Three retirement tax traps that could needlessly cost you six figures

For decades, Americans have been told the same thing about retirement…

Save as much as you can. Contribute money into an IRA and 401(k). Invest it wisely. And build the biggest nest egg possible.

That's good advice. But it leaves out one very important question: How much will you have to pay in taxes on this money in retirement?

We recently sat down with brothers Ryan Thacker and Tyson Thacker, co-founders of B.O.S.S. Retirement Solutions, to talk about an issue they believe doesn't get nearly enough attention.

"People spend 30 or 40 years focused on growing their retirement savings," Ryan said. "But very few people have a plan for how they're going to take that money out in the most tax-efficient way."

And that's where the problem begins.

Because according to the Thackers, some of the biggest tax mistakes in retirement aren't caused by doing something obviously wrong. They're caused by doing things that seem perfectly reasonable: Taking money from your IRA. Filing for Social Security. Selling an investment. Taking a required minimum distribution (RMD).

Each decision may make sense on its own. But in retirement, one financial decision often triggers a chain reaction that impacts many other things.

For example, a withdrawal from your IRA could increase your taxable income. That additional income could cause more of your Social Security benefits to become taxable. Higher income could also increase your Medicare premiums.

And eventually, required minimum distributions could force additional taxable income onto your tax return — whether you need the money or not.

"The problem is that most people look at these decisions separately," Tyson said. "But they're all connected. One simple move with your IRA, Social Security, Medicare, investments or taxes could trigger a chain reaction of events on many other things. And it's often expensive.

Ryan and Tyson recently identified three retirement tax traps they believe everyone who wants to retire should understand.

Tax trap #1: The IRA and 401(k) withdrawal trap

Most people know almost exactly how much money they have saved in their IRA and 401(k).

But here's a question that's much harder to answer: How much of that money will you owe in taxes?

Traditional IRAs and 401Ks offered an attractive deal when you were working. Your contributions were tax-free, and taxes on earnings were generally deferred while your savings grew.

But the taxes didn't disappear. Generally, taxable withdrawals from traditional IRAs and 401(k)s are treated as ordinary income. And for someone who has accumulated hundreds of thousands of dollars in tax-deferred accounts, that can create a significant tax liability in retirement.

"We've sat across the table from families who were incredibly disciplined savers," Ryan said. "They did almost everything right. What they didn't have was a strategy for how they were eventually going to withdraw that money when they were retired."

How and when you withdraw your money matters a lot. Taking too much from the wrong account at the wrong time could increase your taxable income, and potentially create other unintended consequences.

That's why Ryan and Tyson believe retirement planning shouldn't stop with the question: "How much have I saved?" The equally important question may be: "What's the most tax-efficient way to withdraw this money in retirement?"

Tax trap #2: The social security "tax torpedo"

After paying into Social Security throughout your entire working life, you might assume your Social Security check is yours to keep.

That's typically not the case for good savers

Depending on your income in retirement, you could pay taxes on up to 85% of your Social Security benefits. And this is where retirement taxes can become surprisingly complicated.

Let's say you're collecting Social Security and decide to take additional money from your traditional IRA. Nothing unusual about that, right?

But that withdrawal increases your income. And that additional income could cause more of your Social Security benefits to become taxable. Depending on your income, it could potentially increase your Medicare premiums too.

One seemingly routine withdrawal could create a tax chain reaction.

"That's what catches people by surprise," Tyson said. "They look at an IRA withdrawal as one decision, and Social Security as another. But from a tax standpoint, those decisions often collide."

There are strategies that could help reduce these taxes. But timing is critical. And some of the most valuable planning opportunities may exist before you file for Social Security.

Tax trap #3: Waiting until the IRS starts making decisions for you

For years, you decide when to take money from your IRA and/or 401(k). But eventually, that changes.

Under current law, many retirees must begin taking required minimum distributions, or RMDs, from traditional retirement accounts beginning at age 73. And you have to take the required amount whether you need the money or not.

Those distributions could add more taxable income on top of Social Security, any pension, dividends, interest and other retirement income. That's why waiting until your 70s to start thinking about retirement taxes could be an expensive mistake.

"There's an important planning window after you retire, but before you file for Social Security, or take required distributions," Ryan said. "This is your window of opportunity to take advantage of some strategies that could reduce your taxes for the rest of your life."

Those options could include strategically withdrawing money earlier, considering Roth conversions, or using other tax-planning strategies. But there isn't one strategy that's right for everyone. And that's really the larger point.

Retirement planning has changed

Picking investments is important. Generating income is important. Protecting your savings is important.

But none of those decisions should happen in a vacuum.

The next generation of retirement planning is about making better decisions with the money you've already saved.

Which accounts should you withdraw from first? When should you file for Social Security? Should you consider converting some of your IRA or 401(k) into a Roth? How could today's decisions impact your taxes five, 10 or 20 years from now? And how does one decision impact everything else?

Ryan and Tyson believe these are questions people should be asking before they retire — not after the tax bills start arriving. "Retirement isn't about finding one magic investment or one perfect tax strategy," Tyson said. "It's about getting all of these different pieces working together."

Learn about the three tax traps before you retire

Ryan and Tyson have put together a free new report, "Three Retirement Tax Traps That Could Needlessly Cost You Six Figures in Retirement."

The report takes a deeper look at the three tax traps covered here— including IRA and 401(k) withdrawals, the Social Security "Tax Torpedo" and required minimum distributions — along with strategies that could reduce your taxes in retirement.

If you've spent decades building your retirement savings, it makes sense to spend a little time learning how taxes could impact that money when you finally start using it.

Download your free guide "Three Retirement Tax Traps That Could Needlessly Cost You Six-Figures in Retirement" here

About the Authors: Tyson Thacker and Ryan Thacker are the CEO and President of B.O.S.S. Retirement Solutions. They are published authors of the Amazon best-selling book, "The B.O.S.S. Retirement Blueprint, Your Guide to a Secure and Independent Retirement." Their award-winning firm has seven offices located throughout the Wasatch Front, and a new office in St. George.

Advisory services offered through B.O.S.S. Retirement Advisors, an SEC-Registered Investment Advisor. Insurance products and services offered through B.O.S.S. Retirement Solutions. Information contained in this material is for informational purposes only. Actual results may vary. No statement contained herein shall constitute tax, legal, or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of any individual. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Our firm is not affiliated with the Social Security Administration, U.S. government, or any governmental agency.