Four Hidden Tax Traps That Could Derail Your Retirement

When you’re planning your retirement, you want to make sure you’re in the best possible position! Part of being in the best position is ensuring you know about 4 hidden tax traps you might not know about, which can take your retirement off track. Knowing about these pitfalls and, more importantly, how to avoid them, can make a real difference in your retirement spending and the overall longevity of your portfolio. Make sure you’re aware of these 4 hidden tax traps, so you don’t fall victim to them in retirement! 

Net Investment Income Tax (NIIT) 

If you’re a married couple with a combined income of over $250,000, this one will be very important for you. If you meet this threshold, you will be subject to the Net Investment Income Tax (NIIT), which is an additional 3.8% tax. While it may not sound substantial, it can add up a lot over the years. Though it might surprise you, if you did a great job saving and building your retirement, you could be getting huge minimum distributions from your accounts, like $150,000 or potentially more. Once you add in other benefits and income, you may meet that $250,000 threshold, so you’re paying that NIIT. This means you could be in a higher tax bracket than you expected, with that NIIT payment as well. Ensure you’re taking this into account when you’re planning your retirement, as it can make a huge impact on your retirement plan.  

Taxes on Social Security 

When you’re looking into your Social Security benefits, you may see your gross benefit number and think that’s what will hit your account. However, over 80% of Americans actually pay tax on Social Security. Since your income has to be extremely low (under $32,000 of adjusted gross income for a married couple) to avoid paying tax on Social Security, you’ll want to consider the impact tax will have on your benefit. If you’re a married couple making $44,000 or less, only 50% of your Social Security income will be taxable. But if you make anything above that, you will owe taxes on 85% of your Social Security benefit. So, as you’re looking at your retirement income expectations, make sure that you’re considering the taxes you’ll be paying out of your Social Security benefits. 

Medicare Premiums

One more thing that will be deducted from your Social Security benefits is your Medicare premiums! Since Medicare premiums are dictated by your income level, those premium costs can be quite high. There are different tiers and different plans, including supplemental options, which can impact your premium. The average Medicare recipient will likely spend on Medicare A, B, D, and a supplemental plan. For married couples making over $206,000, you can expect your Medicare premiums to start increasing. In fact, depending on your income, those costs generally range from $350 to over $600 a person. Make sure you get an accurate idea of what your Medicare premiums will be, based on your coverage and income, so you can plan accordingly. 

Secure Act 2.0 

The Secure Act 2.0 was enacted in 2022, and while it brought many benefits to retirees, it has also created complications for your beneficiaries. Under the Secure Act 2.0, beneficiaries who inherit an IRA or 401k are required to take that money out of the account within 10 years.  If your beneficiaries don’t do this carefully, they can grossly overpay in taxes. 

Before 2022, beneficiaries who inherited an IRA could stretch out the IRA, taking only the required distributions and allowing the rest of the money to grow. Now, if you inherit an IRA, you are forced to deplete the entire account within 10 years, with 100% of that money in a traditional IRA 401k being taxable. If you think you’re likely to pass on an account like this to your beneficiaries, you need to make sure your beneficiaries understand the implications of the Secure Act 2.0, so they can plan their income correctly and avoid overpaying in taxes.

Preparing for Retirement

As you head into retirement, you want to make sure that you’re understanding the ins-and-outs of the Secure Act 2.0 and the implications it could have for your loved ones. Luckily, REAP Financial has a specific report for that. Send us an email at to get a free copy of our Updated Secure Act 2.0 Report! This free resource will make sure you know all the pros and cons of this legislation and how you can set yourself and your family up to make the most of your retirement funds! 

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