Retirement Tax Trap: Why Your $1M IRA Is Worth Just $700K
If you have $1 million in your IRA, you don’t have $1 million. It might be worth $700,000 or even $600,000 on an after-tax basis. And if your spouse passes away first, the survivor might have even less than that.
There are four taxes most pre-retirees never see coming. They don’t appear on your statement or in your retirement plan unless someone analyzes them. By the time most people figure them out, the window to act might be too late.
This article walks through all four traps, then shows you the one window of time, usually between ages 60 and 73, when you can actually do something about them.
Prefer to watch instead of read? The full video version is here:
The Problem in Plain English
When you saved into your 401(k) or traditional IRA, every dollar you contributed was likely pre-tax. That was the deal: you got a deduction now in exchange for paying taxes later.
The problem is that “later” isn’t a single event. It’s a 20- or 30-year window, and the tax rules change while you’re driving through it.
Most retirees plan for one tax: ordinary income tax on withdrawals. Reasonable. But there are three more tax traps sitting alongside it, compounding the bill in ways most people never see coming. Let’s walk through them one at a time.
Tax Trap #1: RMD Acceleration
RMD stands for Required Minimum Distribution. The IRS gave you a tax break going in, and they want their cut on the way out. Once you hit a certain age, they force you to start withdrawing money from your IRA, whether you need it or not.
Under current rules, the RMD age is 73 for most pre-retirees. If you were born in 1960 or later, it will be 75.
Why RMDs Become a Trap
Most people think RMDs are small and manageable. They’re not. The required withdrawal percentage increases each year. And if you were born in 1960 or later, your RMDs start at age 75, so begin with that row:
- Age 73: about 3.8%
- Age 75: about 4.1%
- Age 80: about 5.0%
- Age 85: about 6.25%
- Age 90: about 8.2%
And that’s a percentage of a balance that, if you invested well, has grown significantly over the years.
The Real-World Impact
Pre-retirees in their early 60s often think they’re in a comfortable 12% federal tax bracket. Then at age 73, RMDs kick in on top of Social Security, and suddenly they’re in the 22% or 24% bracket. The same dollar that cost 12 cents in tax during their 60s now costs 22 or 24 cents in their 70s.
If you didn’t take advantage of those low-tax years between retirement and age 73, you are now paying a premium that you didn’t have to pay.
Tax Trap #2: The Widow’s Penalty
Married couples filing jointly get wider tax brackets and a higher standard deduction. It’s essentially two people’s tax allowances stacked together.
When one spouse passes away, the surviving spouse files as a “single” taxpayer starting the year after. The need for income, in many cases, doesn’t drop in half. The pension might drop a little. Social Security drops to whichever benefit was higher. But the IRA balance? Still there. The portfolio income? Still there.
Now the surviving spouse pays tax on substantial income, but uses single brackets, half the standard deduction, and lower thresholds for everything else.
A Common Scenario
A couple might be in the 22% tax bracket on their retirement income together. The husband passes away. Same household income, more or less. Her marginal tax rate might jump to 32%.
Same money. Different tax filing status. Roughly 10% more to the IRS for the rest of her life.
This is why the work you do in your 60s, before either spouse has passed, matters so much. There are things you can do during the joint-filing years to reduce the eventual tax bill on the survivor. But you have to do them while both spouses are alive.
Tax Trap #3: IRMAA Cliffs
IRMAA stands for Income Related Monthly Adjustment Amount, which is a polite way of saying you’ll pay extra for Medicare when your income is above a certain level.
When you turn 65, you sign up for Medicare. There’s a base premium for Part B and Part D. In 2026, it’s about $202 per month.
If your income is above certain thresholds, the government adds a surcharge. It’s not a smooth phase-in but a cliff. One dollar over the threshold means you owe the surcharge for the entire year.
2026 IRMAA Thresholds (Married Filing Jointly)
- First surcharge: $218,000
- Second tier: $274,000
- Third tier: $342,000
- Fourth tier: $410,000
- Highest tier: over $750,000
At the highest level, your Medicare premium is $689 per month per person. That’s almost $12,000 a year in surcharges for the couple, on top of regular Medicare premiums.
The Two-Year Lookback
Here’s the cruel part: IRMAA is based on your income from two years prior. Your 2026 Medicare premium is based on your 2024 tax return. If you had a large income in 2024, you might not see the IRMAA bill until 2026. Many people don’t connect the dots.
A one-time event like selling a business, taking a large distribution, or doing a Roth conversion at the wrong amount can push you over a cliff for one year and cost thousands you didn’t budget for.
The good news: with planning, you can manage your income to stay under the cliff. That requires actual modeling, which is why a coordinated plan matters.
Tax Trap #4: NIIT (Net Investment Income Tax)
NIIT is the tax most people have never heard of. It’s an extra 3.8% tax on investment income, including interest, dividends, capital gains, and rental income, for couples with modified adjusted gross income above $250,000 (or singles above $200,000).
3.8% doesn’t sound like much. Here’s why it matters:
The Thresholds Aren’t Indexed for Inflation
The NIIT thresholds were set in 2013 and haven’t moved. Every year, more retirees get pulled into NIIT just by standing still.
It Stacks With Other Taxes
If you’re already in the 24% federal bracket, NIIT pushes your effective rate on investment income to 27.8%. Add state tax, using North Carolina’s 4% rate as an example, and now your investment income is being taxed at close to 32%.
It’s Especially Costly When Selling
NIIT is particularly nasty for people selling a property or business. One large capital gain can put you in the NIIT range for that year alone.
If you’re nearing retirement and have a portfolio that generates significant taxable interest and dividends, you’re probably paying NIIT and not even realizing it.
The Opportunity Window: Where Planning Changes Everything
Now that we’ve covered the four tax traps (RMD acceleration, the Widow’s Penalty, IRMAA cliffs, and NIIT), the question is: what do you do about them?
This is where the conversation usually shifts from anxiety to opportunity.
Most pre-retirees have a window, usually between when they retire and when their RMDs begin, during which their taxable income drops dramatically. They’re no longer earning a paycheck. They may postpone Social Security to age 67 or 70 to maximize the benefit. They haven’t hit RMD age yet. So their reportable income might be relatively low for several years.
That window is the most valuable real estate on your tax timeline, yet most people waste it.
The Roth Conversion Strategy
This section is general education, not specific advice for your situation.
A Roth conversion involves moving money from your traditional IRA into a Roth IRA. You pay tax now, at today’s lower rate, on the converted amount. From then on, that money grows and comes out tax-free for you, your spouse, and your heirs.
When done right, with multi-year modeling, a Roth conversion strategy can do four things at once:
- Reduce future RMDs because the IRA balance is smaller
- Cut the Widow’s Penalty because the surviving spouse has tax-free Roth dollars to draw on
- Sidestep IRMAA cliffs in retirement, because Roth withdrawals don’t count toward IRMAA income
- Reduce NIIT exposure because Roth distributions aren’t classified as investment income
Why Roth Conversions Must Be Sized Correctly
Roth conversions only work when done correctly. Convert too little, and you don’t move the needle. Convert too much, and you push yourself into a higher bracket or trigger an IRMAA surcharge.
This is why the tax conversation isn’t a one-meeting decision. It’s a multi-year strategy. Done well, it can save you and your spouse a meaningful amount over a 30-year retirement. Done poorly, it could cost you.
Recap: The Four Retirement Tax Traps
- RMD acceleration that pushes you into higher brackets in your 70s
- The Widow’s Penalty that hits the surviving spouse hard
- IRMAA cliffs that surprise you with thousands in extra Medicare premiums
- NIIT that quietly adds 3.8% to your investment income
And one window of opportunity: the years between retirement and your RMD start date, where you can actively reshape that picture.
Where Do You Stand?
If you’re reading this and thinking, “I have no idea whether any of this applies to me,” that’s exactly the position most pre-retirees are in. And it’s why we built the Retirement Confidence Assessment.
It’s a structured assessment that walks you through where you are today, where the gaps are, and what your actual tax exposure looks like in retirement. There’s no cost to take the assessment, and at the end, you can decide whether you want to talk to us or just take what you’ve learned and run with it.
Take the Free Retirement Confidence Assessment:
Either way, do the work. The cost of not knowing is too high.
