Three Tax Traps Waiting in Retirement (And How to Outmaneuver Them)

RMDs, Medicare surcharges, and taxable Social Security. The three-bucket plan to outmaneuver all three.

A referral came in not long ago. Husband and wife, both recently retired, both feeling good about where they stood. They had followed the playbook their entire working lives.

Maxed the 401(k). Captured the employer match. Reinvested dividends. Did everything the financial media told them to do.

Their combined pre-tax balance was $1.4 million.

They sat across from me and the husband said, “We were told retirement means lower taxes. Less income, lower bracket.” He said it like a man who had been waiting to hear someone confirm it.

He stopped waiting about twenty minutes later.

The Promise Was Half Correct

The logic is not wrong. It is incomplete. And incomplete plans have a way of becoming expensive surprises.

Here is what most people hear: contribute pre-tax, let the money compound tax-deferred, pull it out in retirement when income drops, pay a lower rate.

Simple, elegant, works perfectly on a whiteboard.

Here is what the whiteboard left out: the IRS does not let you leave that money alone forever. At age 73 or 75, three separate tax events arrive at your door. Most people never planned for any of them.

I will be the first to admit that the first time I ran the full math on all three at once, I checked my numbers twice. I was certain I had made an error.

I had not.

Watch me perfectly explain how the process actually works and summarize this article, on a whiteboard.

RMDs: The Withdrawal You Did Not Choose

Required Minimum Distributions are the government collecting what they have been patient about for decades. Every dollar sitting in a traditional IRA or 401(k) entered the account tax-free. The IRS extended credit. At 73 or 75, they call it in.

The IRS takes your December 31st account balance from the prior year and divides it by a life expectancy factor from their Uniform Lifetime Table.

You do not negotiate the amount. You do not delay it. You do not opt out.

If you fail to take the required distribution, the penalty is 25% of the amount you were supposed to withdraw.

On a $1.4 million balance, the first RMD is roughly $51,000. It hits as ordinary income. Same rate as a paycheck from a job.

The couple in my office was 63 when we sat down. With standard compounding through age 73, their $1.4 million was projected to be closer to $2.1 million. Their first RMD was going to be nearly $77,000.

They had never run that number. Nobody had ever asked them to.

The RMD does not hold steady either. The account keeps compounding. The life expectancy factor keeps shrinking.

The mandatory withdrawal grows every year, whether you need the income or not.

IRMAA: The Medicare Surcharge Nobody Warned You About

Layer in Medicare.

The standard Medicare Part B premium in 2026 runs about $185 per month. Most people know that number. What most people do not know is that Medicare uses your tax return from two years prior to calculate what you actually pay.

Cross an income threshold and your premium jumps. The program is called IRMAA, Income-Related Monthly Adjustment Amount, and it is one of the least-discussed costs in retirement planning.

For a married couple in 2026, the first IRMAA surcharge kicks in above $212,000 of modified adjusted gross income. That number can feel distant until you add $77,000 in RMDs to $36,000 in combined Social Security, some dividend income, and maybe some part-time consulting. The ceiling arrives faster than the projections suggested.

The tiers stack quickly. And because the calculation uses income from two years prior, by the time you see the higher premium on your bill, the year that triggered it is already closed. The planning has to happen before the income does.

Social Security: 85 Cents on the Dollar, Taxable

Most people know Social Security exists. Most people do not know that up to 85% of it is taxable.

The threshold that determines how much of your benefit gets taxed has not been adjusted for inflation since 1993. That year, Congress set $44,000 of combined income as the level above which married couples owe tax on 85% of their Social Security benefit.

That threshold is still $44,000 today.

If you and your spouse collect $36,000 in combined Social Security and receive $77,000 in RMDs, your combined income is $113,000. Every dollar of your Social Security benefit that can legally be taxed will be.

The rule has never been indexed to inflation. It was never designed to be.

Three income streams. Three tax events. None of them were in the plan you made at 47.

“I’ll Just Take Less Out”

This is the first response I hear when people start doing the math.

The problem is that with RMDs, less is not an option. The IRS sets the withdrawal amount. You take it, or you pay the 25% penalty on what you skipped. Taking out less only works if the pre-tax balance is smaller.

That is the actual fix. Not managing the withdrawal at 73 or 75. Managing the account balance before 73 or 75.

That is where the three-bucket strategy comes in.

Bucket One: Taxable

Your brokerage or savings account. Money that has already been taxed, invested, and is now subject to capital gains rates when sold.

Capital gains rates run lower than ordinary income rates in almost every scenario. For married couples filing jointly in 2026, if your total taxable income stays below approximately $98,900, your long-term capital gains rate is 0%.

Zero. Nothing owed on the growth.

Above that threshold, most retirees land in the 15% capital gains bracket. Still meaningfully lower than the ordinary income rate on the same dollar.

The taxable bucket does not generate RMDs. It does not create a mandatory income event.

Used correctly, it produces income the IRS collects very little from. It is the most flexible pool of retirement money you can hold.

Bucket Two: Tax-Deferred

Your traditional IRA, 401(k), SEP-IRA, and anything else pre-tax. Every dollar coming out is ordinary income.

The strategy is not to minimize withdrawals from this bucket. It is to size withdrawals to fill exactly the space the tax code already gives you for free.

In 2026, a married couple filing jointly over 60 has a standard deduction of roughly $32,200. That is income you can receive without owing a dollar in federal income tax. If your RMDs stay at or below that number, the government-mandated withdrawal becomes tax-free income by default.

There is a second tool available inside this bucket for anyone who gives to charity: the Qualified Charitable Distribution, or QCD. If you are over 70½, you can send up to $108,000 per year directly from your IRA to a qualified charity. It counts toward your RMD.

It does not count as income on your return. You satisfy the withdrawal requirement, avoid the income event, and get the full charitable benefit without needing to itemize.

The tax-deferred bucket is not the problem. An oversized tax-deferred bucket is.

The goal is to manage it down to a size where RMDs stay within the standard deduction, and strategic giving handles the rest.

Bucket Three: Tax-Free

Your Roth IRA or Roth 401(k). Contributions were made after tax. Growth is tax-free. Qualified withdrawals are tax-free. No required minimum distributions during your lifetime.

This bucket handles everything the other two cannot cover at a low rate. Major one-time expenses. Healthcare costs. Income you need beyond what the standard deduction absorbs. Legacy assets for your heirs, who inherit a tax-free account rather than a deferred tax liability.

Roth withdrawals do not show up as income on your tax return. They do not count toward the IRMAA calculation. They do not affect how much of your Social Security gets taxed.

The larger this bucket, the more control you hold over your total retirement tax picture.

The Window That Closes at 73 or 75

The best time to build the Roth bucket is before RMDs start forcing income on you whether you need it or not.

For most pre-retirees, the years between 60 and 75 are the lowest-income years in a long time. Careers are winding down. Social Security has not started. RMDs have not kicked in. Income is often manageable and, for once in a career, controllable.

That window is where Roth conversions are most powerful.

A Roth conversion takes money from a pre-tax account, pays the tax at today’s rate, and moves it into a Roth where it grows and distributes tax-free permanently.

You are buying out the IRS’s ownership stake in your pre-tax accounts before they get to set the price at 73 or 75.

The most effective conversions happen in layers. Each year you convert enough to fill the lower tax brackets without crossing into the next tier.

If you are in the 22% bracket, you convert to the ceiling of the 22% bracket. You stop there, repeat the following year, and keep reducing the pre-tax balance year by year.

A smaller pre-tax balance means smaller RMDs. Smaller RMDs mean lower IRMAA exposure, less Social Security taxation, and more room to pull from the 0% capital gains window in the taxable bucket. All three problems shrink when the pre-tax balance does.

The three buckets work together. The Roth conversion strategy is how you rebalance between them.

PSA: Nothing is ever once-size-fits-all. Feel free to read my previous article about how someone who came to me after following internet advice lost six figures doing Roth conversions.

What Happened with the Couple

We built a seven-year Roth conversion plan. Annual conversions between $90,000 and $120,000, timed to stay within their bracket ceiling and below the IRMAA threshold triggers.

By the time RMDs arrived, their projected pre-tax balance had come down by roughly $630,000.

That $630,000 is now in a Roth. No mandatory withdrawal schedule attached to it. No ordinary income tax on distributions. No IRMAA calculation to worry about. And when they pass it to their kids, the heirs inherit a tax-free account rather than a deferred tax liability.

Three problems. One coordinated strategy. All of them smaller than they would have been without the plan.

That is what solving two, three, sometimes four different tax problems with one vehicle looks like.

If You’re New Here, Grab a Seat

My name is Drew Scott. If this is the first time something of mine has landed in your inbox or you need a refresher, here’s the short version of who I am and why I write this.

I run two firms. Revolutionary Wealth is our financial planning and wealth management practice. Blueprint Business and Tax Advisors handles tax strategy, estate planning, and business consulting for business owners who are buying, selling, or trying to structure their way to keeping more of what they build.

The clients I spend most of my time with are pre-retirees in their late 50s and 60s, retirees navigating the distribution phase, and business owners earning north of $200,000 who have realized that the person managing their investments and the person filing their taxes have never once sat in the same room together.

Coffee and Compounding is where I write about what I see every week in real planning conversations. Not theory.

The actual math, the actual tools, and the actual mistakes that show up over and over again in people who did everything right and still ended up surprised.

The article above is a good example of what this newsletter is. No fluff. Just the strategies that matter for people who are serious about what they keep, not just what they earn.

I appreciate your attention, see you in a few days. Cheers!

Disclosures:

This blog contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this blog will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Revolutionary Wealth LLC does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

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Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits.

Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

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