Individuals approaching retirement with approximately $1 million in savings are encountering tax consequences from decisions often perceived as responsible. These moves, made in one's late 50s and early 60s, can reshape tax liabilities for decades by limiting flexibility.
A common scenario involves relying heavily on traditional retirement accounts like IRAs and 401(k)s without a long-term withdrawal strategy. Withdrawals from these accounts are taxed as ordinary income, which can combine with Social Security benefits to push retirees into higher tax brackets than anticipated.
Another frequent decision is avoiding Roth conversions to prevent immediate tax bills. However, skipping these conversions during lower-income years may lead to significantly higher taxes later, particularly when required minimum distributions begin. At that stage, the IRS mandates withdrawals regardless of need.
Income timing also presents challenges. Some retirees expect taxes to decrease after they stop working, but pension income, Social Security, and forced withdrawals can concentrate income into a shorter period, increasing the overall tax percentage paid over time.
Financial advisors can model the effects of different strategies, such as partial Roth conversions or adjusted withdrawal sequences, on lifetime tax exposure and after-tax income. Platforms exist to help individuals consolidate views of their IRAs and cash flow for clearer tax planning.
For some, concerns extend beyond current tax rates to future policy risks, including potential changes to tax laws or inflation. This leads some investors to consider diversifying their tax exposure, with options like precious metals sometimes discussed for portions of retirement savings.
The core issue identified is that the most costly tax mistakes in retirement often stem not from aggressive actions, but from passive decisions that reduce future flexibility. Understanding how account structures and timing choices interact over decades is crucial.