DavidMany Americans spend their working lives assuming that retirement means financial relief — fewer expenses, less income, and a lower tax bill. But that assumption is increasingly proving false. In fact, for a growing number of retirees, taxes may actually rise after they leave the workforce.
At the heart of the problem is a little-understood policy with big consequences: Required Minimum Distributions, or RMDs.
Starting at age 73, the IRS mandates that retirees begin withdrawing a set percentage of funds from most tax-deferred retirement accounts, including 401(k)s, traditional IRAs, and TSPs (Thrift Savings Plans). These withdrawals are treated as ordinary income — meaning they’re fully taxable — even if retirees don’t need the money at that moment.
It’s a policy that was designed decades ago to ensure Americans eventually paid taxes on money they saved tax-free. But as retirement timelines have grown longer and savings strategies more complex, the rule has turned into a tax trap for those who don’t plan ahead.
A Retirement Tax Bill You Didn’t See Coming
“Most retirees are shocked to learn they may owe more in taxes during retirement than when they were working,” says Michael A. Scarpati, CEO of RetireUS, a fintech platform that connects individuals with fiduciary advisors. “And it all comes down to Required Minimum Distributions.”
The effects can be cascading. A sudden bump in income from RMDs doesn’t just increase a retiree’s tax bracket. It can also raise Medicare premiums, trigger Social Security taxation, and accelerate the depletion of retirement savings.
Take, for example, a 74-year-old retiree with $600,000 in a traditional IRA. Their RMD for the year would be roughly $23,000. That money is taxed as income — potentially pushing them into a higher bracket and raising their Medicare Part B and D premiums under the Income-Related Monthly Adjustment Amount (IRMAA) rules. And if they’re also collecting Social Security, up to 85% of those benefits could now be taxed.
Why the Traditional Strategy Isn’t Enough
For decades, retirement planning has been dominated by one principle: defer taxes now and deal with them later. But as retirees live longer, accumulate more in retirement accounts, and face a shifting tax landscape, “later” often becomes far more expensive than expected.
The issue is compounded by outdated portfolio guidance that assumes lower income in retirement automatically translates to lower taxes. That’s not always true — especially when RMDs, pensions, and Social Security combine to create a sizable taxable income stream.
“The worst part is that most people don’t find out until it’s too late,” Scarpati explains.
How Tax Diversification Can Help
One of the most underused strategies to combat this retirement tax bomb is tax diversification — spreading assets across different types of accounts, such as Roth IRAs (which grow tax-free), taxable brokerage accounts, and tax-deferred vehicles. By doing so, retirees gain more control over when and how their money is taxed.
Other proactive moves include:
- Roth conversions before RMD age, allowing savers to pay taxes at today’s rates and avoid RMDs on converted funds.
- Qualified charitable distributions (QCDs) from IRAs, which satisfy RMDs while reducing taxable income.
- Using trust-based estate planning to manage distributions and minimize the impact on heirs.
“These aren’t just advanced strategies for the wealthy,” Scarpati says. “They’re essential tools for everyday Americans who want to preserve what they’ve worked a lifetime to build.”
A Crisis in the Making?
The potential scale of the problem is significant. According to the Investment Company Institute, Americans hold over $12 trillion in traditional IRAs alone. With millions of Baby Boomers entering or already in retirement, the window for effective tax planning is narrowing.
RetireUS has launched an initiative called Government Transition Decision HQ, a free support hub that provides financial guidance to federal employees navigating early retirement, RMDs, and legacy planning.
The urgency is especially acute for government employees who may be offered Voluntary Early Retirement Authority (VERA) packages or face job uncertainty amid federal cost-cutting measures. Without understanding the tax implications, a generous retirement offer can turn into a financial headache years down the line.
The Bottom Line
The idea that retirement equals lower taxes is becoming dangerously outdated. For Americans in or near retirement, the IRS may be your largest unexpected expense. But with the right planning — and the right advice — it doesn’t have to be.
“Good intentions won’t save you from bad tax math,” Scarpati warns. “If you want your retirement dollars to go to your family and not the IRS, it’s time to rethink the plan — before the withdrawals begin.”