if you convert a Roth, sell a property, or delay Social Security? Scenario planning lets you be proactive, not reactive.
In Conclusion: Take Control of Your AGI, Secure Your Retirement
When it comes to retirement, knowledge is power. Understanding your AGI and how to manage it opens the door to smarter savings, lower taxes, and better health benefits.
Managing AGI isn’t just a tax move—it’s a long-term strategy. I’ve seen clients save thousands simply by shifting withdrawals, using HSAs more strategically, or delaying income.
So take the time to get familiar with your numbers. Talk with a professional. And remember: your retirement deserves more than guesswork—it deserves a plan.
