Many people assume that taxes will be lower in retirement—after all, you’re no longer earning a paycheck, right? Unfortunately, that’s not always the case. In fact, for many retirees, taxes go up, not down.
In a recent discussion, Erin and Larry outlined four key reasons why you should expect higher taxes in retirement—and, more importantly, how you can prepare.
1. You May Spend More in Retirement, Not Less
A common assumption is that expenses will drop in retirement. But the reality? Retirement is like a permanent weekend.
In the early years—sometimes called the “go-go years”—you’ll likely be traveling, dining out, and spending more on hobbies and leisure. This means you’ll need more income, which translates to higher taxes.
As Larry put it:
“For many, the first ten years of retirement are the most active. You’re going to feel the best you’ll ever feel and want to enjoy it.”
The result? You may need to withdraw more money from taxable accounts, which increases your tax liability.
Planning tip:
Consider tax-free income sources—such as Roth IRAs or cash-value life insurance—to supplement taxable withdrawals and reduce your tax burden.
2. Tax Rates Are Set to Increase in 2026
Thanks to the 2017 Tax Cuts and Jobs Act, we’re currently in a historically low-tax environment. However, those cuts expire at the end of 2025, meaning tax rates will revert to higher levels in 2026 unless Congress takes action.
Larry’s advice?
“We’re in one of the lowest tax periods in history. Now is the time to take advantage of lower rates—before taxes become more expensive.”
Planning tip:
- Consider Roth conversions now while tax rates are low.
- Shift money from tax-deferred accounts (like 401(k)s) to tax-free accounts to avoid higher taxes later.
- Meet with a financial professional to discuss strategic withdrawals before the tax hikes occur.
3. Required Minimum Distributions (RMDs) Will Push You into a Higher Tax Bracket
If you’ve saved in a 401(k) or traditional IRA, at some point, the government will force you to withdraw money—even if you don’t need it. These are called Required Minimum Distributions (RMDs), starting at age 73 for most retirees today.
Here’s the problem:
- You have to withdraw a set percentage of your account each year.
- That money is taxable as ordinary income.
- Your Social Security benefits may also become taxable because RMDs increase your overall income.
As Larry noted:
“People are surprised by how much they’re required to withdraw. Suddenly, they’re paying more in taxes than they ever expected.”
Planning tip:
- Reduce RMDs by shifting money into a Roth IRA (Roth accounts don’t have RMDs).
- Use qualified charitable distributions (QCDs) to donate directly to charity tax-free instead of taking an RMD.
4. Government Debt is at a Record High—And Taxes May Rise to Pay for It
The U.S. national debt has surpassed $36 trillion, and history tells us that higher taxes are a likely solution.
Larry put it bluntly:
“The government has two choices—cut spending (which they don’t like to do) or raise taxes. With debt climbing fast, the writing is on the wall.”
The average taxpayer’s share of the national debt is $271,000—a number that’s only growing. That means future tax hikes aren’t just possible; they’re likely.
Planning tip:
- Be proactive. Start shifting money into tax-free accounts now.
- Don’t assume taxes will stay the same. Build flexibility into your retirement plan to adjust to future tax changes.
- Work with a professional to create a strategy that minimizes long-term tax liability.
Final Thoughts: Plan Now to Pay Less in Taxes Later
If you’re not planning for higher taxes in retirement, you could be setting yourself up for unpleasant surprises down the road. The good news? Smart tax strategies today can save you thousands in the future.
Have questions? Call 615-216-1048 or visit sfawealth.com to create your personalized tax-efficient retirement plan today.
Taxes are going up—but with the right plan, you can pay less.