Beware This 'Safe' Retirement Strategy That Can Create a Tax Mess Later
You know that "safe" retirement move everyone touts? Max out your traditional 401(k) and IRA, defer the taxes and call it a day. But, according to the experts, you're not actually saving money. You're just kicking the bill to your future self when tax rates might be higher.
The real problem isn't the deferral itself. It's what happens when mandatory withdrawals kick in and trigger a cascade of taxes, higher Medicare premiums and unexpected Social Security taxation. One misstep with your retirement strategy can turn what looked like a winning move into a costly headache.
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The RMD Reality Check
Here's the thing: "Tax deferral is not tax avoidance," said Phillip Zagotti, a certified public accountant (CPA) and an attorney at North Star Law Firm. "Every dollar that goes into a traditional 401(k) or IRA pre-tax is a dollar the IRS still expects to tax."
Most people sock away pre-tax contributions without considering the IRS's future claim.
"Maxing out pre-tax accounts can turn tax deferral into a major retirement tax mistake," according to Chad Cummings, an attorney and CPA at Cummings & Cummings Law. "I often see investors value today's deduction without pricing the government's future claim. That's the key point."
The numbers make it real: a $3 million traditional IRA at age 73 produces an initial required minimum distribution (RMD) of roughly $113,000 before Social Security. That's real money hitting your tax return whether you need it or not.
"One of the most frustrating things about traditional retirement accounts is mandatory distributions," said Melanie Musson, a finance expert with Quote.com. "Maybe you don't need that much income. Too bad, you have to take it, even if it puts you in a higher tax bracket and could even push you into annual earnings that require you to pay taxes on your Social Security income."
The Hidden Tax Triggers Nobody Talks About
Those mandatory withdrawals don't just trigger ordinary income tax. They can set off a domino effect of unexpected costs. Most people never plan for it.
"There are serious benefits to contributing on an after-tax basis, like to a Roth IRA or 401(k), but most folks simply opt for 'set it and forget it' by automatically contributing to their company's retirement plan without slowing down to factor in the tax burden once withdrawals start," Cummings said.
At 2026 Medicare thresholds, a modified adjusted gross income above $109,000 for single filers or $218,000 for married couples triggers an Income-Related Monthly Adjustment Amount (IRMAA).
"One mandatory withdrawal can increase Part B and Part D premiums two years later," Cummings continued. "In other words, you can end up paying substantially more for Medicare simply because you put too much in a pre-tax retirement account. This requires a complex and costly rollover strategy to correct."
Then there's Social Security.
"Additional IRA income can cause up to 85% of Social Security benefits to become taxable, so the retiree can pay tax on the RMD while exposing benefits that otherwise might escape taxation," Cummings explained. "Again, there are real benefits here to contributing on an after-tax basis."
Surviving Spouses Get Hit the Hardest
A surviving spouse often faces these problems on steroids.
"After one spouse dies, the survivor may retain the same retirement assets while losing joint tax brackets and married IRMAA thresholds," Cummings said.
"The tax burden can rise when household cash needs fall. Heirs can inherit the tax problem. Most non-spouse beneficiaries must empty an inherited traditional IRA within ten years, and withdrawals generally arrive as ordinary income without some kind of step-up eliminating the deferred tax."
What To Actually Do About It
The tax experts said a large traditional 401(k) balance isn’t inherently bad.
“The mistake is assuming the tax consequences can wait until retirement,” said Christopher Stroup, founder and president of Silicon Beach Financial.
“Years before RMDs begin, consider whether Roth conversions, strategic withdrawals, charitable giving or greater use of taxable assets could reduce future taxable income and create a more flexible retirement income strategy.”
The best thing you can do is start planning now. Talk to a CPA or financial advisor about a mix of pre-tax and after-tax accounts and map out your withdrawal strategy while you still have options. Tax deferral is a tool, not a solution — and the time to think about it is decades before you need the money.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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