How Taxes Change Once Your Retirement Savings Grow and How to Plan for It
Most people focus on how much they can save for retirement. Far fewer think about how those savings will be taxed later. But once portfolios grow beyond a certain size, taxes can quietly become one of the biggest threats to retirement income.
I’ve seen retirees do a great job building wealth, only to be surprised by Required Minimum Distributions (RMDs), Social Security taxation, and Medicare surcharges. The good news is this: with some planning, many of these tax hits can be managed.
Let’s break down how taxes tend to affect different portfolio levels and what strategies can help.
When Taxes Start to Matter More
Taxes don’t suddenly appear at one exact number, but there are practical ranges where their impact becomes more noticeable.
For smaller portfolios, withdrawals are often modest and may stay within lower tax brackets. As balances grow, withdrawals rise, and more income gets exposed to taxes.
A simplified way to think about it:
• Under ~$250,000 in retirement accounts — taxes are usually manageable; withdrawals tend to be relatively small
• $250,000–$600,000 — taxes start to show up more; Social Security taxation can enter the picture
• Above ~$600,000 — RMDs, bracket management, and Medicare IRMAA can become real planning issues
These aren’t hard rules, but they reflect common patterns.
Understanding RMD Pressure
RMDs currently begin at age 73 under federal law. The IRS requires annual withdrawals from traditional IRAs and pre-tax retirement accounts.
The larger the account, the larger the forced withdrawal and the tax bill that comes with it.
For example, a $1 million traditional IRA at age 73 could generate an RMD around the high-$30,000 range depending on IRS life expectancy tables. That gets added to taxable income whether you need the money or not.
That’s why pre-retirement tax planning matters.
A Simple Tier Framework
Here’s a practical way to view tax exposure as savings grow:
Tier 1: Under ~$250K
• Focus on saving habits and sustainable spending
• Taxes are usually secondary
Tier 2: ~$250K–$600K
• Social Security taxation may begin
• Early tax diversification helps
Tier 3: ~$600K–$1.2M
• RMDs become meaningful
• Tax diversification is increasingly important
Tier 4: ~$1.2M–$2M
• Tax planning is critical
• IRMAA exposure becomes more likely
Tier 5: $2M+
• Advanced planning often needed
• Poor tax management can be costly
Again, these are planning lenses, not rigid thresholds.
The Power of Tax Diversification
Tax diversification simply means spreading money across:
• Tax-deferred accounts (Traditional IRAs/401(k)s)
• Tax-free accounts (Roth IRAs/401(k)s)
• Taxable brokerage accounts
This gives retirees flexibility to decide where income comes from each year, helping manage tax brackets and Medicare premiums.
Roth Strategies Matter
Two common approaches:
Roth contributions
Shifting new savings toward Roth accounts when in reasonable tax brackets
Roth conversions
Moving money from traditional to Roth in lower-income years before RMDs begin
Conversions create taxes today but can reduce future RMDs and taxable income later.
The key is doing them strategically, not all at once.
Using Taxable Accounts Wisely
Brokerage accounts often get overlooked, but they provide flexibility:
• Long-term capital gains rates can be lower than ordinary income rates
• No RMDs
• Step-up in basis for heirs
For many retirees, having a mix of taxable and retirement accounts improves control.
Different Mixes Call for Different Moves
If most of your savings are pre-tax:
• Building Roth and taxable balances adds flexibility
If most savings are Roth:
• Some traditional contributions can help smooth lifetime taxes
If you lack taxable savings:
• A brokerage account using low-cost funds can help diversify tax exposure
There’s no one-size-fits-all answer.
Age Matters in Planning
Time affects your options.
In your 40s
• Maximum flexibility
• Long runway for tax strategy shifts
In your 50s
• Still strong conversion opportunities
• Catch-up contributions help
In your 60s
• Window before RMDs becomes important
• Withdrawal sequencing matters
In your 70s+
• Focus shifts to smart withdrawals and targeted planning
Earlier planning gives more control, but later planning still helps.
The Real Takeaway
Taxes in retirement aren’t a punishment for saving well they’re just part of the system. But ignoring them can reduce the value of what you’ve built.
The goal isn’t to avoid taxes completely. It’s to manage them over your lifetime so more money supports your lifestyle instead of going to the IRS.
Small adjustments over time often make a big difference.
If you build tax awareness into your retirement strategy early, your future self will likely thank you.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
