In Retirement, More Spending Can Lead to Higher Taxes

In this episode of Motley Fool Hidden Gems Investing, Motley Fool retirement expert Robert Brokamp breaks down the hidden math behind retirement spending and what you can do now to keep more of your money. Key topics discussed include:

• How one year of higher spending can force bigger withdrawals in following years just to cover the tax bill, compounding the cost over time.
• Tax benefits for the 65-and-older crowd result in a lot of tax-free income -- but spending beyond certain levels can result in a quickly accelerating tax bill.
• How bigger withdrawals can trigger taxes on Social Security benefits and surprise IRMAA surcharges on Medicare premiums.
• Why building up Roth assets and paying off debt before retirement can protect you from these tax traps.

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A full transcript is below.

This podcast was recorded on Aug. 8, 2026.

Robert Brokamp: When you're retired, spending this year could affect your tax bill for years to come. I explained why in this Saturday Personal Finance Edition of The Motley Fool Hidden Gems Investing podcast. I'm Robert Brokamp, and before we dig into this week's topic, I'd like to highlight a new Foolish resource. One of my earliest educational experiences about investing came during a literature of the American South class in college, believe it or not. The lesson didn't come from the professor but from one of my fellow students’ dads, who was a financial advisor and asked the professor if he could talk for 15 minutes about the importance of starting investing early. He showed how much we could accumulate 20, 30, 40 years down the road, if we just started investing even a little bit at our young ages. That lesson stuck with me and was one of the reasons why I opened an IRA in my early 20s. If you'd like to provide that kind of lesson to the young people in your life, then I invite you to be among the first to experience The Fool Community Foundation's new tool, The Freedometer before it launches in classrooms this fall. Through interactive simulations and real-world scenarios, The Freedometer helps students discover how investing can turn small decisions today into long-term wealth. Sign up in just 10 seconds at foolfoundation.org/freedometer.

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Robert Brokamp: Of course, the No. 1 reason people accumulate wealth is to retire, which brings us to the main topic of today's show. Manufacturers will determine your ability to retire, but there's one that is at the heart of your money destiny. It's also the one over which you have the most control, and that is your spending. While working, the more you spend, the less you have left over to save. Once you've retired, the more you spend, the higher your withdrawal rate and the higher the chances that you'll deplete your portfolio. No, that's all common sense.

But there's one aspect about spending in retirement that is generally less appreciated. The higher your expenses, the more you have to withdraw from your investment accounts. This often results in higher taxes, which in itself is another expense that necessitates even more withdrawals, which then results in even more taxes and so on.

To illustrate this, let's consider a hypothetical couple with the following particulars. Each spouse is 66-years-old. They receive $40,000 a year from Social Security. They claim the standard deduction for 2026, which is $32,200 for married folks plus an additional $1,650 apiece for couples 65 and older. They each also claim the $6,000 bonus senior deduction available to citizens 65 and older, created by the One Big Beautiful Bill. However, as a married couple, it does begin to phase out at an adjusted gross income above $150,000, and that figure is $75,000 for single filers. Then the rest of their income that they're going to need is going to be withdrawn from traditional retirement accounts, which will be taxed as ordinary income. Using the 1040 calculator at dinkytown.net, which is an excellent resource for all kinds of financial calculators, here are this couple's estimated 2026 federal taxes based on different levels of annual income.

First off, if they keep their spending below $73,500 or so, their federal tax bill is zero. That's thanks to a higher standard deduction and that bonus senior deduction for the 65 and older crowd, the partially tax-free nature of Social Security, and historically low tax rates in general.

However, once their spending goes above that level, additional withdrawals could result in higher taxes. Just to give you an idea at spending of $80,000 a year, their taxes would be more than $1,200. If their spending were $100,000, that would drive up their tax bill to more than $5,000. If their annual spending were $150,000, their taxes would be more than $11,000. If they're well-off retirees, and they're spending $200,000 a year, their tax bill jumps to almost $23,000.

Unfortunately, it doesn't end there. When April of 2027 rolls around, and our hypothetical couple has to pay that higher tax bill for 2026, how will they get the money? By withdrawing more from their retirement accounts, which will increase their taxable income for 2027. Then, when April of 2028 rolls around, they'll have to withdraw more to pay that higher tax bill, which will increase their taxable income for 2028, and so on. In other words, an expense today could affect their tax bills for years to come.

Now, admittedly, this illustration is somewhat of a worst-case scenario. The couple's tax bill would not increase if the additional spending were covered by qualified withdrawals from Roth accounts, which are tax-free. This is one of the many reasons to bulk up your Roth assets before retirement. Or the couple might cover their extra spending by selling assets held for longer than a year in a regular brokerage account. Cost basis comes out tax-free, and the gains are taxed at lower long-term capital gains rates, which actually can be as low as 0% for taxpayers below certain income thresholds, at least up to a limit. Additional spending by a hypothetical capital may not result in quite as much additional taxes. On the other hand, this analysis completely ignores state and local income taxes. The key here is that how you'll cover an expense in retirement will determine the tax consequences.

Now, when it comes to spending and taxes in retirement, there are two other considerations. First up, Social Security. Now, the good news is that not all of your Social Security benefits will be taxed. Exactly how much is added to your taxable income will depend on your so-called combined income, also known as your provisional income, which is calculated by adding 50% of your Social Security benefit to your other income sources, which includes interest from otherwise tax-free municipal bonds, but not qualified withdrawals from Roth accounts. The level of your combined income determines the percentage of your benefits that will be included in your taxable income, according to the Social Security tax brackets.

Now, it should be said that these brackets don't adjust for inflation. They're pretty low, and I suspect that most people listening to this podcast will be in the top bracket, but it is one other way that higher spending in retirement could lead to a higher tax bill. Now we come to that other government retirement benefit, Medicare. Every year, the monthly premiums charged for Parts B and D are adjusted. Higher-income retirees pay an extra fee known as the Income-Related Monthly Adjustment Amount or IRMAA. These extra surcharges are based on your modified adjusted gross income from two years prior. The amounts that retirees are paying in 2026 are based on their 2024 tax returns.

This year, these IRMAA charges kick in for singles who had a 2024 modified adjusted gross income above $109,000, and it's twice that amount, or $218,000 for married joint filers. Less than 10% of retirees actually pay the IRMAA surcharges, since most retirees actually get by on pretty modest incomes. However, it often comes as a surprise to retirees who generally don't pay the surcharge, but make a large withdrawal in a single year, maybe to make a large purchase, like an RV, second home, or a family vacation, as happened to someone I know who sold stocks to take his entire family on a cruise for his 80th birthday. Again, this is another way that higher spending in retirement could have other financial consequences.

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Robert Brokamp: What should you do with all this information? Well, first off, I do want to make it clear that I don't think you should spend your retirement pinching pennies just so you can stick it to the IRS. You saved and invested for decades in order to have a fulfilling retirement, and you should enjoy it. However, I do think it's important to understand the full cost of additional spending in retirement. Whenever we buy something, we always look at the price tag, it's important to know that any purchase in retirement that requires a bigger withdrawal from an IRA or a taxable brokerage account, that true cost of that purchase is going to actually be higher than what you see on that price tag.

Furthermore, you can limit your post-work tax bill by contributing more to Roth accounts or converting traditional accounts to Roth accounts. Here's one final consideration. Make it a goal to pay off your debts before you retire. Nowadays, Americans are more comfortable going into retirement with debt. Back in 1989, less than half of households in the 65-74 age range had any debt, according to the Federal Reserve. Today, two thirds of people in that age range owe someone money. That debt represents an ongoing retirement expense, which, you guessed it, could result in higher taxes. Nowadays, quickly paying down debt provides a pretty solid guaranteed return, which is essentially the interest rate you're paying. The rates on most types of loans, such as mortgages, auto loans, school loans are around 7% now, sometimes a bit lower, oftentimes a good bit higher. The average rate on a credit card is around 20%.

On top of that, several studies have shown that retirees with less debt are happier. One example, the 2024 MassMutual Retirement Happiness study, which found that 61% of retirees who are much happier in retirement compared to when they were working, said they worked to pay off their debt at least five years before retirement, compared to 48% of those who are not happier in retirement. Paying those debts off before you retire, especially using cash or bonds that are only earning 4% or less, will lower your expenses in retirement, which in turn could lower your taxes and make you feel more financially free. That, my Foolish friends, is the show.

Thanks so much for spending part of your weekend with us, and thanks to Bart Shannon, the engineer for this episode. As always, the people on the program may have interest in the investments they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.

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