The Tax Torpedo Explained, Why Middle-Class Millionaires Pay the Most

For decades, the message was simple: contribute to your 401(k), defer taxes, and build your nest egg. For millions of disciplined savers, that advice worked sometimes very well.

But I’ve seen a growing number of retirees surprised by something they didn’t plan for: higher taxes in retirement than they expected. Not because they did anything wrong, but because large balances in traditional, tax-deferred accounts can create tax challenges later.

Let’s talk about why this happens and what can be done about it.

When Saving Success Creates Tax Pressure
Traditional IRAs and 401(k)s give you a tax break upfront. Contributions reduce taxable income today, and investments grow tax-deferred. The tradeoff is that withdrawals are taxed as ordinary income later.

For retirees with modest balances, this is rarely a major issue. But for those who saved consistently and built seven-figure portfolios, the tax bill can become meaningful.

Some retirement research, including analyses from firms like Morningstar, has shown that retirees with large tax-deferred balances can face higher lifetime taxes than they anticipated sometimes rivaling what they paid in peak earning years. The key driver isn’t punishment; it’s math and tax brackets.

RMDs: The Forced Income
Required Minimum Distributions (RMDs) are often the turning point.

Under current law, RMDs begin at age 73, gradually rising to age 75 for younger cohorts under recent legislation. Once RMDs start, the IRS requires annual withdrawals based on life expectancy tables.

These withdrawals are taxable as ordinary income whether you need the money or not.

For example, a retiree with $1.5 million in a traditional IRA at age 73 could see an initial RMD in the ballpark of $55,000–$60,000, depending on IRS factors. As the retiree ages, the required percentage increases.

Add Social Security and possibly a pension, and taxable income can climb quickly.

Understanding the “Tax Torpedo”
The so-called Social Security “tax torpedo” is a real planning issue, though often misunderstood.

As provisional income rises, more of your Social Security becomes taxable up to 85% of benefits. This doesn’t mean an 85% tax rate, but it does mean more income gets pulled into the tax calculation.

In certain income ranges, each extra dollar withdrawn from a traditional account can cause more of Social Security to become taxable. That can push effective marginal rates higher than the headline tax bracket.

While extreme figures like 40%+ marginal impacts can occur in narrow situations, the more common reality is a noticeable bump in effective taxes for middle-income retirees.

Who Feels This Most
Interestingly, this often affects disciplined middle- to upper-middle-income savers more than the ultra-wealthy.

Retirees with roughly $1–$2 million in traditional accounts, moderate pensions, and Social Security often land in the phase-in zones where taxation becomes less efficient.

This group frequently includes teachers, nurses, engineers, and other steady savers who followed the rules and contributed consistently.

Why Roth Accounts Change the Equation
Roth accounts operate differently.

• No RMDs for the original owner
• Qualified withdrawals are tax-free
• Withdrawals don’t increase provisional income
• Less impact on Medicare IRMAA thresholds

That flexibility gives retirees more control over their taxable income each year.

It doesn’t mean Roth is always better just that having some Roth money creates options.

The Window for Roth Conversions
One of the best planning windows often appears between retirement and RMD age.

Income may be lower before Social Security and RMDs begin. That can create room to convert portions of a traditional IRA to Roth at manageable tax rates.

Converting $20,000–$40,000 per year over time can meaningfully reduce future RMDs. The goal isn’t to eliminate taxes, but to smooth them over a lifetime.

Every situation is unique, and conversions should be coordinated with tax brackets and Medicare thresholds.

Balance Beats Extremes
The takeaway isn’t to abandon traditional accounts. They remain valuable, especially during high-earning years.

The real goal is tax diversification having money in:
• Traditional (tax-deferred)
• Roth (tax-free)
• Taxable brokerage accounts

That mix allows retirees to choose where income comes from and manage brackets more effectively.

Control Is the Real Objective
Retirement planning isn’t just about how much you save. It’s about where you save and how withdrawals are taxed later.

A flexible structure helps reduce surprises and gives you more control over your income plan.

Saving diligently is still the right move. Pairing that discipline with tax awareness simply makes the outcome stronger.

The goal isn’t to outsmart the tax code it’s to plan around it thoughtfully, so your retirement income works the way you expect.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.