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In Morgan Housel’s most recent book, he defines “wealth” as everything you have minus everything you want.
If I were to ask any engineer what “wealth” means to them, they would give me an exact dollar figure.
This is all to say that the meaning of “wealth” is subjective.
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For the purposes of this column, we’re going to use the figure of $3 million, because if you have that and a large share is tax-deferred, failing to get ahead with your tax planning can increase the risk of running into the “tax torpedo.”
When we run tax projections, we’re crossing a busy street full of tax torpedoes. We’re looking:
I’ll spare you from the new work-around phaseouts from the One Big Beautiful Bill (OBBB).
In an example, Joe and Susan have saved $3 million. Two-thirds of it is in retirement accounts; the rest is in a trust account. They’re 65 and plan to live on the trust account until they’re forced to take required minimum distributions (RMDs) at 75. They’ll receive $6,000 per month from Social Security.
They spend $10,000 per month and when you look only at their balance sheet, have put themselves in a good place. However, projecting tax rates tells a much uglier picture.
Let’s assume Joe and Susan earn about 7% per year on their retirement accounts and have $4 million in those pots when they hit RMD age. This means their RMDs will be about $162,000 per year.
Social Security will pay them $72,000 per year. Of that, about $61,000 will be taxable. Assuming they have $30,000 from other income sources, including interest, dividends and capital gains, their gross income is about $253,000.
This is where the math becomes more imperfect. Some tax brackets are indexed for inflation, such as income. Others aren’t, such as net investment income tax. We’ll use 2026 figures to make things a bit simpler.
When you have $253,000 in joint income at 75, in 2026, you’re sitting in the 22% to 24% marginal income bracket. Most people might look at this and say: Not so bad. Getting hit by this car doesn’t hurt as much as you thought it would.
However, if you’re in the 10%, 12% or 22% bracket today, it’s worth considering Roth conversions to reduce future RMDs and pay at today’s rate.
I can’t overstate how much easier the planning technology has made it to look at current rates vs future rates. Not to mention, it’s nearly impossible to build a spreadsheet to track all of the landmines. You can access a version of what we use.
There are three capital gains brackets. Most people reading this will fall into the 15% bracket, which runs from $98,900 to $613,700 of taxable income.
You might be thinking, “Phew, dodged the unwieldy motorcycle.” Not so fast.
There is a lesser-known tax cliff called the net investment income tax (NIIT), which effectively brings your capital gains and dividends from 15% to 18.8% when you cross $250,000 of adjusted gross income (AGI).
This is an important distinction because this is gross income, not taxable, which accounts for deductions.
Let’s jump to the ultimate tax trigger for the retirees with whom we work. I’ve seen no tax in the post-alternative minimum tax (AMT) era that makes people so angry. I’m nominating tariffs as No. 2.
IRMAA is a surcharge on your Medicare Part B and D income based on your modified adjusted gross income (MAGI) from two years ago.
If you’re on Medicare in 2026, your Part B and D premiums are based on your gross income from 2024. Joe and Susan would have about $150 per month in surcharges between Part B and Part D.
You can look at all of these things in isolation and say, “That’s not that bad.” I understand that argument.
But likely, their marginal income rate went up by about 10% at the same time that their capital gains increased by a few percentage points and their Medicare premiums jumped.
The sum can feel greater than the parts. Add to that, these numbers don’t go up in a straight line, they can grow exponentially with higher income and asset figures.
