GoKawiilKey Takeaways The ‘retirement tax bomb’ refers to the often unexpected tax burden that comes in later years.
Minimum distribution requirements can force retirees into higher tax brackets and impact Medicare.
Anne Lester explains how account diversification and other key strategies can set retirees up for success.
If you’re like a lot of people navigating this tax season, you might have a simple strategy: Pay what you owe now and forget the rest — aka defer taxes wherever possible — until you hit retirement.
“Many people assume their taxes will go down [in retirement] because their income will go down,” Anne Lester, former head of retirement solutions for JPMorgan Asset Management and author of Your Best Financial Life: Save Smart Now for the Future You Want, tells Entrepreneur.
Image Credit: Courtesy of Anne Lester
Unfortunately, exiting the workforce doesn’t always mean lower taxes. Instead, many retirees have to contend with a “retirement tax bomb,” or the often unexpected tax burden that comes with hefty savings in popular retirement accounts like 401(k)s and IRAs.
Minimum distribution requirements and higher tax brackets
When people reach the age of taking minimum required distributions from retirement savings accounts (typically at 73 years old), they actually could move into a higher tax bracket than expected. What’s more, entering a higher tax bracket can also increase social security taxes and Medicare surcharges.
“What looks good on paper, which is to maximize all your tax-advantaged growth, may not make sense if it’s going to bump you into a higher tax bracket, so you might want to consider drawing some money out of that IRA or 401(k) plan systematically beforehand,” Lester says.
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