The Tax Trap: Why Your 401k Isn’t All Yours

Retirement is supposed to be the best part of your life, but it is hard to live fully when you are constantly worried about the complexity of today’s financial landscape. On this week’s episode of Retire Well, Josh Bretl and Mark Elliott dive into why retirement planning has changed so much since the days of our grandparents. Back then, pensions were the norm, but today we are managing a pile of money in IRAs and 401k plans that has yet to be taxed.

The Shift from Pensions to Tax Liability

For decades, the government encouraged us to shove money into tax-deferred accounts, promising that we would be in a lower tax bracket when we retired. The reality is that many high-net-worth retirees find themselves in the same, or even higher, brackets once they start taking income. This is why we focus so heavily on tax-smart strategies at Wellment Financial. We want to make sure your fiscal house is under one roof, connecting your investments directly to a proactive tax plan.

Unexpected Taxes You Need to Know About

Most people expect to pay some taxes, but few are prepared for the hidden ones that legislation like the Secure Act brought to the table. Here are a few key areas where we see retirees get surprised:

• The Death of the Stretch IRA: If you leave a million dollars to your children in a traditional IRA, they now have to take that money out within 10 years. That can push them into much higher tax brackets during their peak earning years.
• The Single Filer Penalty: When a spouse passes away, the survivor often keeps most of the household income, but their tax status changes from married filing jointly to single. This is often the largest tax increase a person will ever face.
• Social Security Taxation: Up to 85% of your Social Security benefit can be taxable depending on your other income sources.

Planning is an Ongoing Process

osh reminds us that a financial plan is not a one-time document you stick in a drawer. It has to evolve as the rules change. For example, recent changes in standard deductions and Illinois property tax rules mean that strategies we used five years ago might need an update today. We use mock tax returns in the fall to help our clients identify problems before the year ends, allowing them to keep more of what they have earned.