Photos by Karina Eremina of Joy of the Moment Photography
Rising taxes in retirement is an important risk for the tax-conscious to understand. This is especially true for individuals who have saved all or most of their retirement assets in tax-deferred vehicles, like IRAs and 401(k)s. These popular savings vehicles defer taxes into the future. If taxes are higher in retirement than they are today, people with IRAs and 401(k) plans could pay more in taxes than planned. That’s because in a rising tax environment, a larger portion of your IRA or 401(k) withdrawals could go to the IRS. Some savers are concerned about higher taxes in retirement since higher taxes pose one of the greatest risks to traditional tax-deferred savings vehicles.
Will my taxes be lower, the same, or higher in retirement?
“It is not possible to predict the future, however, there are four ways that your taxes could potentially rise in retirement,” Jim says. “It may be important for you to understand these factors and consider whether they could potentially impact your retirement strategy.”
Four Ways Your Taxes Could Rise in Retirement:
1. You Change Tax Brackets – Your marginal tax rate determines the percentage of your income you will owe in taxes. Some savers may not maintain the same marginal tax rate throughout retirement. One reason for a tax rate change in retirement is when a spouse passes away and the surviving spouse moves from filing married/joint to filing as a single filer. Single filer bracket rates are applied to significantly less income than joint filer rates, so the total amount of taxes you pay could go up, as more of your income is subject to higher bracket rates.
2. Tax Brackets Change Around You – Even if your filing status stays the same throughout retirement, tax brackets could change around you. This occurs when Congress passes new laws impacting tax brackets. For example, in 2017, Congress passed and the President signed into law comprehensive tax reform, sometimes referred to as the Trump Tax Cuts. This legislation temporarily lowered tax bracket rates for many Americans, but this law and its lower bracket rates will expire in December 2025. Absent Congressional action, beginning January 2026, tax bracket rates will revert back to their previously higher levels. If you are evaluating your retirement strategy based on today’s tax rates, it’s important to remember those rates could likely be higher starting in 2026, even if your income remains the same.
3. Deductions Are Eliminated – Tax brackets are only one factor that can potentially impact your taxes in retirement. The amount of your income subject to taxation is another way that you could possibly pay more taxes in retirement than planned. If you earn $100,000 annually and can deduct $20,000, you likely pay taxes on $80,000 of taxable income. If next year you can only deduct $10,000, you would pay taxes on $90,000 of taxable income instead. Your bracket didn’t change, but you ended up paying more in taxes because more of your income was subject to taxation due to deduction changes.
4. The Way Assets Are Taxed Changes – You could also end up paying more taxes in the future if Congress changes the way retirement assets are taxed. One example of this could be Social Security. Before 1984, Social Security benefits were non-taxable. Based on legislation passed in 1983, up to 50%of Social Security payments became taxable, and in 1993, that amount was raised to 85%. Congress could potentially pass new legislation making an even higher amount of the benefit taxable for some retirees. If that happened, you could pay more in taxes because more of your retirement income would be subject to taxation.
Evaluating Tax-Free Strategies
Tax diversification is a valuable option to consider. Some savers choose to address these risks in retirement by incorporating tax-free strategies into their retirement approaches. Tax-free assets can serve as a hedge against rising taxes in the future. Since Roth IRAs, Roth 401(k)s and other tax-free savings vehicles are funded with after-tax dollars, no taxes are due on the funds when they are withdrawn in retirement. That means if Congress raises taxes in the future, these funds would not be impacted. By ensuring a portion of your retirement funds are in tax-free accounts, you may feel better protected against the potential risk of rising taxes in retirement.
What Action Could You Take Today to Help Protect Yourself from Tax and Legislative Risks?
Could your potential tax bill in retirement be bigger than you think? You could find out in 30 seconds. Jim invites you to click the QR code to generate a complimentary Retirement Tax Bill analysis to view your potential taxes in retirement. “Once you’ve seen your numbers, let’s talk,” Jim says. “I look forward to speaking with you. Together, we can discover what’s going on in your current planning and if that is the optimal path for you.”
Jim Sloan is a 24-year financial advisor and six-time author that designs tax-conscious retirement strategies for baby boomers. Investment advisory services offered only by duly registered individuals through MariPau Wealth Management, LLC. Insurance products offered by Jim Sloan & Associates, LLC. Jim Sloan & Associates, LLC and Maripau Wealth Management are not affiliated entities, and do not offer legal or tax advice.