Building a healthy retirement account is an accomplishment, but reaching retirement with a sizable balance introduces a new challenge: taxes. While many investors focus on accumulating wealth, understanding how and when those savings will be taxed can make a meaningful difference over a retirement that may last decades.
John Young, a Certified Financial Planner who works with high-net-worth individuals and families on long-term wealth strategies, says one of the most common surprises he sees isn't a lack of savings—it's the tax bill that comes with those savings. He helps clients think beyond investment returns to develop strategies that improve tax efficiency throughout retirement.
For many retirees, the first wake-up call comes when Required Minimum Distributions (RMDs) begin. These mandatory withdrawals from most tax-deferred retirement accounts can create taxable income whether the money is needed or not.
"The biggest surprise is often the size of the required distributions and the taxes that come with them," John says. He notes that inherited retirement accounts can create additional challenges, as many non-spouse beneficiaries are now required to distribute inherited IRA assets within 10 years, potentially accelerating taxable income.
That reality is changing how financial professionals think about retirement savings. "Roth accounts should probably be top of mind," John says. For years, maximizing pre-tax contributions was considered the default strategy. Today, Roth accounts deserve a much more prominent place in retirement planning because qualified withdrawals are tax-free.
The expansion of Roth options through employer-sponsored retirement plans has also created more flexibility. Roth 401(k)s and other workplace Roth offerings allow employees to build tax-free retirement assets without relying solely on traditional IRAs.
Just as important as how much you've saved is where you've saved it. A retirement portfolio consisting entirely of tax-deferred accounts may not stretch as far as it appears. “A million dollars turns into $700,000 really fast after taxes,” John explains. He also notes that unexpected expenses can force larger withdrawals that may push retirees into a higher tax bracket.
Fortunately, planning opportunities exist before RMDs begin. Many retirees experience several lower-income years after leaving the workforce but before claiming Social Security or reaching the age for required distributions. John says these "gap years" can provide opportunities to evaluate Roth conversions.
"Looking at timely Roth conversions before RMDs and Social Security kick in is an important strategy," John says. Working with a financial and tax professional can help determine how much to convert while managing tax brackets and other considerations, such as Medicare premium surcharges.
High-income earners also have more options than they may realize. While income limits restrict direct Roth IRA contributions, workplace Roth accounts, and strategies such as backdoor Roth IRAs may still allow investors to build tax-free retirement assets.
Finally, John encourages retirees to think strategically about withdrawals. For those who regularly support charitable causes, making qualified charitable distributions directly from retirement accounts can reduce taxable income while fulfilling philanthropic goals.
As retirement balances continue to grow, tax planning is becoming just as important as investment planning. "These large retirement balances are really taxable IOUs to the IRS," John says. The earlier investors begin considering where their retirement dollars are held—and how they'll eventually be withdrawn—the more flexibility they may have to preserve their wealth for themselves and future generations.
Reach out to John Young to learn more at YoungGlobalWealth.com.