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Why a $3M Nest Egg Can Mean Higher Taxes in Retirement · Align Your Retirement

• 0:00
  SPEAKER_00: A woman came to me last year with$3 million saved.
• 0:04
  SPEAKER_00: Every dollar of it in a 401k and a rollover IRA.
• 0:07
  SPEAKER_00: No Roth, no brokerage account.
• 0:09
  SPEAKER_00: Just one very large, very disciplined pile.
• 0:13
  SPEAKER_00: Let's call her Margaret.
• 0:14
  SPEAKER_00: She asked the question I hear most often.
• 0:16
  SPEAKER_00: Is this enough?
• 0:17
  SPEAKER_00: It was enough.
• 0:18
  SPEAKER_00: That was not the problem.
• 0:19
  SPEAKER_00: The problem is that later in retirement, Margaret will pay more federal income tax than she did in her final year of work in a year when she earns no salary at all.
• 0:30
  SPEAKER_00: The size of the tax bill is not the main issue here.
• 0:33
  SPEAKER_00: By that point, she no longer controls how much comes out.
• 0:36
  SPEAKER_00: I'm Hazel Secko, certified financial planner, CDFA, and a fee-only fiduciary at Align Financial Solutions.
• 0:43
  SPEAKER_00: And this is Align Your Retirement.
• 0:45
  SPEAKER_00: Quick note before we start I'm a financial advisor, but I'm not your financial advisor.
• 0:50
  SPEAKER_00: This is education, not personal advice.
• 0:52
  SPEAKER_00: So please talk with your own tax and financial professionals before acting on anything you hear.
• 0:57
  SPEAKER_00: And I'm holding today's tax rules constant throughout so you can see the mechanism clearly.
• 1:01
  SPEAKER_00: This is an illustration, not a forecast.
• 1:04
  SPEAKER_00: Part one.
• 1:05
  SPEAKER_00: Why the working year costs less?
• 1:07
  SPEAKER_00: Start with Margaret's final year of work.
• 1:10
  SPEAKER_00: Most people do not look at this the right way.
• 1:12
  SPEAKER_00: She's 62 and earned$185,000, but she did not pay tax on$185,000.
• 1:20
  SPEAKER_00: She put$24,500 into her 401k, then$5,400 into a HSA that is$29,900 that came off the top before the IRS ever saw it.
• 1:33
  SPEAKER_00: Then the standard deduction applies.
• 1:35
  SPEAKER_00: Her taxable income is$139,000.
• 1:39
  SPEAKER_00: Her federal tax is about$26,000.
• 1:42
  SPEAKER_00: An important update for those still working.
• 1:45
  SPEAKER_00: Starting in 2026, if your prior year's earnings from your employer exceed$150,000, your age 50 catch-up contributions must go into a Roth account.
• 1:58
  SPEAKER_00: While this still helps grow your Roth savings, those contributions will no longer reduce your taxable income for the year.
• 2:05
  SPEAKER_00: Now, hold that$26,000.
• 2:07
  SPEAKER_00: This next part surprises most people.
• 2:10
  SPEAKER_00: Margaret keeps her standard deduction in retirement.
• 2:13
  SPEAKER_00: Once she turns 65, the deduction increases slightly.
• 2:17
  SPEAKER_00: What she loses is the pre-tax shelter.
• 2:20
  SPEAKER_00: The 401k deferral and the HSA were available because she was working.
• 2:24
  SPEAKER_00: They end when the paycheck ends.
• 2:26
  SPEAKER_00: That was almost$30,000 a year of income.
• 2:29
  SPEAKER_00: She did not have to report.
• 2:31
  SPEAKER_00: In retirement, with only pre-tax accounts, there's no replacement for that shelter.
• 2:36
  SPEAKER_00: Margaret spent 30 years getting a discount she'll not get again.
• 2:40
  SPEAKER_00: She used that discount to build the asset that gets taxed the hardest.
• 2:45
  SPEAKER_00: Part two.
• 2:46
  SPEAKER_00: Why she can't choose the number.
• 2:48
  SPEAKER_00: This is where her choice disappears.
• 2:50
  SPEAKER_00: Margaret was born in 1964.
• 2:53
  SPEAKER_00: Under Secure 2.0, that means her required minimum distribution starts at 75, not 73.
• 2:59
  SPEAKER_00: If you were born between 1951 and 1959, yours start at 73.
• 3:04
  SPEAKER_00: Check which one you are, because a lot of coverage gets this wrong.
• 3:08
  SPEAKER_00: At 75, the IRS divides her prior year-end balance by 24.6.
• 3:14
  SPEAKER_00: That is the required minimum distribution factor for that age.
• 3:18
  SPEAKER_00: Her balance is no longer 3 million.
• 3:21
  SPEAKER_00: She retires now and lives on this money for 13 years at 6% growth, drawing about$100,000 a year.
• 3:30
  SPEAKER_00: It's still around$4.5 million by the time she turns 75.
• 3:34
  SPEAKER_00: That's the arithmetic of a portfolio that grows faster than she spent it.
• 3:39
  SPEAKER_00: $4.5 million divided by$24.6 is about$183,000.
• 3:44
  SPEAKER_00: That amount has to be withdrawn, whether she needs it or not.
• 3:48
  SPEAKER_00: She doesn't ask for it.
• 3:49
  SPEAKER_00: The IRS mandates it.
• 3:51
  SPEAKER_00: Now, Social Security adds on top.
• 3:54
  SPEAKER_00: Margaret claimed that$70,000 and receives about$48,000 a year.
• 3:58
  SPEAKER_00: The thresholds that decide how much of that gets taxed were written into law in 1983 and 1993.
• 4:06
  SPEAKER_00: $25,000 and$34,000 for a single filer,$32,000 and$44,000 for a couple.
• 4:13
  SPEAKER_00: These thresholds have remained unchanged for four decades, never once adjusted for inflation.
• 4:18
  SPEAKER_00: When that rule was written, fewer than one in 10 beneficiaries pay tax on their benefit.
• 4:25
  SPEAKER_00: Social Security's own projections have that rising past half.
• 4:29
  SPEAKER_00: With a$183,000 required distribution, she's far past those thresholds.
• 4:35
  SPEAKER_00: For her, they function as if they do not exist.
• 4:38
  SPEAKER_00: 85% of her benefit becomes taxable income.
• 4:41
  SPEAKER_00: Part three, the relief she doesn't get.
• 4:48
  SPEAKER_00: Right now, there is a deduction designed to help retirees.
• 4:52
  SPEAKER_00: It is$6,000 per person, aged 65 and up, on top of the standard deduction.
• 4:58
  SPEAKER_00: If you're 65 today and your income is modest, that is real relief.
• 5:03
  SPEAKER_00: Margaret won't qualify for this relief for two important reasons.
• 5:07
  SPEAKER_00: It phases out for a single filer starting at$75,000 of income, and it is gone entirely by$175,000.
• 5:16
  SPEAKER_00: Her required distribution alone is$183,000.
• 5:20
  SPEAKER_00: And under current law, it expires after 2028.
• 5:24
  SPEAKER_00: She turned 65 in 2029, so the one provision meant to help retirees does not reach her.
• 5:30
  SPEAKER_00: She misses it for both reasons.
• 5:32
  SPEAKER_00: This is where Margaret lands:$206,000 in taxable income and roughly$42,400 in federal taxes.
• 5:41
  SPEAKER_00: That is about$16,400 more than her final working year.
• 5:47
  SPEAKER_00: She pays a higher tax bill than when she was employed full-time with no salary at all.
• 5:53
  SPEAKER_00: This repeats every year for the rest of her life.
• 5:56
  SPEAKER_00: Everything that would have changed this, the sequencing, the buckets, the window, is written up in my free guide, the Executive Women's Tax Playbook.
• 6:04
  SPEAKER_00: The link is in the show notes and it'll be there when you finish.
• 6:08
  SPEAKER_00: Part four.
• 6:08
  SPEAKER_00: The part that follows two years later, there's another important layer.
• 6:12
  SPEAKER_00: It comes much later and it often goes unnoticed as a consequence of the original decision.
• 6:18
  SPEAKER_00: Medicare charges a surcharge called Irma when your income crosses certain lines.
• 6:24
  SPEAKER_00: In 2026, that line is$109,000 for a single filer and$218,000 for a couple.
• 6:32
  SPEAKER_00: It is a cliff, not a slope,$1 over the line, and you move into the entire next year.
• 6:37
  SPEAKER_00: And it works on a two-year look back.
• 6:40
  SPEAKER_00: Your 2026 premiums are set by your 2024 tax return.
• 6:45
  SPEAKER_00: So the required distribution Margaret takes at 75 shows up on her Medicare bill at 77.
• 6:51
  SPEAKER_00: The letter explains the surcharge, but it does not explain the decision that caused it.
• 6:56
  SPEAKER_00: If you want to understand how the Medicare lookback works and how to appeal a surcharge, I covered it in detail in a separate episode.
• 7:03
  SPEAKER_00: The link is in the show notes.
• 7:05
  SPEAKER_00: Quick question before we keep going.
• 7:07
  SPEAKER_00: Did you know your Medicare premium was set by a tax return from two years ago?
• 7:11
  SPEAKER_00: If you're listening on Spotify, drop your answer in the comments right in the app.
• 7:15
  SPEAKER_00: And if you're watching on YouTube, tell me below.
• 7:18
  SPEAKER_00: Because I genuinely want to know how many people were told this.
• 7:21
  SPEAKER_00: Part 5.
• 7:22
  SPEAKER_00: Let me argue the other side.
• 7:23
  SPEAKER_00: Now I have just spent the past few minutes telling you that a large pre-tax balance is a problem.
• 7:29
  SPEAKER_00: Let me be fair, because for some of you, it's not.
• 7:32
  SPEAKER_00: If your balance is small enough relative to your spending that your withdrawals stay near the size of your deductions, none of this reaches you.
• 7:40
  SPEAKER_00: You will not trigger a required distribution that matters.
• 7:43
  SPEAKER_00: If your heirs will be in a lower bracket than you, leaving money pre-taxed can be the correct answer.
• 7:49
  SPEAKER_00: If you have real gap years, meaning a genuine stretch between your last paycheck and your first required distribution, you have a window where you have unusual control over your taxable income.
• 8:00
  SPEAKER_00: Margaret has 13 of those years ahead.
• 8:03
  SPEAKER_00: That is the planning window she can still use.
• 8:06
  SPEAKER_00: She's missing a second type of account.
• 8:08
  SPEAKER_00: For 30 years, she did exactly what she was told, using just one, but no one ever pointed out that this account would one day force withdrawals.
• 8:17
  SPEAKER_00: Part 6.
• 8:18
  SPEAKER_00: And if you're married, you just heard your survivor's tax return.
• 8:22
  SPEAKER_00: Everything I've shown you uses single filer numbers because she's single.
• 8:26
  SPEAKER_00: If you're married, I need you to understand what you just heard.
• 8:30
  SPEAKER_00: Most of these thresholds narrow sharply when a couple becomes one person.
• 8:34
  SPEAKER_00: The Irma line is$218,000 for a couple and$109,000 for a single filer.
• 8:41
  SPEAKER_00: The standard deduction is cut in half.
• 8:43
  SPEAKER_00: The tax brackets are close to half through most of the range.
• 8:47
  SPEAKER_00: And the Social Security thresholds are not even that generous.
• 8:50
  SPEAKER_00: $32,000 for a couple,$25,000 for a single filer.
• 8:54
  SPEAKER_00: When one of you dies, the survivor generally files as single from the following year on.
• 9:01
  SPEAKER_00: She loses a smaller of the two Social Security checks.
• 9:04
  SPEAKER_00: Household income falls.
• 9:06
  SPEAKER_00: She inherits the IRA.
• 9:08
  SPEAKER_00: The balance does not shrink because he died.
• 9:11
  SPEAKER_00: So her household income falls, but the income, the tax code measures, changes very little.
• 9:17
  SPEAKER_00: Every threshold becomes narrower.
• 9:19
  SPEAKER_00: Rates going up is a guess about politics.
• 9:22
  SPEAKER_00: One spouse outliving the other is close to a certainty.
• 9:25
  SPEAKER_00: That's the best reason to move money before you have to.
• 9:29
  SPEAKER_00: It isn't about guessing future tax rates, it's about how the tax code treats survivors.
• 9:34
  SPEAKER_00: Part seven.
• 9:35
  SPEAKER_00: What actually helps, honestly, sized.
• 9:37
  SPEAKER_00: So what actually works?
• 9:39
  SPEAKER_00: The time between your last paycheck and your first required distribution is when you have the greatest flexibility with your taxable income.
• 9:48
  SPEAKER_00: No salary to report and no mandatory withdrawals yet.
• 9:51
  SPEAKER_00: For Margaret, that's 13 years.
• 9:52
  SPEAKER_00: That's your chance to shift money out of pre-tax accounts on your own terms while you still control the rate before the IRS decides for you.
• 10:02
  SPEAKER_00: Most content on this topic overstates a benefit.
• 10:05
  SPEAKER_00: The advantage is real, but it is not unlimited.
• 10:08
  SPEAKER_00: Shifting money comes with a cost.
• 10:10
  SPEAKER_00: You'll owe taxes when you do it.
• 10:12
  SPEAKER_00: For someone like Margaret, making smart moves over a full retirement adds up to a few percent of her total wealth.
• 10:18
  SPEAKER_00: That's meaningful.
• 10:19
  SPEAKER_00: But it isn't a silver bullet.
• 10:21
  SPEAKER_00: If someone promises a bigger payoff, they're leaving out the tax bill.
• 10:25
  SPEAKER_00: The real payoff?
• 10:26
  SPEAKER_00: Every dollar you move now, while the wider thresholds are in place, is a dollar your survivor won't have to withdraw under tighter, less favorable rules.
• 10:36
  SPEAKER_00: Draw three columns on a page, taxable, rough, and pre-tax.
• 10:42
  SPEAKER_00: Write your actual balance in each.
• 10:44
  SPEAKER_00: Most people in your position see most of their money in one column and little or nothing in the others.
• 10:50
  SPEAKER_00: Count your gap years from the year you plan to stop working to the year you turn 73 or 75, depending on your birth year.
• 10:58
  SPEAKER_00: If that number is zero, you have less flexibility than you think.
• 11:02
  SPEAKER_00: You need to design around that now.
• 11:04
  SPEAKER_00: Run your own numbers as a single filer.
• 11:07
  SPEAKER_00: Why?
• 11:08
  SPEAKER_00: Because that is the scenario your plan needs to account for.
• 11:11
  SPEAKER_00: The sequencing behind all of this is written up in my free guide, the Executive Women's Tax Playbook, the link in the show notes.
• 11:19
  SPEAKER_00: If you have a large pre-tax balance and aren't sure which of these exceptions applies to you, you can schedule a short call.
• 11:26
  SPEAKER_00: That link is in the show notes.
• 11:28
  SPEAKER_00: I'll tell you which of the three buckets need your attention over the next 10 years.
• 11:33
  SPEAKER_00: If you want to go deeper on the planning window I described, the next episode covers that in detail.
• 11:39
  SPEAKER_00: Thank you for spending this time with me.
• 11:41
  SPEAKER_00: If this was useful, follow the show and share it with one person who has a very large, very disciplined pile of her own.
• 11:49
  SPEAKER_00: I'm Hazel Secko.
• 11:50
  SPEAKER_00: This is Align Your Retirement.
• 11:52
  SPEAKER_00: I'll see you in the next one.