5 Ways Gen X Accidentally Raises Their Tax Bracket in Retirement Planning
The retirement planning landscape is different for Gen Xers than it was for their boomer parents. Although some rules and strategies remain timeless, being unaware of important changes could trip up some Gen Xers and push them into a higher tax bracket during their retirement.
Here are five potential landmines that require tweaks to the “boomer playbook” to make it applicable to retiring Gen Xers.
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1. Waiting as Long as Possible To Take an RMD
According to Congress.gov, the SECURE 2.0 legislation pushed back the age for required minimum distributions to 75 from 73 for those born in 1960 or later. This includes every Gen Xer. As RMDs create taxable income, deferring them as long as possible can seem to be advantageous. But it can actually create unexpected consequences.
Imagine you have a $750,000 traditional IRA. If you let it grow an additional two years, from age 73 to age 75, it may grow to $800,000. This can result in higher taxes for two reasons. First, a larger account balance generates a larger distribution. Second, your life expectancy is shorter at age 75 than at age 73, meaning you’ll have a smaller divisor in the equation the IRS uses to calculate your RMD. This will boost the amount of your RMD even more.
According to the IRS Uniform Lifetime Table, Pub. 590-B, the divisor at age 73 is 26.5, but it shrinks to 24.6 at age 75. On an $800,000 IRA, that results in an age-75 RMD of $32,520. But one taken on the $750,000 balance at age 73 would be just $28,302. That two-year wait could potentially result in a 15% increase in taxable income.
2. Earning Even Minimal Amounts While Taking Social Security
If your income is too high, whether through earnings from your job or other sources like retirement distributions, your Social Security may become taxable. Per the SSA, those limits begin at $25,000 for single filers and $32,000 for those married filing jointly. At that point, up to half of your benefits may be taxable. If you’re a joint filer earning above $44,000 or a single filer exceeding $34,000, up to 85% of benefits become taxable. These limits were enacted in 1983 and 1993 and haven’t been raised since.
Social Security uses “combined income” for the purposes of taxation, which consists of adjusted gross income plus tax-exempt interest plus half of Social Security. While the earnings thresholds may have been reasonable when enacted, they have not been adjusted for inflation in decades.
3. Lumping Roth Conversions
Roth conversions are taxable events. While it can be tempting to convert a large Roth all at once, that can easily push you into a higher tax bracket.
For 2026, the 12% marginal tax bracket starts at $24,800 in taxable income for a joint filer, while the 22% bracket requires taxable income of $100,800. Meanwhile, the 24% bracket doesn’t kick in until an income of $211,400, per the IRS.
Imagine you have a $200,000 traditional IRA and taxable income of $80,000. If you make a series of smaller, $20,000 Roth conversions, you can keep yourself in the 12% tax bracket. If you convert the entire $200,000 all at once, you’ll push yourself into the 24% bracket, essentially doubling the amount of tax you have to pay on a portion of your Roth.
4. Downsizing by Selling a Paid-Off House
Many retirees can reduce their cost of living by downsizing their homes. But the home-sale capital gains exclusion was set in 1997 and has never been indexed for inflation, per the National Association of Realtors. At $250,000 for a single filer and $500,000 for joint filers, the IRS limits are still relatively high in many parts of the country. Living in a coastal or wealthier area or even simply holding onto your home for a few years, can potentially make a large portion of your gain taxable.
5. Failing To Observe the 10-Year Rule When Inheriting IRAs From Parents
Generation X is in the midst of a significant wealth transfer from their parents, particularly in the form of inherited IRAs. A rule put in place in 2019 requires most non-spouse beneficiaries to drain those inherited IRAs within 10 years, per the IRS. Failure to take these withdrawals results in a 25% excise tax.
These forced withdrawals stack directly on top of the salaries and other income of beneficiaries, potentially pushing them into higher tax brackets. Although Roth IRAs don’t generate taxable income, many Gen Xers will inherit a sizable amount of taxable retirement money in the form of traditional IRAs and other pre-tax accounts.
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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