Many people have spent a lifetime saving and accumulating money in tax-deferred retirement savings vehicles like the 401(k), 403(b), 457, IRA, SEP IRA, or TSP Plan (non-Roth retirement accounts). As you make contributions into these plans, you are making the decision to defer income (and income tax) today.

The money within these vehicles has the advantage to grow tax deferred, but when you take withdrawals from these accounts it is taxed as ordinary income, which is the second highest tax rate today (up to 37%), right behind the Estate & Gift Tax rate of 40%.

While the ability to fund these accounts with pre-tax money and the benefit of tax-deferred growth is appealing, many people don’t understand the long-term tax implications.

In extreme cases, taxes could erode up to 70% of the value of these accounts without proper planning. Let’s look at the 11 potential taxes on your retirement assets.


For individuals over age 59.5, their retirement accounts could be the most substantial portion of their overall savings. If you have participated in these plans, you have deferred income taxes each time you made contributions. The first time you will be taxed on your retirement money is upon distribution. The first tax is the Federal income tax, which is as high as 37% today (scheduled to increase to 39.6% in 2026). Here is a snapshot of the federal rates for retirement account distributions for 2021:

Rate For Single Individuals For Married Individuals Filing Joint Returns
10% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% $523,601 or more $628,301 or more

The second tax would be a state income tax. There are only nine states that have no state income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In high tax states such as California where the top rate is 13.3%, this could mean that a total income tax of up to 50.3% on your distributions from these accounts. Of course, to hit these high rates you need to have substantial total income.

But what if you are lucky enough to not need income from your retirement account? Maybe you have a pension, Social Security benefits, outside investments such as dividends, interest, annuity income, or even a business ownership paying you income that covers your living expenses.

Well, the IRS doesn’t allow you to defer taxes indefinitely, they want their portion of your hard-earned money!

Under today’s law, at age 72 you are required to start taking money out of your retirement accounts (non-Roth IRA accounts) whether you need it or not. These are called Required Minimum Distributions (RMDs) and they can cause a massive tax problem in retirement for people who have a large retirement account balance.

As an example, let’s look at a married couple, age 60, who has accumulated $2,500,000 in pre-tax retirement accounts. They have a successful small business and don’t plan on taking any money from their retirement accounts anytime soon. Based on a 6% market growth rate, their retirement account balances are projected to grow to just over $5,000,000 by age 72. Based on that value, their required distribution will be almost $200,000 whether they need the money or not. This $200,000 could easily cost them $48,000 – $72,000 of federal income tax depending on their other income (without even factoring in that taxes may be higher in the future based on the amount of national debt we have accumulated). If they are subject to state taxes, that increases the burden even further.

In addition, once they are age 65+, the required minimum distribution could create a monthly surcharge on their Medicare Part B and Part D premiums. This Medicare surcharge known as IRMAA is the third potential tax caused by your retirement accounts. IRMAA is calculated based on your modified adjusted gross income from two years prior. So for 2021, Medicare uses your modified adjusted gross income from 2019.

For Medicare Part B, if your 2019 modified adjusted gross income is:

File Individual Income Tax Return File joint tax return You pay each month
$88,000 or less $176,000 or less $148.50
above $88,000 up to $111,000 above $176,000 up to $222,000 $207.90
above $111,000 up to $138,000 above $222,000 up to $276,000 $297.00
above $138,000 up to $165,000 above $276,000 up to $330,000 $386.10
above $165,000 and less than $500,000 above $330,000 and less than $750,000 $475.20
$500,000 or above $750,000 and above $504.90

For Medicare Part D, if your 2019 modified adjusted gross income is:

File individual income tax return File joint tax return You pay each month
$88,000 or less $176,000 or less your plan premium
above $88,000 up to $111,000 above $176,000 up to $222,000 $12.30 + your plan premium
above $111,000 up to $138,000 above $222,000 up to $276,000 $31.80 + your plan premium
above $138,000 up to $165,000 above $276,000 up to $330,000 $51.20 + your plan premium
above $165,000 and less than $500,000 above $330,000 and less than $750,000 $70.70 + your plan premium
$500,000 or above $750,000 and above $77.10 + your plan premium

As you can see, the decision to defer taxes while you are working can bring about a lot of complexities when you retire. This is why we recommend working with one of our advisors who specializes in tax-efficient retirement planning.


At the death of an owner of a large retirement account, like an IRA, the retirement asset can be subject to additional taxes. Under current law, most assets get what is known as a step-up in basis at death (congress is proposing legislation to eliminate this benefit, more to come on this topic later). What this means is that the beneficiary inherits the asset at its value at date of death and the asset can generally be sold with little or no income tax consequences.

Retirement accounts are among a special class of assets known as income in respect of a decedent, or IRD. This means all retirement accounts (except for Roth IRAs) will be subject to federal income tax and state income tax at the death of the account owner. Because of the SECURE Act of 2019, this income tax can be spread out over a 10-year timeframe by your beneficiary (certain exceptions apply), but none the less the tax must be paid. If your beneficiary is in a high tax bracket, they could pay as much as 37% in Federal tax and their applicable state tax rate on this inheritance. Again, using the country’s most extreme example, if your beneficiary is in California and is in the top income bracket, they would pay as much as 50.3% between state and federal taxes (increasing to 52.9% in 2026) leaving just 49.7% remaining for their inheritance. These are taxes five and six that could be imposed on your retirement accounts.

Lastly, if your beneficiary is retired and on Medicare, the inherited retirement account and subsequent required distributions from these accounts could push them into the higher Medicare surcharges known as IRMAA which was mentioned previously. This is the seventh potential tax issue on your retirement savings.


Next, if the owner’s estate is large enough, the retirement asset could also be subject to a federal estate tax and a state estate tax. In 2021, a person’s estate would be subject to a federal estate tax if the net estate (all assets owned by the person – including residence, retirement accounts, life insurance, stocks, bonds, mutual funds, and other real estate and business interests – minus all debt of the decedent) exceeds $11,700,000 (again, there is proposed legislation that could lower this exemption to $3,500,000).

The federal estate tax is currently 40%. This means anything over the exemption of $11.7m will be taxed at 40%. In addition to the federal estate tax, many states impose state estate and inheritance taxes. The federal estate tax and state estate or inheritance tax are taxes eight and nine that your retirement dollars could be subject to.


The final two taxes that could be imposed on your IRA inherited by your descendant upon your passing is the federal and state generation-skipping transfer (GST) taxes. This tax would only be imposed if the retirement plan owner had a sufficiently large net estate, and the retirement plan owner left his or her retirement assets payable to a grandchild/other related person more than one generation younger than him or her.

If the retirement plan is subject to generation-skipping transfer taxes, leaving it to your grandchildren could be a major tax mistake, as this would subject the retirement account to an additional 40% tax on top of the income taxes and estate taxes that were already paid. Because the current GST Tax exemption amount is relatively generous at $11,700,000 ($23,400,000 for a married couple with proper planning), it is relatively rare to encounter a situation where the GST Tax needs to be paid on retirement accounts. However, this will become more of a problem if the estate tax and GST Tax exemption amounts remain subject to sunset in 2025 or proposed legislation gets approved through congress.


With all the taxes a retirement account can be subject to during life and upon death of the owner, it is not unusual to see the after-tax proceeds payable to the beneficiary at death suffer a shrinkage of as much as 40% – 70%. That’s correct: your beneficiary of a large IRA could be left with only 30% to 60% of the retirement account to spend after all the tax is paid.

But it doesn’t have to be this way. With proper income distribution planning during your lifetime and strategic estate tax planning to structure your assets properly to your beneficiaries upon your passing, you can substantially reduce or eliminate many of these tax burdens that infest your hard-earned retirement assets.

To get professional advice on the best way to maximize your retirement dollars and minimize taxes, please reach out to one of our wealth management advisors today to get a personalized plan.

Dave Alison, CFP®, EA, BPC

President | Founding Partner