Retirement in the Twin Cities offers much to enjoy, including vibrant communities, access to nature, and world-class healthcare. However, it also presents a unique mix of state income taxes, property taxes, and living costs, for Minneapolis–St. Paul retirees, careful retirement income planning is important to ensure that your wealth lasts as long as you do.

An innovative retirement income plan considers the critical pieces of cash flow needs, tax strategy, and longevity risk. Putting these pieces together enables you to preserve your wealth and maintain the lifestyle you desire, even over several decades of retirement. Our guide will highlight how to evaluate and integrate these pieces into your own retirement income plan.

Understanding the Tax Landscape in the Twin Cities

Unlike some other states, Minnesota taxes most forms of retirement income, including Social Security benefits, pensions, and withdrawals from traditional IRAs and 401(k) plans. The state’s lack of broad exemptions means tax planning is even more critical for retirees.

For example, Minnesota did pass legislation in 2023 that increased the ability of retirees to subtract Social Security benefits from the state tax calculation. However, the threshold to obtain the complete subtraction of benefits is relatively low (AGI below $105,380 for MFJ and $82,190 for Single filers). Working with an advisor who can help create accurate tax projections and implement tax reduction strategies may help you save thousands of dollars every year on Minnesota state taxes.

Beyond state income taxes, retirees also need to account for property taxes, which vary widely by county, and sales taxes, which can influence long-term budgeting decisions. All these taxes can increase your retirement income needs and potentially jeopardize the long-term success of your plan.

Structuring Income Sources for Lower Taxes

A diversified mix of tax-deferred, tax-free, and taxable accounts provides retirees with the flexibility to manage their income and control tax brackets on a year-by-year basis.

Tax-deferred accounts (Traditional IRAs, 401(k)s) grow tax-free until withdrawn, and then all withdrawals from the account are taxed at ordinary income rates (like wage income).

Tax-free accounts (Roth IRAs, Roth 401(k)s) allow for tax-free withdrawals in retirement if you follow the rules for Roths (starting withdrawals after age 59.5 and waiting at least 5 years to start withdrawals).
Taxable brokerage accounts do not provide tax deferral or avoidance, but they offer liquidity (with no age-based penalties for withdrawals) and preferential tax rates on qualified investment income.

Accumulating value in only one type of account makes it challenging to optimize your tax profile in retirement. For example, many retirees accumulate significant value in tax-deferred accounts, often with little to no value in taxable or tax-free accounts. This means that every dollar they spend from their retirement portfolio will be fully taxed.

Retirees who can build up value in a variety of account types will have many more options for controlling taxes in retirement. Coordinating withdrawals across these sources allows retirees to minimize taxable income while keeping their financial goals on track.

For example, many folks are retiring before needing to take required withdrawals from their tax-deferred accounts (RMDs). Suppose they have also accumulated value in a taxable account. In that case, they can use this money to cover living expenses while making Roth conversions, which will help reduce tax-deferred dollars and increase tax-free dollars.

Strategic Withdrawal Planning

The sequence in which you draw from different accounts can make a major difference. A typical tax-efficient withdrawal order is to begin with taxable accounts, followed by tax-deferred accounts, and preserve Roth assets for last. However, with strategic retirement income planning, it can also be advantageous to consider coordinating some level of income from both taxable and tax-deferred accounts while staying within certain federal and/or state tax thresholds. This allows you to realize income at lower tax rates and preserve more of your money for the long term.

Managing annual income thresholds can also limit taxes on Social Security benefits and Medicare surcharges (IRMAA). The amount of your Social Security benefits that is taxed is determined by your total combined income – more income equals more benefits being pulled into the tax calculation. Your Medicare premiums are also determined by the income on your tax return. Those with high enough incomes will incur additional premiums, known as IRMAA, that increase their total healthcare costs in retirement.

Additionally, strategically timing investment sales can help reduce capital gains exposure, which could push you into a higher tax bracket. If you need to realize gains to generate cash from a taxable investment account, consider spreading out realized gains over two years to help reduce total taxes.

Managing Required Minimum Distributions (RMDs)

Once you reach age 73 (or 75 for some retirees), you must begin taking Required Minimum Distributions (RMDs) from traditional tax-deferred retirement accounts. These mandatory withdrawals can push you into a higher tax bracket, causing you to lose more money to taxes.

Some practical ways to manage large RMDs and reduce your taxes include:

Giving some (or all) of your RMD directly to a charitable cause. This is known as a Qualified Charitable Distribution (QCD), which allows you to make tax-free donations from your IRA.
Performing partial Roth conversions before RMD age to reduce future RMDs. Roth conversions allow you to turn tax-deferred money into tax-free money. You will pay taxes now on the conversion, but you will reduce the size of future RMDs, along with their associated tax hit.

Thoughtful RMD planning can make a significant difference in your lifetime tax bill.

Using Roth Conversions Strategically

Roth conversions, moving money from traditional IRAs into Roth accounts, can be especially valuable during lower-income years, such as early retirement. Before age 70, when you must start claiming Social Security benefits, your only taxable income may be investment income from a taxable brokerage account.

To maximize these conversions, it can be helpful to build up value in a taxable brokerage account. This account can be used to help fund your lifestyle, while Roth conversions are completed with your tax-deferred funds.

The benefits of strategic Roth conversions include:

Reducing future RMDs and taxes.
Creating tax-free growth for heirs and legacy goals.
Providing flexibility to manage income and taxes later in life.

It’s also important to consider Minnesota-specific tax implications and consult with a professional to determine whether conversions align with your overall financial plan.

Factoring in State and Local Considerations

When creating a tax-efficient retirement income plan, it’s important to look beyond federal tax rules and account for Minnesota’s state and local tax structure, which can meaningfully affect your long-term finances.

Minnesota State Income Tax: Minnesota employs a progressive income tax system with four brackets, ranging from approximately 5.35% to 9.85% (as of 2025). Unlike some states, Minnesota taxes most types of retirement income, including:

Social Security benefits, depending on income level. Higher-income retirees may be required to pay state tax on all their benefits, while lower-income retirees may qualify for a full exemption.
Pensions and annuity income, both public and private.
Traditional IRA and 401(k) withdrawals are fully taxable at the state and federal levels.

There are limited retirement income subtractions available, but these phase out at moderate income levels. Because of this, income timing, Roth conversions, and withdrawal sequencing become especially valuable tools for Twin Cities retirees who want to manage their state tax exposure.

Minnesota Estate Tax: Minnesota is one of the few states that imposes its own estate tax, separate from the federal system. In 2025, the state estate tax exemption is $3 million per person, significantly lower than the federal exemption of $13.99 million.

This means that individuals (and couples, depending on the estate size and titling) may still face a Minnesota estate tax, even if they are far below the federal threshold. The state’s estate tax rates start around 13% and can reach up to 16%, applied only to the portion of the estate exceeding the $3 million exemption.

For Twin Cities residents with larger estates, estate planning strategies such as charitable bequests, lifetime gifting, and the use of trusts can help reduce exposure. Coordinating beneficiary designations, wills, and philanthropic goals ensures that your wealth is distributed efficiently, aligning with your legacy wishes.

Local Property and Living Costs: Where you live within the Twin Cities can also influence your retirement plan. Property taxes can vary widely between Hennepin, Ramsey, and the surrounding counties. Some retirees choose to downsize or relocate to suburbs with lower property taxes or housing costs, freeing up income for travel, family, or philanthropy.

Finally, consider healthcare access and community amenities as part of your broader financial plan. Balancing these local costs with state-level tax strategies helps create a more comprehensive, tax-efficient retirement plan that supports both your lifestyle and long-term financial security.

Coordinating Investments, Pensions, and Social Security

For many Twin Cities retirees, managing income across investments, pensions, and Social Security isn’t just about maximizing cash flow; it’s about doing so in a tax-efficient and coordinated way. The sequence and timing of these income sources can significantly influence both your current tax bill and your long-term financial flexibility.

Social Security Timing and Tax Implications: Deciding when to claim Social Security benefits, as early as age 62 or as late as 70, can have ripple effects throughout your retirement plan. Electing to delay benefits increases your monthly payment and may also allow you to draw more strategically from taxable or tax-deferred accounts in the meantime.

Be aware that up to 85% of Social Security benefits may be subject to federal income tax, and 100% of benefits may be subject to Minnesota state taxes. Careful coordination of the timing of these benefits along with other income sources can help reduce these taxes.

Integrating Pension Income: Many Twin Cities residents, particularly those from the public sector, education, or healthcare, receive defined-benefit pensions or deferred compensation plans. These payments are typically fully taxable at both the federal and state levels in Minnesota, making it essential to align them with other income sources.

Key strategies include:

Coordinating pension start dates with Social Security claiming decisions to manage combined income levels.
Using taxable account funds to supplement pension income without triggering higher marginal tax rates.

Investment Coordination and Withdrawal Flexibility: Your investment accounts play an important supporting role in maintaining tax control throughout retirement. Blending taxable and tax-free investment income can help smooth income through market fluctuations while maintaining a steady monthly cash flow.

A Coordinated Example: Consider a Minneapolis couple, both age 65. One receives a public pension, and both have IRAs and a joint brokerage account. By delaying Social Security until age 68, performing partial Roth conversions in lower-income years, and drawing selectively from taxable accounts, they can reduce both federal and state income taxes in Minnesota over time (while keeping their Medicare premiums and tax on Social Security in check).

In short, coordinating these income streams isn’t just about math; it’s about creating a flexible, integrated plan that supports your lifestyle and legacy goals while minimizing your tax burden each year.

Common Mistakes in Tax-Efficient Retirement Planning

Given the complexities discussed in previous sections, creating a tax-efficient retirement income plan presents some challenges. Here are some of the most common mistakes retirees make with their withdrawals:

Withdrawing too much too soon and pushing income into higher brackets.

For instance, a retiree who takes a large lump sum from a traditional IRA to buy a vacation home might accidentally push their income into a higher federal and Minnesota tax bracket for the year.

Ignoring how state taxes differ from federal rules.

A Minneapolis couple may plan their withdrawals based on federal tax brackets only to discover that Minnesota also taxes their pension and part of their Social Security, leading to a higher overall tax bill.

Delaying Roth conversions until RMD age.

Someone who waits until age 73 to consider conversions misses out on the lower-tax window between retirement and required distributions, losing the chance to smooth income and reduce future taxes.

Overlooking Medicare surcharges or taxation of Social Security benefits.

A retiree might sell appreciated investments in one year, unknowingly raising their income enough to trigger higher Medicare premiums (also known as IRMAA) and increase the taxable portion of their Social Security benefits.

Avoiding these pitfalls can help you maintain a more predictable, sustainable income throughout retirement.

Tax-Efficient Retirement Income Planning FAQs

1. Does Minnesota tax Social Security benefits?

Yes, depending on your income level. Some retirees may qualify for a complete exemption from paying state tax on their benefits, thanks to legislation passed in 2023, but many still pay state tax on at least a portion of their benefits.

2. How can I reduce taxes on my RMDs?

Consider QCDs, partial Roth conversions, and coordinated withdrawal strategies before age 73 (or 75).

3. What are the benefits of doing a Roth conversion during early retirement?

It allows you to lock in tax-free growth, reduce future RMDs, and create flexibility for your heirs.

4. Are there Minnesota-specific deductions or credits for retirees?

Minnesota offers limited deductions or credits specific to retirees, aside from the updated Social Security benefit subtraction introduced in 2023. This allows lower-income retirees to subtract their entire benefit from the state tax calculation, which makes tax planning even more critical for Minnesota residents.

5. How can I balance withdrawals to stay in a lower bracket?

Blending distributions from taxable, tax-deferred, and Roth accounts can help smooth income and minimize taxes.

How Clerestory Advisors Helps Twin Cities Residents Build Tax-Efficient Retirement Plans

At Clerestory Advisors, we help retirees and near-retirees across the Minneapolis–St. Paul has developed coordinated retirement income and tax strategies that sustain lifestyle goals while reducing lifetime taxes.

Our personalized approach integrates:

Investment strategy and tax management
Social Security and pension optimization
Minnesota-specific income and estate tax planning

Whether you’re already retired or planning your transition, we’ll help you design an efficient retirement income plan that supports your goals, minimizes taxes, and builds lasting financial confidence.

Reach out today to schedule an introductory call if you’d like to learn more about how we can support you with tax-efficient income planning in retirement.

Sources:

https://www.house.mn.gov/hrd/pubs/ss/ssmnsocsec.pdf

https://www.house.mn.gov/hrd/issinfo/sstaxes.aspx#:~:text=Part%20or%20all%20of%20a,Disability%20Insurance%20(OASDI)%20benefits

https://www.house.mn.gov/hrd/issinfo/penexcl.aspx?src=20

https://www.cms.gov/newsroom/fact-sheets/2025-medicare-parts-b-premiums-and-deductibles

https://www.aarp.org/social-security/retirement/federal-income-taxes/

Liz Alf is the Principal of Clerestory Advisors and fee-only CERTIFIED FINANCIAL PLANNERTM located in Minneapolis, MN. She is a member of the National Association of Personal Financial Advisors (NAPFA), the Fee Only Network and Wealthtender. She enjoys serving clients with on-going financial planning and investment management services.