Ask people what their biggest expense in retirement will be, and you’ll often hear healthcare, housing, or travel. But for many retirees, the real answer is taxes, quietly built into the retirement accounts they spent a lifetime filling up. On this episode of Wealth Creator Radio, I share why taxes may be your largest retirement expense, the hidden tax landmines that catch retirees off guard, and how a multi-year tax plan can help you keep more of what you’ve saved. Plus, we break down some of the IRS “Dirty Dozen” tax scams to watch out for. Watch Out for the IRS Dirty Dozen Each year, the IRS flags its “Dirty Dozen” list of tax scams. A few of the most common include: Phishing emails: Messages that look official, sometimes even appearing to come from services like DocuSign, designed to get you to click a link or enter personal information. Bad social media tax advice: “Too good to be true” tax strategies that can land you in serious trouble with the IRS. Fake IRS helpers: Scammers posing as third parties offering to help set up your IRS account. Remember, the IRS generally contacts you by mail, not by phone. Fake charities: Before donating, research the organization, check reviews, and confirm it’s legitimate. One simple tip: if you’re reading a suspicious email on your phone, hit “forward.” That often reveals the sender’s full email address, which can quickly show you it’s not from who it claims to be. Tax Preparation vs. Tax Planning Many people believe they have a tax strategy because they work with a CPA or tax preparer each spring. But tax preparation is really tax reporting. It’s like a reporter at the scene of the crime: this is what happened, and there’s very little you can do about it now. Tax planning is like installing the locks and alarm system before anything happens. It means making proactive decisions throughout the year, such as which accounts to withdraw from, whether Roth conversions make sense, and whether tax-loss harvesting could help. The goal isn’t just to pay less this year, but to pay less over your lifetime. Your 401(k) Has a Mortgage If you have a $1 million home with a $300,000 mortgage, you’d say you have $700,000 of equity. But if you have $1 million in a 401(k), most people say they have $1 million. The truth is, your tax-deferred accounts carry a built-in debt to the IRS and the state. If all your money is in tax-deferred accounts, your only tax plan is to pay whatever the tax bill turns out to be. Retirement Taxes Are a 30-Year Game Retirement can last 30 years or more, and tax rules will almost certainly change along the way. It’s like playing a board game where someone swaps out the board halfway through. Required minimum distributions (RMDs) are a good example. The starting age has moved from 70½ to 72 to 73, and it’s 75 for those born in 1960 or later. Many retirees are surprised to find themselves in a higher tax bracket in their mid-70s than they were during their working years. The Hidden Tax Landmines in Retirement Several tax traps can quietly raise your costs in retirement: RMDs: Required withdrawals start around 4% and grow larger as you age. Social Security taxation: Taking more from your IRA can cause more of your Social Security benefits to be taxed. IRMAA: Higher income can increase your Medicare Part B and Part D premiums. The senior deduction: Higher income can phase out the temporary $6,000 senior deduction, which is currently scheduled through 2028. The widow’s penalty: When a spouse passes away, the survivor often moves to single filing status, where tax brackets are much narrower. Many survivors end up paying more tax on less income. Diversify Your Taxes, Not Just Your Investments Most people think about diversification in terms of stocks and bonds. But tax diversification may be just as important. Think of your savings in three buckets: Tax-free: Roth accounts, specially designed life insurance, and municipal bond income. Taxable: Brokerage and savings accounts, which are taxed each year but have cost basis. Tax-deferred: 401(k)s and IRAs, which are taxed when you withdraw. Having money in each bucket gives you flexibility to manage your tax bracket year by year. If tax rates rise, a heavily tax-deferred portfolio can lose far more to taxes than a slightly higher investment return can make up. Tax Planning Is a Gift to Your Family Under the SECURE Act, most non-spouse beneficiaries now have 10 years to withdraw inherited retirement accounts and pay the tax. Since many people inherit money in their 50s or 60s, those withdrawals often stack on top of their own peak earnings, potentially pushing them into a much higher bracket. Planning ahead, including strategies like Roth conversions, can help reduce the tax burden you pass on to the people you love. Bringing It All Together With a Written Plan With so many brackets, thresholds, and phase-outs moving at once, it’s nearly impossible to make good tax decisions off the cuff. A written, multi-year tax and income plan looks at your actual tax return, projects your taxes year by year and over your lifetime, and helps identify the best windows for strategies like Roth conversions. That’s a key part of our Blueprint to Worry Less Wealth®, which brings together your income, investments, taxes, health care, and legacy planning into one cohesive strategy. Plan Today to Worry Less Taxes are unavoidable in retirement, but overpaying doesn’t have to be. We can help you prepare today so you can have worry-less wealth. You can do this by learning more about our Blueprint to Worry Less Wealth. You can also Get your Wealth Creator Toolbox for free.
