July 18, 2024

Political Commentary

News Politics Business Sports

How Can Tax Rates Be Higher in Retirement Than Your Earning Years?

2 min read

Ask an Advisor: How Can Tax Rates Be Higher in Retirement Than Your Earning Years?

I recently attended a retirement seminar at a local community college where the instructor talked about potentially higher tax rates in retirement due to the new RMD age. I have been under the impression throughout my saving career that tax rates in retirement are supposed to drop, especially if you pace your withdrawals. How can tax rates in retirement be higher than your earning years?


Let’s start with the simplest answer and then build from there. Required minimum distributions (RMDs) are certainly a reason that a person’s tax rate might go up in retirement, but they’re not the only reason. There are a number of possible scenarios in which a person faces higher taxes in retirement when compared to their earning years. (And if you need help with planning for taxes in retirement, consider matching with a financial advisor.)

New RMD Rules Could Lead to Higher Taxes

Under the SECURE 2.0 Act, the age at which required minimum distributions (RMDs) start rose from 72 to 73 in 2023. With that change, any money invested on a pre-tax basis in a 401(k) will have an extra year to grow before you have to start withdrawing the money. This means you could have a larger balance that has to be distributed each year once RMDs kick in, and with it, a larger tax bill.

Keep in mind that the RMD age is set to increase to 75 in 2033. As a result, anyone who turns 75 that year or later can leave their savings invested for an extra three years when compared to the previous rules. More time in the market could mean even a larger balance that has to be distributed each year. These larger distributions could potentially push you into a higher tax bracket. (And if you need help planning for RMDs, consider talking with a financial advisor.)

Larger distributions can also trigger Medicare’s income-related monthly adjustment amount (IRMAA), leading to higher monthly premiums for Medicare Parts B…

2023-12-24 11:20:35

All news and articles are copyrighted to the respective authors and/or News Broadcasters. VIXC.Com is an independent Online News Aggregator

Read more from original source here…

Leave a Reply

Copyright © All rights reserved. | Newsphere by AF themes.