This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
One of the most widely-known financial rules-of-thumb is to defer taxes, but what continues to become more evident is that doing so could likely cost you more in the future.READ THE ARTICLE
One of the most widely-known financial rules-of-thumb is to defer taxes, but what continues to become more evident is that doing so could likely cost you more in the future. As past podcast guest, David McKnight, says, “The tax train is coming,” and right now we have a window of opportunity to leverage historically-low tax rates.
Pay now, profit later: When it comes to your retirement nest egg, one thing to keep in mind is if you’re likely to experience a higher marginal income tax rate in the future, it makes sense to convert your 401(k) or IRA to a Roth IRA – or, move those savings to a taxable investment account now. By doing so, you maintain more control over how gains are taxed, and since rates are expected to rise in 2026, also save yourself a potentially hefty tax bill down the road.
Additionally, some other reasons to be wary of deferring taxes include:
📌Solo years: If a spouse passes away, the surviving spouse then becomes an individual taxpayer, and put in a higher tax bracket than a married couple with the same income
📌Stealth taxes: Traditional IRA and 401(k) distributions have an impact on the amount of taxes your Social Security benefits face, as well as your Medicare premium surtax
📌Ordinary income tax: Traditional retirement account distributions are taxed at ordinary income, and at your highest tax rate, regardless of investment earnings
📌The SECURE Act: The elimination of the Stretch IRA means beneficiaries now pay ordinary income taxes on distributions
Avoid the tax trap: Fewer tax brackets lead to wider tax brackets, and ultimately, a higher risk of being in the same or higher tax bracket in retirement. Couple that with the impact of Stealth Taxes, and it’s easy to see why tax-deferral may not be a good idea for anyone anymore.