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These 5 Tax Mistakes Will Waste Your Retirement Savings · Retirement Answers

• 0:00
  Jacob: These five tax mistakes will end up costing you thousands of dollars throughout retirement if you don't know what to look for. So that's what I'm gonna share with you today on the show, ways to avoid these different mistakes and things to look for instead. Hi there, my name is Jacob Duke. I'm your host here of the Retirement Answers Podcast. Welcome back to another episode.
• 0:17
  I'm also a certified financial planner and I own a retirement planning firm where we help people just like you plan smarter so you can retire better. So in my time as a retirement planner, I've seen everything under the sun. I've seen people go through retirement without a plan at all make many mistakes along the way. I've seen people that try to over optimize every single decision, and it ends up costing them their sanity. So today, want to talk about tax planning and more specifically, five different tax planning mistakes that could end up costing you a lot of money throughout retirement because taxes are a big part of everything we do.
• 0:49
  In my opinion, every decision comes back to taxes in some way as it relates to retirement, whether you take money from your IRA or your Roth or IRA from a brokerage account, or when you decide to take your social security benefits and how you realize capital gains in a brokerage account and which types of investments you actually hold in your different account types. Everything comes back to taxes in some way and how you fit this into your greater plan is very important. So let's just go ahead and jump into the first mistake. Number one, it's whenever someone focuses only on this year's taxes, and this is a big pitfall for most people because none of us like to pay taxes. So if we think about how to minimize our tax bill this year, that's normally something that makes us feel really good, right?
• 1:32
  We don't wanna pay anything more than we have to, and if we can find ways to reduce that through deductions or other tax planning strategies, we definitely wanna do that. But here's the problem, this becomes a tax trap because of the short term thinking that actually leads to doing things this way. Whenever you don't consider all of your tax bill, whenever you don't consider your lifetime tax bill, you only focus on this year, which might end up costing you thousands of dollars later on in the future. Now, here's an example. Let's say we want to take money out of our brokerage account or just live off of cash out of our bank account for our first year of retirement.
• 2:06
  That sounds great and that sounds good. Typically, we wanna take from these after tax savings buckets early on, that's the standard rule of thumb whenever you start distributing money out for your retirement income, but here's the problem, if all of that money is tax free, meaning you're just pulling from cash, then you're not gonna be using up your standard deduction. You don't have any other income, so you're gonna be wasting your 31,500, at least as it stands here in 2025, of standard deduction that you otherwise could have used by pulling money out of your traditional IRA tax deferred money, you can pull up to that standard deduction, that's what I call the 0% tax bracket. So while you might be focusing only on this year's taxes and think, oh, well, I'm going to just live off my cash I have on hand at the bank and am I gonna pay any taxes? So that feels really good, no taxes this year.
• 2:51
  The problem is, is you're not thinking about all of even your taxes this year, but if you go even further than that and you say, I'm gonna only pull up to that standard deduction of $31,000 out of my tax deferred IRAs, that means I'm not gonna pay any tax on that distribution. I'm gonna live off cash out of my brokerage account. Great, no taxes at all this year in that scenario as well. Here's the problem with that. If you've got a million or 2 or $3,000,000 or more in a tax deferred IRA, it might be beneficial to evaluate a Roth conversion strategy or some other higher distribution strategy out of that tax deferred account to reduce your future taxes.
• 3:25
  Because if you think about if you're 60 or 63, and you've got this $2.03, $45,000,000 in a tax deferred account, what is that gonna be by age 73 or age 75 whenever your required minimum distributions are gonna kick in. You've got to think about what your tax bill will be in the future because the more that this account type grows, essentially you're just building up that larger tax bill for yourself then. Now, this actually gets even worse whenever you are married and let's say you get hit by a bus and your surviving spouse, they're left with that $3.04, $56,000,000 in a tax deferred account. Well, this is what we call the widow's tax trap, and I've talked about this before on the on the podcast here, but basically they have to take the same RMD amount in dollars assuming they are of RMD age at this point, but the problem is, is they're gonna have to do that at a single tax filers tax rates, which are compressed and about half of that of married filing jointly. So the tax problem only gets worse over time rather than better in most scenarios.
• 4:21
  And this doesn't even assume tax rates increasing themselves. This assumes tax rates staying the same. It's just the life circumstances are changing and actually creating a higher tax bill later down the road. So if you're only focusing on your tax bill this year and trying to minimize your taxes paid, you're likely not gonna be using those tax brackets, the 1012% and your standard deduction on the front end, you're not gonna be using those effectively compared to what your tax rate might be in the future. Because if you can take money out at the 10% tax bracket, or even at the 12% tax bracket, in addition to your standard deduction, that might be a much lower tax rate than whatever you would be paying in the future to distribute once a pension or once Social Security or once your RMDs kick in, they're gonna be very large, you could be in the 2224% brackets down the road, which could lead to other issues like IRMAA, which we'll talk about here in just a moment.
• 5:11
  So that's the first tax mistake is only focusing on this year's taxes without considering the greater plan and looking at your lifetime tax bill. The second tax mistake that most retirees end up making is just having no understanding of how social security taxation works for their benefits in retirement. So most people just start off by assuming that 100% or all of their benefits are going to be taxed as normal income, and that is not true. In fact, at most 85% of your social security benefits would ever be taxable as income, meaning the top 15%, the last 15% there that is never going to be taxed. So at most 85%, but here's the cool part, up to none or 0% of your benefits would ever be subject to taxation if a few things are true.
• 5:55
  So I'm gonna outline that in terms of the calculation here in just a moment, but here's the kicker. If social security is your only form of income, okay, so you don't have an IRA distribution, you don't have any pensions, you don't have any part time work or any earned income, you might have some just minimal interest amounts in a bank account or something like that, that won't matter too much here, but let's say you have no other income outside of your social security benefits. If that's the case, then none of your benefits will be subject to taxation. Okay, you heard me right, none of your benefits. So zero taxes on your social security benefits, and this is regardless of how much your benefits are, regardless of if you're single or if you're married, whatever your total benefits are for you and your household, if that's the only source of income, none of those benefits are going to be taxed.
• 6:41
  Now, there's a reason for this, and it's because social security calculation around taxes is not the same as normal income. It's gonna be taxed at the same rates ultimately, but how you determine how much of your benefits is taxable, that's the key part. And so, what we do here is we have to find what's called your provisional income and this is specific to social security. So the first part of this is we're trying to identify how much of our benefits are actually subject to taxation and then would be added to our other forms of income. So, how do we do this?
• 7:09
  We have to figure out your provisional income by doing three things, we take half of your social security amount. So if you make $30,000 in social security, we take 15,000, that's 50%. We take any other sources of income, IRA distribution, earned income, interest from a bank account, dividends in a brokerage account, and then you also have to add in tax free or municipal bond interest as well. That's the little extra one here, even though you're not being taxed there on the municipal bond interest, it is factored into this provisional income calculation. So three things, half of your social security, all other forms of taxable income, and then even you have to add in your municipal bond interest.
• 7:46
  So those three things are gonna be added together here. And then once you have that number, that is your provisional income, okay? Next, you have to take that number and then run it through the provisional income tax brackets. The first bracket is zero to 20 5,000 if you're single, if you're married filing jointly, it's a zero to 32,000, that is what's called the 0% bracket. So any dollars of your provisional income, any dollars that fall into that bracket, none of the benefits in that bracket are subject to taxation.
• 8:15
  So that's the 0% bracket, meaning none of the dollars that fall in that one are subject to taxation. The next bracket is the 50% bracket. So half of the dollars that fall into this bracket are going to be subject to taxation as it relates to social security. And again, this is all gonna maybe make sense here in just a moment, kind of as we round this out and give you the big picture, but if you're wondering what these provisional income brackets are, just a quick aside, I've got a document called the important numbers PDF and it's for 2025 information, has the tax brackets, has the provisional income brackets, has anything you might need to know, and also have a new updated One Big Beautiful Bill document as well that can give you all the need to knows on that. If you want these documents, if you want this for your own personal use, shoot me an email, happy to send these over to you, just shoot me an email with the subject line saying, send me the PDF or important numbers PDF, letting me know that you want that, I'll send that over to you, it's completely free, happy for you to have that and use it however you need to.
• 9:09
  So these provisional income tax brackets again are on that document. So the second bracket is the 50% bracket and for married filing jointly, it's the range from 32,000 to 44,000, for single filers, it's from 25 to 34. Anything above that, anything above 44,000 or 34,000 if you're single, is the 85% taxable bracket. So we've got three levels of these provisional income tax brackets, the zero, the 50%, and then the 85%. Again, it'll make more sense if you can see it on the document, that's why I encourage you to shoot me an email, letting me know that you want it.
• 9:43
  Once you run your provisional income through these brackets, that's gonna tell you how much of your Social Security benefits based on all the other sources of income are actually subject to taxation, and that can end up being anywhere from 0% to 85%. It could be any percentage of your total benefits, and this might be a little bit confusing, and I don't have time necessarily to walk through all this in a perfect example, I've done other episodes on this, so if you wanna go back and listen to those other episodes, that'd be great. I've also done YouTube videos on this, so I'll have those linked down in the description for you as well, and seeing it visually kind of see me walk through this on a whiteboard might be really helpful. So I'm just gonna finish this off here and say that once we have that number, we know how much our benefits are gonna be taxed. Now, why is this important to know and understand?
• 10:27
  Well, whenever most people come to me and they say, Jacob, I want to take my social security benefits at 62 because I don't know if there's going be enough benefits to go around here in five or ten years. I want to get what I can while I can, I paid so much in, I think it's my money, I just want to get it? The break even on this thing is way down the road. I've got to be 82 before I actually get my money out compared to waiting to 67. So I just want to go ahead and start.
• 10:49
  The problem is, is if you take it too soon, and you don't have enough social security benefits and you've got to take other distributions out of your portfolio, whether it be out of your IRA or four zero one ks, some sort of tax deferred source, your distributions out of those tax deferred sources could force 85% of your, again, reduced benefits, 85% of that could be taxable because of the other income needed. So whenever you start to think about, again, your lifetime tax bill and how this all works together, you want to think about what if I actually delayed my benefits into the future, which means my benefits are increasing in value, so that then I have less money I need to take out of my accounts in the future, which means less of my actual social security benefits will be subject to taxation because I have less amount of other sources of income. And on the front end of retirement, until you get to filing for Social Security, you can actually take more money out of your tax deferred accounts, again, at lower tax brackets, the standard deduction, 1012% for sure, is what you'd likely wanna do, take more money out of your tax deferred accounts at lower tax rates right now, but then also to you reducing that future RMD risk once you do get to 73 or 75 later on because you are intentionally spending down your accounts.
• 12:05
  Now, it's also important to factor in how Social Security taxes work as it relates to Roth conversions. So if you're taking your benefits right now today, and you're like, man, I'm not paying any taxes on this, let me go ahead and do Roth conversions up to the top of the 12% bracket. Well, what you have to do is you have to know how social security is gonna be calculated in terms of the taxation in that scenario to know how much out of your Roth conversion is being taken away because of how much social security is now being added into your income equation because of the Roth conversion. So there's a lot of chicken and the egg kind of things going on here because you have more income, more of your social security will be taxable and because you have less income, less of your social security will be taxable. And so knowing how these things interact with each other is gonna be crucial to you making the best decisions around your tax plan, especially run Roth conversions, around how you gains harvest if you're able to do that at the 0% bracket, because even if you do capital gains harvesting and pay no taxes on those long term capital gains, the capital gains are actually being included in your provisional income calculation as it relates to social security taxation.
• 13:07
  So again, there's a lot that goes into that, but the biggest mistake is people just either automatically assuming they're paying no taxes on their benefits, or they're paying taxes on a 100% of their benefits. It's neither of those things and it depends on a lot of different variables and levers that can be pulled and changed as you build your plan. So that's number two, pay attention to social security taxation. The third mistake around taxes doesn't necessarily hit you in a direct tax way, but it's a penalty and it's through IRMAA, which stands for income related monthly adjustment amounts. And this is a penalty or a surcharge that is placed on your Medicare premiums and causes you to pay higher premiums because you had too high of an income to tax years ago.
• 13:46
  So here in 2025, if your income was too high in 2023, and I'm gonna share what those brackets are here in just a moment, then your Medicare premiums could be increased here this year. So what are these levels? What are the brackets? The good news is, is these are going up or adjusting or inflating over time. So they're not stagnant and just in place, but here in 2025, the first level, the first IRMA surcharge bracket, and really these are cliffs, as soon as you have $1 over, guess what?
• 14:16
  You're gonna have to pay the surcharge on your Medicare premiums. But for married filing jointly, it's $212,000 or less. If you have less than 212,000, if that was your modified adjusted gross income in 2023, then you are not gonna pay any surcharges on your Part B or Part D premiums for Medicare. And again, that's for married filing jointly, for single tax filers, it's half of that, it's a $106,000. Now it goes up to the, now it goes up another level, from $2.12 to $2.66 and then $1.00 6 to $1.33 if you're single.
• 14:48
  And so again, these different brackets, these are gonna be on that important numbers document that I can send you. So if you wanna look at these yourself and make it really easy, then go ahead and send me an email, let me know that you'd like a copy of it. But the key here is this, number one, these surcharges only apply for one year. So just because you go over the income cliff this year, for example, doesn't mean that next year you're gonna have those IRMA penalties on your Medicare premiums. It's only one year at a time.
• 15:15
  Now, here's the thing, most people hear about IRMA surcharges and these penalties and like, I need to avoid them at all costs. And that's obviously a good idea, you want to avoid them when you can, but at all costs is where people go wrong. And here's why. Let's say that again, early on in retirement, you're trying to reduce your Medicare premiums, if you're between 65 and 70, and you're doing that by not pulling as much money out of your IRAs or, you know, trying not to gains harvest as much in your brokerage account, and so you're kind of trying to defer or delay taxes into the future or delay income as far as you can to reduce your IRMAA risk. Here's the problem, if you do that and don't do any raw conversions and don't do any other tax planning strategies that are gonna help you long term, then you're gonna get to RMD age and your RMDs would be massive, which could ultimately force you to be over the IRMA brackets for the rest of your life because those RMDs are huge.
• 16:09
  So here's the suggestion, here's just something to think about. What if you intentionally go over the IRMA surcharge brackets in a year or two or three, kind of depends on what your plan would dictate, but what if you intentionally and knowingly did that to do a higher amount of Roth conversions or do more tax planning that would help you for the rest of your life, and you just pay the extra premiums for one year or two years, so that you didn't have to pay premiums for the rest of your life. Okay, once you get to that RMD age in the future. So that's just a thought, right? Most of us again, we're trying to avoid these IRMA surcharges, but I'm saying there could be an opportunity to intentionally or knowingly end up paying IRMA surcharges a couple years down the road because of a greater tax strategy or plan that you have in place.
• 16:52
  Now, this also relates to your Affordable Care Act or ACA subsidies for those of you who are 65. So before you actually get to Medicare age, again, most of us want to keep our health insurance premiums to a minimum, we want to keep those as low as possible, but here's the thing, if we again, don't take advantage of our gap years, if we don't take advantage of the opportunity of no income or low income during these early stages of retirement, we're trying to save a couple $100 now every single month on your ACA premiums or your health insurance premiums, but that could cost you hundreds of thousands of dollars throughout the rest of your life or your spouse's life or even less money for your inheritance for your kids and grandkids down the road because you didn't do the tax planning you otherwise should have done in these early stages of retirement. So all that to say, we have to pay attention to IRMA penalties and not be unaware of what we're doing and why we're doing it. We don't wanna get caught off guard by these additional penalties because no one likes a tax surprise like that.
• 17:48
  But what I'm also saying is that we just shouldn't go for them and try to avoid these penalties or try to always get ACA subsidies at all costs and avoid any other major tax planning if there's an opportunity there. So again, this is a balancing act and you've got to evaluate this for your situation, but you have to know that IRMA penalties exist in the first place in order to even know how to plan for them and know why you're intentionally trying to do other tax strategies that would push you over these IRMA surcharge brackets. So that's number three, is having no understanding of IRMA penalties and how they relate to your income. The fourth tax mistake that I see is thinking that Roth conversions are always gonna be the right thing, and they're always gonna be saving you money. Here's the issue with this thinking.
• 18:28
  Roth conversions can be very powerful, absolutely, they're definitely not a free lunch. You don't just make money randomly because of Roth conversions, you have to think about the timing of them. You've got to think about how long it's gonna take to earn back the taxes paid, or when you actually get to see the benefit because here's the reality. Conventional wisdom says to spend your Roth dollars last in retirement. But my argument is that if we're not gonna have Roth dollars to spend until age 80 or 90 or 95, then what am I gonna spend it on at that point?
• 18:57
  So what's the true benefit of Roth conversions? You have to understand why you're even doing them, because if it's to have tax free money in retirement, guess what? You might not ever end up using the dollars you converted to Roth in your life. Now, here's some reasons that it could be very beneficial. You could do it to lower your future RMDs for you and your spouse, or to reduce that future widow's tax trap if one of you predeceases the other earlier than expected, or if you know that you're not gonna spend all of your money and you wanna leave a tax free inheritance for your kids and have the opportunity to pay taxes at a fairly low rate, then Roth conversions can help you get more money into that Roth IRA for them, and then you can let that compound and grow tax free before they receive it, and then once they do receive it, they have additional ten years before they have to take all that money out, and that's all due to the SECURE Act and kind of some new rules there, but they have ten years before they have to distribute all the money out of those Roth IRAs that they inherit, which allows more tax free growth.
• 19:54
  So it's a great way to transfer wealth to the next generation. Now, here's the thing, in all these scenarios, it's not to create tax free income for yourself. It's only to avoid major taxes because of RMDs in your lifetime or to avoid major taxes in the transfer or inheritance that would go to the next generation. Okay, so it's not so much an idea of creating tax free income for you while you're alive, it's really more about everyone else beyond you, if that makes sense, or just simply reducing forced taxation because of those RMDs. Because here's the thing, whenever you do a Roth conversion, you've got to understand how many years it actually takes to get back to the same dollar amount after tax than you would have otherwise had.
• 20:35
  So especially if you have to withhold the taxes on a Roth conversion itself, rather than pay the taxes out of cash, that's gonna set you back even further and dig the hole even farther. So you've got to get higher returns for longer in order to get back to the same wealth level because you've taken money out of the market. It's no longer making you money because you paid taxes as opposed to more money growing and still staying in that IRA. Yes, your tax bill is gonna be going up over time, but you have more money to pay the taxes with because of the growth and not taking money out to do the Roth conversion. So Roth conversions are not the end all be all tax planning strategy.
• 21:11
  There's so many other ways to do tax planning, but Roth conversions do happen to be one strategy. You just have to understand that breakeven points like when am I gonna see the benefits of this and are the benefits even for me? They might be for everyone else and it's really not for me. So really you have to evaluate here, what's the benefit of the conversion and kind of have a good framework or mindset around that. Because at the end of the day, Roth conversions only make sense if your tax rate today is gonna be much lower than whatever your tax rate would be in the future.
• 21:38
  If your tax rate today is the same as it would be in the future, then Roth conversions still don't make sense. So, you've got to evaluate this for your situation. Don't just take my talking about it or anyone else's talking about Roth conversions and think that it's the only way to do good tax planning. That's not true. Sometimes the best tax planning is to actually not do Roth conversions.
• 21:57
  And the fifth tax mistake that I often see is whenever people come to me with the exact same investment allocation within all three different account types being tax deferred, tax free like a Roth, and then taxable like a brokerage account. Whenever all three accounts are invested the exact same from an allocation standpoint, let's say 60% stock, 40% bonds in all three accounts, it's showing me that we are not diversified from a tax standpoint as it relates to asset location. So when it comes to investing your money, this is an easy win. If you invest the right types of investments within each account type based on how that account type is taxed, you are gonna be saving so much money every single year. Obviously it relates to how much money you have in these different buckets, but if you can do this correctly, you're gonna save yourself thousands of dollars every single year, but also thousands of dollars over your lifetime.
• 22:48
  So here's a quick rundown. Whenever we have a taxable account like a brokerage, we want to limit how much income or dividends that that account is producing. Why? Because that account is taxed every single year, you're gonna get a ten ninety nine, you're gonna pay taxes on those dividends and interest, however much is being generated every single year. So if we can minimize that, you're lowering your tax bill automatically.
• 23:09
  Also, whenever we think about the types of holdings in the account, you want things that qualify for long term capital gain treatment, or qualified dividends. Most of the time, this is gonna be stock funds. So if you have things that can qualify for long term capital gains, you can benefit from tax gain harvesting in that account here in the future once you reach long term status. So the taxable account is where you wanna hold stocks in a perfect world. Most of the time you have to have some sort of money market or cash holdings within your taxable accounts, whether it be in a savings account or actually in a brokerage, because you need some sort of after tax income to live on if you needed it, right?
• 23:44
  You've got to have some cash set aside, it's gonna be getting whatever current interest rates are. So it's not gonna be a perfect fit where you can hold only stock funds within that taxable brokerage account, but anything beyond your basic cash needs, you kind of want to be holding that in stocks within the brokerage account. Now for your tax deferred accounts, four zero one ks's, traditional IRAs, four zero three Bs, TSPs, anything that's tax deferred, you want to hold any and all of your fixed income or interest producing investments in these account types, why? Because no matter what, any interest earned along the way is not gonna be taxed every year. This is a tax sheltered account, meaning all taxes are deferred into the future.
• 24:24
  And the other thing with this is regardless of the underlying investments, stocks, cash or bond, anytime you take money out of a tax deferred account is gonna be classified as normal income. There's no qualified dividends, there's no long term capital gain treatment, everything is treated as normal income upon distribution from the account. So you want to align the same type of taxability of your interest or dividends or capital gains with this account type by saying, wanna have any fixed income, CDs, treasuries, bonds, as well as any interest bearing assets that are, as as any other interest bearing assets. You wanna have these in the traditional IRAs because that interest is always gonna be treated as normal income, but also any IRA distributions are gonna be taxed as normal income as well. So that's the first, so that's the second bucket is your tax deferred bucket.
• 25:12
  That's where you want to hold your more conservative and income producing assets. And another reason for this is so that you can almost limit or control the growth of your tax deferred assets compared to taxable or Roth. Because again, these tax deferred assets will have required distributions here in the future. And so essentially, you grow this account more than otherwise you need to be, then you could just be building up a larger tax bill for yourself. So you want your taxable account to grow a lot, you want your tax deferred account to grow less than that, and then your tax free account like a Roth IRA, you want those to grow as much as possible as well.
• 25:45
  So you don't want hardly any fixed income or interest bearing types of investments in a Roth IRA, you want this one to be growth focused because any distributions again in the future, they're gonna be coming out tax free. So you don't want to give your kids an inheritance one day with a bunch of CDs and your Roths, you want those to be growing, taking an aggressive stance on that, so that you can actually have more money for them in the future that's tax free. So this is called asset location and strategically positioning your different investment types within each of these account types in a thoughtful manner. And this is an easy win for everyone if you just take a little bit of time to think about it and be thoughtful about how you position your investments within your account types. So again, people come to me all the time and guess what, they've got the same allocation in every account and this is an easy win that I point out every single time.
• 26:32
  And you don't realize how big it is until you don't get as big of a tax bill or a big of a ten ninety nine in your brokerage account in the future. And you won't see the benefits of this until later on. But if you can find a way to limit how much your tax deferred accounts are growing compared to your taxable and Roth IRA, then you will have less RMDs in the future, which could lead to no IRMA surcharges and less taxes on your social security benefits and so on. So the impact of this is not just this year, it's ongoing, it's in perpetuity. You just have to make sure you set it up correctly and keep it that way moving forward.
• 27:04
  So these five tax mistakes are things that I see all the time. These are things that I want you to know about so you don't make these same mistakes. So I hope this has been helpful as you continue to prepare or live out your dream retirement. Thanks so much for tuning into this week's episode. We will talk to you again very soon.
• 27:21
  Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning in to this week's episode. I look forward to talking with you again next week.