Many people who save money in traditional 401(k)s, Individual Retirement Accounts (IRAs) or other tax-deferred investment vehicles do so assuming their income-tax rate in retirement will be lower than that of their working years. The whole premise behind tax deferral is we know we’re going to have to pay income tax on this money eventually. We just want it to be less in retirement than what we’d pay during our working years.
However, it’s not unusual for retirees to find themselves in the same or an even higher tax bracket in retirement. How so? “Many people tap accumulated wealth outside their IRAs,” says Kathy Cashatt, a Schwab senior financial planner in Phoenix. “When you add that income to Social Security and the required minimum distributions (RMDs) you can land in an unexpectedly high tax bracket.” Keep in mind with the passage of the SECURE Act, the age for the onset of RMDs has changed from 70½ to 72 for retirees who turned 70½ after December 31, 2019. Retirees who turned 70½ before 2020 will still have the same RMD requirements.
Fortunately, a number of strategies can help reduce the impact of RMDs.