How to Keep Your Hard-Earned Money from Slipping Away
Imagine this: you’ve spent decades building your retirement nest egg, only to find out that your dream retirement could turn into a tax nightmare. For many retirees with $2 million or more in assets, this isn’t just a hypothetical scenario. It’s a reality that can drain hundreds of thousands from your savings. Today, we’re diving into three sneaky tax traps that could cost you dearly if you’re not careful.
The Medicare-IRMA Ambush
Let’s kick things off with a trap that can catch even the savviest retirees off guard: the Medicare Income-Related Monthly Adjustment Amount, or IRMA for short.
What is IRMA? It’s a penalty added to your Medicare premium based on your income from two years prior. If your income exceeds $106,000 as a single filer or $212,000 for married couples filing jointly, you’re in the danger zone.
Real-Life Example: Meet Robert, a 67-year-old retiree with a $3 million portfolio. In 2023, he sold $800,000 worth of stock, triggering a $400,000 capital gain. While he thought he was making a smart move, his income shot up, and in 2025, his Medicare premiums jumped by over $5,000.
The Long-Term Impact: Over a 25-year retirement, these mistakes can cost you six figures in unnecessary premiums.
Takeaway: Before making any major financial moves—like selling stocks or withdrawing from your IRA—think about how it might affect your IRMA.
Missing the Roth Conversion Sweet Spot
Next up is a missed opportunity that’s like passing up an open layup in the NBA finals.
What is a Roth Conversion? It’s the process of moving money from your pre-tax retirement accounts into a Roth IRA, where it can grow tax-free. You pay taxes on the amount you convert now, but it’s worth it in the long run.
The Golden Window: The best time to consider a Roth conversion is during the gap years between retirement and age 75, before required minimum distributions (RMDs) kick in.
Example: David and Susan, both 66, have $2.5 million in pre-tax IRAs. They planned to let their accounts grow untouched, but when RMDs hit at age 75, they faced huge tax bills and IRMA surcharges.
Takeaway: Be proactive during those low-tax years. Consider converting portions of your pre-tax accounts to Roth IRAs to build a balanced portfolio of tax-free and taxable assets.
The Wrong Withdrawal Sequence
Finally, let’s talk about the importance of your withdrawal strategy.
Three Buckets of Retirement Assets: Your retirement savings typically fall into three categories:
Taxable Accounts: You pay taxes annually on dividends and realized gains.
Tax-Deferred Accounts: Traditional IRAs and 401(k)s, where withdrawals are taxed as ordinary income.
Tax-Free Accounts: Roth IRAs, where you’ve already paid taxes, and withdrawals are tax-free.
Common Mistake: Many retirees rely solely on their taxable accounts for living expenses, allowing their pre-tax balances to grow. This can create a future tax bomb that’s hard to defuse.
Strategic Blending: Instead of sticking to one type of account, consider a mix. Withdraw from taxable accounts for some expenses, and use pre-tax accounts for others. This helps you fill up favorable tax brackets without triggering unnecessary taxes.
Takeaway: Master the art of strategic blending to create a tax-efficient withdrawal plan that keeps your tax burden manageable.
Final Thoughts
Navigating retirement taxes doesn’t have to be complicated. By being proactive and understanding these three traps—IRMA ambush, missed Roth conversion opportunities, and the wrong withdrawal sequence—you can save yourself hundreds of thousands of dollars.
Want to dive deeper? Check out the full video on our website for more insights and strategies to keep your hard-earned money where it belongs: in your pocket, not Uncle Sam’s.
Education only, not advice. Consult your professional(s).