Retirement, Retirement Income, Taxes

How Can Retirement Income Create a Tax Trap?

Tax planning should be an integral part of your financial plan

Retirement income withdrawals are loaded with surprises. You’re not accumulating anymore – that was the easy part. Decumulation is different. Whether you’re in pre-retirement, early retirement, middle or late retirement; what some people all the go-go years, go-slow years, or the no-go years, the withdrawal stage is different and filled with tax traps, some of which can result in life-long penalties.

What is an example of a tax trap in retirement?

Example: Take Bill (I made him up). He’s retired and single with a taxable income just over $58,000, which includes $45,000 in IRA income and $37,500 in Social Security benefits. As you can see, this puts him squarely in the 22% tax bracket with room to spare.

Table of 2026 tax rates showing marginal rates (10–37%) for Married Filing Jointly and Single, with income brackets for each rate.

He decides to tap his IRA for an extra $1,000 for a concert road trip. Adding $1,000 to his taxable income should keep him in the 22% bracket, so the additional tax on that extra $1,000 should be $220, right?

Nope. Bill will owe $407 in taxes on that $1,000. That’s a 40.7% federal tax rate on that additional money.

How can that happen?

Learn more about how Tax Planning Changes During the Four Stages of Retirement.

Enjoy!

Jim

Jim Lorenzen

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients’ wealth management needs since 1991. Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing wealth management, retirement planning and investment advisory services. Jim's background includes founding, building, and selling five successful businesses and international consulting. He has been headline speaker at more than 500 national and international association and corporate conventions for clients such as Foster Grant, Hobie Cat, CapCities/ABC, H.R. Textron, Hearst Corporation, The National Management Association, the National Newspaper Association, and Cox Communications and has been featured on American Airlines' Sky Radio heard on more than 19,000 flights, as well as in The Wall Street Journal’s SmartMoney magazine, The Profit Sharing Council of America’s Insights; also published in the Journal of Compensation and Benefits, NASDAQ, and in scores of national and international association trade publications.

See Full Bio

————————————

Interested in becoming an IFG client? Why play phone tag? Schedule your 15-minute introductory phone call!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER^® professional and An Accredited Investment Fiduciary^®in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

How Can Retirement Income Create a Tax Trap?

Schedule Your
20-Minute “Right Fit” Introductory Call Now!

Recent Posts