A POPULAR JOKE about retirement is that it can be hard work. That’s because financial planning is like a jigsaw puzzle, and retirement often means rearranging the pieces. In the past, I’ve discussed two key pieces of that puzzle: how to determine a sustainable portfolio withdrawal rate and how to decide on an effective asset allocation. But there’s one more piece of the puzzle to contend with: taxes. Especially if you’re planning to retire on the earlier side, it’s important to have a tax plan. When it comes to tax planning for retirement, there’s one key principle I see as most important, and that’s the idea that in retirement, the goal is to minimize your total lifetime tax bill. That’s important because a fundamental shift occurs the day that retirement arrives: In contrast to our working years, when taxes are, to a large degree, out of our control, in retirement, taxes are much more within our control. By choosing which investments to sell and which accounts to withdraw from, retirees have the ability to dial their income—and thus their tax rate—up or down in any given year. The challenge, though, is that tax planning can be like the game Whac-A-Mole. Choose a low-tax strategy in one year, and that might cause taxes to run higher in a future year. That’s why—dull as the topic might seem—careful tax planning is important. To get started, I recommend this three-part formula: Step 1 The first step is to arrange your assets for tax-efficiency. This is often referred to as “asset location.” Here’s an example: Suppose you’ve decided on an asset allocation of 60% stocks and 40% bonds. That might be a sensible mix, but that doesn't mean every one of your accounts needs to be invested according to that same 60/40 mix. Instead, to help manage the growth of your pre-tax accounts, and thus the size of future required minimum distributions, pre-tax accounts should be invested as conservatively as possible. On the other hand, if you have Roth assets, you’d want those invested as aggressively as possible. Your taxable assets might carry an allocation that’s somewhere in between. If you can make this change without incurring a tax bill, it’s something I’d do even before you enter retirement. Step 2 How can you avoid the Whac-A-Mole problem referenced above? If you’re approaching retirement, a key goal is to target a specific tax bracket. Then structure things so your taxable income falls into that same bracket more or less every year. By smoothing out your income in this way from year to year, the goal is to avoid ever falling into a very high tax bracket. To determine what tax rate to target, I suggest this process: Look ahead to a year in your late-70s, when your income will include both Social Security and required minimum distributions from your pre-tax retirement accounts. Estimate what your income might be in that future year and see what marginal tax bracket that income would translate to. In doing this exercise, don’t forget other potential income sources. That might include part-time work, a pension, an annuity or a rental property. And if you have significant taxable investment accounts, be sure to include interest from bonds. Then, for simplicity, subtract the standard deduction to estimate your future taxable income. Suppose that totaled up to $175,000. Using this year’s tax brackets, that would put your income in either the 24% marginal bracket (for single taxpayers) or 22% (married filing jointly). You would then use this as your target tax bracket. Step 3 With your target tax bracket in hand, the next step would be to make an income plan for each year. The idea here is to identify which accounts you’ll withdraw from to meet your household spending needs while also adhering to your target tax bracket. This isn’t something you’d map out more than one year in advance. Instead, it’s an exercise you’d repeat at the beginning of each year, using that year’s numbers. What might this look like in practice? Suppose you’re age 65, retired and not yet collecting Social Security. In this case, your income—and thus your tax bracket—might be quite low. To get started, you’d want to withdraw enough from your tax-deferred accounts to meet your spending needs but without exceeding your target tax bracket. This would then bring you to a decision. If you’ve taken enough out of your tax-deferred accounts to meet your spending needs and still haven’t hit your target tax rate, then the next step would be to distribute an additional amount from your pre-tax accounts. But with this additional amount, you’d complete a Roth conversion, moving those dollars into a Roth IRA to grow tax-free from that point forward. How much should you convert? The answer here involves a little bit of judgment but is mostly straightforward: You’d convert just enough to bring your marginal tax bracket up into the target range. Some people prefer to go all the way to the top of their target bracket, while others prefer to back off a bit. The most important thing is just to get into the right neighborhood. What if, on the other hand, you’ve taken enough from your pre-tax accounts to reach your target tax rate, but that still isn’t enough to meet your spending needs? In that case, you wouldn’t take any more from your pre-tax accounts, and you wouldn’t complete any Roth conversions. Instead, you’d turn to your taxable accounts, where the applicable tax brackets will almost certainly be lower. Capital gains brackets currently top out at just 20%. Thus, for the remainder of your spending needs, the most tax-efficient source of funds will be your taxable account. What if you aren’t yet age 59½? Would that upend a plan like this? A common misconception is that withdrawals from pre-tax accounts entail a punitive 10% penalty. While that’s true, it isn’t always true, and there’s more than one way around it. One exception allows withdrawals from a workplace retirement plan like a 401(k) as long as you leave that employer at age 55 or later. In that case, as long as you don’t roll over the account to an IRA, you’d be free to take withdrawals without penalty. If you’re retiring before age 55, you’ll want to learn about Rule 72(t). This allows for withdrawals from pre-tax accounts at any age, as long as you agree to what the IRS refers to as substantially equal periodic payments (SEPP) from your pre-tax assets. The SEPP approach definitely carries restrictions, but if you’re pursuing early retirement, and the bulk of your assets are in pre-tax accounts, this might be just the right solution.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.