How to Avoid a Retirement “Tax Time Bomb”

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How to Avoid a Retirement “Tax Time Bomb”
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Have you ever considered the potentially devastating impact of taxes in retirement? Most people haven’t because they assume they will pay less in taxes when they retire than during their working years. But many retirees have found this is not the case. Most forms of retirement income are taxed, making tax-deferred retirement accounts such as a 401(k), IRA, or 403(b) like sitting on a tax time bomb, Pamela says.

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Q2 2020 hedge fund letters, conferences and more

Americans Are Paying Higher Taxes In Retirement

"Most people look at their savings and think it’s all theirs," she says. “You may have forgotten you’ll owe Uncle Sam the taxes he let you defer all those years - on every penny you’ve put in and every penny of growth.”

Financial Planning and Taxes with Van Leeuwen & Company’s Kenneth Van Leeuwen

Financial PlanningValueWalk's Raul Panganiban interviews Kenneth Van Leeuwen, CFP, founder of Van Leeuwen & Company, and discuss his approach to investing, financial planning, and taxes. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Van Leeuwen & Company's Kenneth Van Leeuwen


Taxes are already one of the three largest expenses for retirees, and they are likely to increase in the future due to the ballooning national debt and growing government costs as more people retire. Two reasons many Americans are paying higher taxes in retirement than they did when they were working: 

  • Required Minimum Distributions (RMDs) mandate that retirees start drawing money from tax-deferred accounts around age 70½, often pushing them into a higher tax bracket.
  • RMDs and income from other sources can end up forcing retirees to pay taxes on a large portion of their Social Security benefits. Financial planners and CPAs are seeing some retirees’ tax rates double or more because of this.

How To Avoid The Tax Time Bomb?

How can people avoid the tax time bomb? One sure way is by using a specialized form of high cash value dividend-paying whole life insurance to save for retirement. This method can allow retirees to pay zero taxes legally, Pamela says, because:

  • It uses after-tax money, which grows tax-deferred and can be accessed tax-free under current tax law.
  • Withdrawals are not subject to RMDs that can push people into a higher tax bracket.
  • The IRS does not count income from this method when determining how much taxes people pay on Social Security income. Income from these plans also won’t increase Medicare premiums, unlike IRA distributions and tax-exempt bond income.

“If, like most folks, you believe tax rates will go higher in the long term, you can eliminate unpleasant surprises by paying taxes up front,” Pamela says. “Then the money in your retirement savings can be truly yours to keep.”


About the Author: Pamela Yellen is founder of Bank On Yourself, a financial investigator and the author of two New York Times best-selling books.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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