The 5 Retirement Tax Traps That Could Drain Your Wealth
Retirement is supposed to be about enjoying the fruits of your labor — travel, family time, and perhaps a bit of well-earned relaxation. But many don’t realize that the retirement tax landscape differs significantly from their working years. Without careful planning, taxes can take a bigger bite of your retirement income than expected.
for the entire year. Proactive tax planning, including using Roth accounts, strategic withdrawals, and tax-efficient investments, can help keep income below these thresholds. 4. THE WIDOW’S TAX PENALTY When one spouse passes away, the surviving spouse faces a double financial hit — not only does one Social Security check disappear, but the survivor also moves from married tax brackets to single tax brackets, which can lead to significantly higher taxes on the same income. Many couples don’t plan for this transition, but there are ways to mitigate it. Roth conversions, life insurance, and properly structured investment withdrawals can all help protect the surviving spouse from unexpected tax burdens. 5. THE ESTATE TAX AND INHERITANCE MISTAKE Many retirees assume their heirs will inherit their assets tax- free. While that’s true for after-tax investments, it’s not the case for traditional retirement accounts. The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries, meaning heirs must now withdraw and pay taxes on inherited IRAs within 10 years. For those with large retirement accounts, this can create an unintended tax problem for heirs, pushing them into high tax brackets at the peak of their earning years. A combination of tax diversification, strategic giving, and trusts can help manage this impact. Important Note: While federal taxes are a significant concern, don’t overlook state taxes — some states tax Social Security benefits and retirement distributions differently. Depending on where you live, state tax laws could impact your overall retirement tax strategy. SMART PLANNING CAN REDUCE RETIREMENT TAX RISK While these tax traps can create unexpected financial burdens, proactive planning can help retirees keep more of what they’ve worked hard to build. Strategies such as Roth conversions, charitable giving, tax-efficient withdrawals, and proper estate planning can all help reduce unnecessary taxation. Retirement is too important to leave to chance. A well-structured financial plan can help you enjoy your wealth without unnecessary surprises from the IRS.
Here are five key tax traps that retirees, especially those with substantial 401(k) and investment assets, should watch out for.
1. THE REQUIRED MINIMUM DISTRIBUTION (RMD) SURPRISE Many retirees think of their 401(k)s and IRAs as their own money, but the IRS sees it differently. Once you hit age 73 (or 75 for some under the SECURE 2.0 Act), you’re required to start withdrawing a portion of your tax-deferred savings every year, whether you need the money or not. These withdrawals are fully taxable, and if you’re not careful, they can push you into a higher tax bracket, increasing the tax on your Social Security benefits and even triggering higher Medicare premiums. Strategic planning, including Roth conversions and charitable giving strategies, can help reduce the long-term impact of RMDs. 2. SOCIAL SECURITY’S HIDDEN TAX BITE Most retirees don’t realize that up to 85% of their Social Security benefits can be taxed. The taxability of Social Security is based on a formula that includes your income from pensions, investments, and even tax-free municipal bonds. Many are shocked to realize that extra income, whether it’s from an IRA withdrawal, a side business, or selling investments, can cause their Social Security to be taxed at higher levels. Managing income streams carefully can help avoid unnecessary taxation on benefits.
3. THE MEDICARE SURCHARGE (IRMAA) PENALTY High-income retirees face another hidden tax — the
Income-Related Monthly Adjustment Amount (IRMAA). This surcharge increases Medicare Part B and Part D premiums for those with higher incomes, based on a two-year lookback at your tax return.
For example, a retiree with taxable income just a dollar over the threshold could pay significantly higher Medicare premiums
2 McBeathFinancialGroup.com
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