Most retirement income planning focuses on the accounts: how much is in the 401(k), when to take Social Security, what the withdrawal rate will be. The implicit assumption is that the income a retirement portfolio generates is the income you actually receive. It isn’t. The tax structure of your retirement accounts determines what percentage of every withdrawal actually reaches your bank account, and most people haven’t modeled what their effective tax rate in retirement is going to be.
For high earners who’ve spent their careers deferring income into traditional 401(k) and IRA accounts, the bill comes due in retirement. And it often arrives at a time when they thought they’d be done paying.
What is the hidden tax cost in retirement accounts?
The deferred tax liability you don’t see on your statement: Every dollar in a traditional 401(k) or IRA is pre-tax. Your statement shows the gross balance. The net balance, what you actually own after satisfying the deferred tax obligation, is lower. Per the IRS, required minimum distributions begin at age 73 for most account holders, and the withdrawn amounts are taxed as ordinary income at your marginal rate in the year of withdrawal.
Why marginal rates in retirement often surprise people: The common assumption is that retirement income will be lower than working income, producing a lower tax rate. For high earners with large pre-tax balances, this doesn’t always happen. RMDs from a $2 million IRA at age 73 generate roughly $75,000 in required taxable income using the IRS Publication 590-B life expectancy factor of 26.5. Add Social Security (up to 85% of which may be taxable under the IRS combined income formula), plus any other income, and the marginal rate in retirement can approach or match the rate during peak working years.
The Medicare IRMAA amplifier: Per the IRS income thresholds that trigger Medicare Income-Related Monthly Adjustment Amounts, a married couple with modified adjusted gross income above $212,000 in 2026 pays surcharges on Medicare Part B and Part D premiums. Large RMDs can push income above these thresholds, adding $1,000 to $4,000 or more per year in additional Medicare costs. The tax cost isn’t just income tax. It’s income tax plus the Medicare surcharge that income tax triggers.
The planning window most people miss
The years between retirement and age 73, when income may be lower and before RMDs begin, represent the highest-leverage window for tax management in most people’s financial lives. Income in this window can often be managed intentionally.
Roth conversions in this window pay ordinary income tax today on amounts converted, in exchange for tax-free growth and tax-free withdrawals later. The math works when current rates are lower than anticipated future rates, and the gap between early retirement income and post-RMD income often creates exactly that setup.
Strategic Roth conversions during this window can materially reduce the lifetime tax burden on a large pre-tax balance. The IRS imposes no annual limit on conversion amounts. The constraint is the tax cost you’re willing to accept in a given year versus the projected tax cost of leaving the balance to grow in a pre-tax account and distributing it under the RMD schedule.
The math most people haven’t run on their own accounts
Take a 62-year-old who retires with $1.8 million in a traditional IRA and $200,000 in Roth and taxable accounts. If they do nothing from 62 to 73, the traditional IRA grows to approximately $3.6 million at 6% annually. The first RMD at 73 using the IRS factor of 26.5 is roughly $136,000. At 74, the factor decreases, raising the RMD further. By the mid-70s, RMDs alone may generate $150,000 to $175,000 in ordinary taxable income annually.
If instead this person converts $80,000 per year from 62 to 72 (10 years), paying taxes at a moderate bracket, they’ve moved roughly $800,000 to Roth while the account is still growing but before forced distributions begin. The RMD at 73 on a smaller balance is lower. The effective lifetime tax rate on the portfolio is lower. The Medicare surcharge risk is lower.
This is the planning that happens before the problem arrives. After 73, the options narrow considerably.
Schedule a no-obligation call with Jeff to model the tax structure of your retirement income before the RMD clock starts running.
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The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial.
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