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Retirement Tax Traps

Joe Anderson — Tue, 24 Jun 2025 12:03:28 +0000

Taxes don’t retire when you do. In fact, they can become one of the biggest surprises—and traps—for retirees. In this article, I’m going to walk you through the most common retirement tax pitfalls and how to sidestep them so you can keep more of your hard-earned money.

Let’s start with the basics. Most retirement accounts like 401(k)s and traditional IRAs grow tax-deferred, meaning you’ll pay taxes when you take money out. Once you hit age 73 (or 75, depending on your birth year), Required Minimum Distributions (RMDs) kick in. These are mandatory withdrawals that count as taxable income. Miss one, and the IRS hits you with a 25% penalty. Ouch. But there are ways to reduce your tax bill, like using standard deductions, itemizing when possible, and making Qualified Charitable Distributions (QCDs) to donate directly from your IRA.

Next, let’s talk tax brackets. Many people think all their income is taxed at the highest bracket they fall into. Not true. We have a marginal tax system. That means your income is taxed in layers: 10%, 12%, 22%, and so on. That also means there’s room to be strategic. For example, you could do Roth conversions to fill up lower brackets before tax rates go up in the future (as they’re currently set to do).

Speaking of Roths, they’re a powerful tax escape hatch. Unlike traditional retirement accounts, Roth IRAs offer tax-free withdrawals and aren’t subject to RMDs. Plus, they don’t count as provisional income, which helps when it comes to Social Security taxes and Medicare premiums.

Social Security benefits themselves can be taxable depending on your provisional income, which includes half your Social Security, your adjusted gross income, and even tax-exempt interest. Couples earning over $32,000 could find 50% to 85% of their benefits taxed. And since these income thresholds aren’t indexed for inflation, more and more retirees are getting caught in the tax net.

Then there’s IRMAA—the Income-Related Monthly Adjustment Amount. This affects your Medicare premiums if your income from two years ago was too high. Single filers earning over $106,000 or joint filers over $212,000 will pay more for Part B and Part D. Roth conversions, tax-efficient investing, and proper withdrawal strategies can help reduce your IRMAA exposure.

Capital gains are another important area. Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your taxable income. Real estate can be tricky here. While you get exclusions for a primary residence ($250,000 single, $500,000 married), rental properties are fully taxable and subject to depreciation recapture. However, a 1031 exchange can defer those taxes.

Retirees often forget that no one is automatically withholding taxes for them anymore. You may need to make quarterly estimated tax payments. Miss those, and the IRS charges penalties—currently about 8% annualized interest.

Watch out for IRA rollovers, too. A direct rollover avoids taxes, but if you take possession of the funds even briefly, 20% gets withheld. Fail to redeposit the full amount within 60 days, and it’s taxable and potentially penalized.

Mutual funds outside of retirement accounts can generate tax bills from capital gains and dividends—even if your investment value goes down. Consider using ETFs or index funds instead. They’re generally more tax efficient.

High earners need to be aware of the 3.8% Net Investment Income Tax (NIIT), which applies to interest, dividends, and rental income over $200,000 (single) or $250,000 (married).

There’s also the widow’s penalty: after one spouse passes, the surviving spouse files as single, which could push them into a higher tax bracket on the same income. Planning ahead with Roth conversions and income splitting strategies can soften the blow.

Lastly, think about where you live. State taxes vary widely. Alaska is the most tax-friendly, while New York tops the chart for retirees with a tax burden of 12.3%.

The bottom line? Don’t wait until retirement to start tax planning. With the right strategies in place, you can avoid the worst traps, stretch your savings further, and enjoy the retirement you worked so hard to earn.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

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Maximizing Retirement Savings: Strategies with IRAs and Tax Planning

Joe Anderson — Tue, 01 Apr 2025 11:25:28 +0000

1. Importance of Utilizing Retirement Accounts

Many individuals overlook the full potential of available retirement accounts. Anderson and Clopine highlight the benefits of Traditional IRAs, Roth IRAs, 401(k)s, and 403(b)s. Notably, only 21% of the population has a Roth IRA, and 30% possess a Traditional IRA. Increasing retirement contributions by just 1% annually can lead to substantial growth over time.

2. Understanding Retirement Account Types and Contribution Limits

The discussion covers various retirement accounts, including 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, Self-Directed IRAs, and SIMPLE IRAs. For 2025, contribution limits are as follows:

401(k) and 403(b) Plans: The annual contribution limit is $23,500, with an additional $7,500 catch-up contribution for individuals aged 50 and over. irs.gov
Traditional and Roth IRAs: The contribution limit remains at $7,000, with a $1,000 catch-up contribution for those aged 50 and over. irs.gov

Understanding eligibility and contribution rules for each account type is crucial, especially the tax-free growth benefits offered by Roth IRAs.

3. Asset Allocation and Asset Location Strategies

Anderson and Clopine explain the distinction between asset allocation (distribution among stocks, bonds, real estate, cash) and asset location (placement in tax-free, taxable, tax-deferred accounts). Strategically placing assets can optimize tax efficiency. For instance, allocating stocks in Roth IRAs and bonds in tax-deferred accounts can be beneficial. The flexibility of investing in IRAs and Roth IRAs allows for a wide range of options, including mutual funds, ETFs, and individual stocks.

4. Exploring Self-Directed IRAs and Real Estate Investments

Self-Directed IRAs permit investments in non-traditional assets like real estate, cryptocurrencies, and precious metals. While holding real estate in an IRA is possible, it’s important to note that gains are taxed as ordinary income upon withdrawal. Considering the potential benefits and risks of holding real estate in a Roth IRA versus a Traditional IRA is essential.

5. Crafting a Diversified Retirement Strategy

A diversified retirement strategy should consider factors such as desired retirement age, required rate of return, and risk tolerance. Having funds in different account types (tax-free, taxable, tax-deferred) can help manage tax exposure in retirement. Anderson and Clopine encourage individuals to think about their future selves and the long-term benefits of disciplined saving and investing.

6. Leveraging Spousal IRAs and Employer Matches

Spousal IRAs allow a non-working spouse to contribute to an IRA based on the working spouse’s income. Taking full advantage of employer matches in 401(k) and 403(b) plans is a strategic way to maximize retirement savings. Automating contributions and prioritizing retirement savings over other expenses are recommended strategies.

7. Utilizing Catch-Up Contributions and the Power of Compounding

For those over 50, catch-up contributions provide an opportunity to boost retirement savings. The power of compounding growth can lead to significant wealth accumulation over time with disciplined contributions. Starting to save early and consistently is key to achieving substantial growth in retirement accounts.

8. Navigating Inherited IRAs and Understanding Tax Implications

Beneficiaries of inherited IRAs must withdraw the funds within 10 years and pay taxes on the distributions. Understanding the new laws and planning accordingly can help manage the tax impact. Non-compliance with mandatory withdrawal rules can result in penalties.

9. Considering Roth IRAs as an Emergency Fund

Roth IRAs offer flexibility, allowing for tax-free withdrawal of contributions (but not earnings) at any time. While they can serve as an emergency fund, it’s advisable to keep them separate to allow for tax-free growth over time. Maintaining a dedicated emergency fund in addition to retirement savings is emphasized.