I recently attended a retirement seminar at a local community college where the teacher talked about the potential for higher tax rates in retirement due to the new RMD era. I’ve been under the impression throughout my savings career that tax rates in retirement are supposed to come down, especially if you speed up withdrawals. How can tax rates in retirement be higher than in your years of earning?
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Let’s start with the simplest answer and then build from there. Required Minimum Distributions (RMDs) are certainly a reason why a person’s tax rate may be higher the retirementBut they are not the only reason. There are a number of potential scenarios in which a person faces higher taxes in retirement than in their years of earning. (And if you need help planning for taxes in retirement, Consider matching with a financial advisor.)
New RMD rules could lead to higher taxes
under Safe Code 2.0which age Minimum distributions required Starting RMDs increased from 72 to 73 in 2023. With this change, any money invested on a pre-tax basis in a 401(k) will have an extra year to grow before you have to start withdrawing money. This means that you can have a larger balance to take out each year once RMDs start, and with it a larger tax bill.
Keep in mind that the age of the RMD is set to rise to 75 in 2033. As a result, anyone who turns 75 in that year or after can leave their savings invested for an additional three years compared to the previous rules. More time in the market may mean a larger balance to be distributed each year. These larger distributions will likely push you into a higher tax bracket. (And if you need help planning RMDs, consider talking to one financial consultant.)
Larger distributions can also run Medicare The amount of the monthly income-related settlement (IRMAA), which results in higher monthly premiums for Medicare Parts B and D.
Having more income
Many retirees who have earned a good salary and made significant savings at work are surprised to find that their income may actually increase in retirement. While up to 85% of Social security If benefits are taxable, combining those payments with retirement account withdrawals can result in significant income. Add to that pension income, taxable investments, rental income, and part-time work, and a retiree could find himself in a higher tax bracket than he was in during his initial earning years.
Inheriting pre-tax money can also increase income in retirement from then on Inherited IRAs It has a 10-year window for full distribution. In other words, the full amount of the inherited IRA will be added to the beneficiary’s income within 10 years. (And if you need help managing your income streams in retirement, This tool can help you match with a financial advisor.)
Widow’s tax.
Widows tax is an oft-ignored tax rate increase that affects married couples upon the death of their first spouse. In retirement, the death of a spouse often does not result in a significant reduction in income. But the surviving spouse’s retirement income is now subject to the “single” tax bracket, rather than the much preferred “married couples” bracket.
For a couple with a taxable income of $50,000 at retirement, this could result in an increase in taxes each year by nearly $1,000. For a couple with an income of $100,000, the tax increase would be closer to $5,000. (a financial consultant It can help you navigate through financial changes that may affect your tax situation.)
A big one-time expense
A retiree may plan to take their pre-tax distributions evenly over time, but life rarely goes as planned. People may pay higher taxes in retirement during years when large distributions have to be taken from a pre-tax account for one-time expenses. Hopefully, this distribution is for something fun like an RV or a trip with the grandkids, but there may be a need to pay for a new roof or long-term care. In either case, a lump sum distribution will raise your income tax and IRMAA bill for that year.
Tax law changes
The tax code is written in pencil. Although some provisions of the tax code appear to be less popular in the amendment, none of them has been fixed. We already know that tax rates are set to rise in 2026 after the law expires The Tax Cuts and Jobs Act (TCJA) So it’s a matter of ‘when’, not ‘if’. Historically, tax rates are at all-time lows, so it’s also understandable that taxpayers can expect more changes to tax brackets in the coming years.
Some will underestimate the impact of the TCJA rate expiration because the changes are only three to four percentage points. But for some groups, this means a 25% increase in the taxes you pay. For example, the 12% tax bracket would move to 15% (for married couples filing jointly, this applies to income up to $89,450). This means that overnight your taxes will increase by more than $2,000 from that bracket alone. (And if you need more help planning for potential tax rate increases, Consider speaking with a financial advisor.)
Heritage planning
When it comes to tax planning, we have to take into account more than just the age of the taxpayer. Pretax money that is passed on to heirs will still be subject to income taxes at some point in the future. If this inheritance occurred during the beneficiary’s peak earning years, it could result in a significant increase in taxes compared to what the original taxpayer would have paid even without applying any of the other factors.
Understanding what a person might pay in taxes now versus in the future will have a significant impact on whether specific tax planning strategies should be pursued. Any strategies that intentionally change the timing of income, be it by accelerating income Roth conversions Harvesting capital gains, or accelerating deductions through tax-efficient charitable giving, must be seen through the lens of how tax rates change over time. While these strategies may create new financial flexibility for the future, they may lead to higher taxes in a given year of retirement. (And if you need more help with your financial plan, Consider matching with a financial advisor.)
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The idea of low taxes for everyone in retirement is a common myth that unfortunately leads to inaction on tax planning. The best way to avoid higher taxes in retirement is to have a proactive and deliberate plan specific to your individual situation. Tax planning is about taking consistent actions over time, not a one-time big event. Small hinges will swing big doors when it comes to lowering a person’s retirement tax bill.
Tips for finding a financial advisor
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find a financial consultant It doesn’t have to be difficult. Free SmartAsset tool It matches you with up to three vetted financial advisors who serve your area, and you can interview your advisors at no cost to determine the right one for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.
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Consider a few advisors before you settle on one. It is important to make sure you find someone you trust to manage your money. When you consider your options, These are the questions you should ask the counselor to ensure that the right decision is made.
Stephen Jarvis, CPA, is a financial planning columnist for SmartAsset and answers readers’ questions on personal finance and tax topics. Do you have a question you want answered? Email [email protected] and your question may be answered in a future column.
Please note that Stephen is not a participant in the SmartAdvisor Match platform and has been compensated for this article. Taxpayer resources from the author can be found at Retirement @taxpodcast.com. Financial advisor resources from the author are available at Retirement Tax Services.com.
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