When Retirement Goes Better Than Planned: The Tax Problems of Having Too Much Money

For decades, retirement planning has centered around one question:

"Will I have enough?"

It's an understandable concern. No one wants to outlive their savings.

But after working with hundreds of retirees, we've noticed another problem that receives far less attention:

What happens when retirement goes better than expected?

Many retirees discover they saved diligently, invested wisely, spent less than anticipated, and watched their portfolios continue to grow throughout retirement. While that's certainly preferable to running out of money, it can create a new set of planning challenges.

Large retirement accounts, growing investment portfolios, and conservative spending habits often lead to higher taxes, increased Medicare premiums, and more complicated estate planning.

In other words, financial success can create tax inefficiencies if it isn't managed strategically.

Why More Money Doesn't Always Mean More Financial Flexibility

Accumulating wealth is only one part of retirement planning.

The other part is figuring out how to use that wealth efficiently.

Many retirees assume that if they don't need to withdraw money from their retirement accounts, they'll simply leave it invested. Unfortunately, the IRS has other plans.

Once Required Minimum Distributions (RMDs) begin, retirees lose much of their control over the timing of taxable withdrawals.

Even if they don't need the income, they're generally required to take distributions from traditional IRAs and many employer-sponsored retirement plans.

Those distributions can create a ripple effect across nearly every aspect of a retirement plan.

The Challenge of Large Required Minimum Distributions

For retirees with substantial tax-deferred savings, RMDs often become the biggest source of taxable income later in retirement.

What starts as a manageable annual withdrawal can grow significantly over time if investment returns outpace distributions.

Example

Mark retires at age 65 with:

• $2.8 million in traditional retirement accounts

• A paid-off home

• A pension

• Social Security benefits

He doesn't need to touch his IRA during his first several years of retirement.

By the time RMDs begin, his account has grown to more than $4 million.

Now he's required to withdraw well over $150,000 annually, regardless of whether he needs the money.

Those withdrawals increase:

• Federal taxable income

• State taxable income (where applicable)

• Medicare premiums

• Taxes on investment income

Ironically, delaying withdrawals because he didn't need the money ultimately resulted in larger taxable distributions.

Key Insight

Sometimes the biggest tax bill isn't caused by poor planning. It's caused by successful investing combined with years of deferred taxation.

Medicare IRMAA Can Turn Success Into Higher Healthcare Costs

Many retirees are surprised to learn that Medicare isn't priced the same for everyone.

Higher-income retirees pay Income-Related Monthly Adjustment Amount (IRMAA) surcharges on:

• Medicare Part B

• Medicare Part D

As retirement income increases, so do Medicare premiums.

Large RMDs are one of the most common reasons retirees unexpectedly cross into higher IRMAA brackets.

Unlike income taxes, these higher premiums often feel like an additional tax on retirement success.

Conservative Spending Can Create Bigger Tax Problems Later

Many retirees underspend because they're worried about the future.

They postpone vacations.

Delay home improvements.

Skip experiences they've always wanted.

Meanwhile, their retirement accounts continue growing.

While financial discipline is admirable, consistently spending far less than your plan allows can unintentionally increase future tax liabilities.

Example

Susan budgets $130,000 annually for retirement but only spends about $75,000 because she's afraid of running out of money.

As a result:

• Her IRA continues growing.

• Future RMDs become much larger.

• She pays more in taxes.

• Medicare premiums increase.

• She ultimately leaves a larger tax-deferred account to her children.

The money she spent decades saving may eventually be taxed at higher rates than if she had withdrawn it more strategically during retirement.

A Large Traditional IRA May Not Be the Gift You Think It Is

Many retirees view their IRA as a legacy for their children.

While those accounts can certainly provide meaningful inheritances, they also come with tax consequences.

Under current law, most non-spouse beneficiaries must fully distribute inherited retirement accounts within ten years.

For adult children in their peak earning years, those required withdrawals can push them into much higher tax brackets.

Example

A daughter earning $250,000 inherits a $1.5 million traditional IRA.

Over the next ten years, she must withdraw those funds according to current distribution rules.

Those withdrawals may be taxed at some of the highest marginal rates she'll ever pay.

Meanwhile, a Roth IRA inherited under similar circumstances may provide significantly greater tax flexibility.

Important Note

Leaving pre-tax retirement assets to heirs often transfers a future tax liability along with the inheritance.

Tax Diversification Matters Just as Much as Investment Diversification

Many retirees have diversified portfolios but not diversified tax treatment.

It's common to see wealth concentrated in:

• Traditional IRAs

• 401(k)s

• 403(b)s

While these accounts provide valuable tax deferral during working years, relying too heavily on them can reduce flexibility in retirement.

A diversified retirement income strategy may include assets held in:

• Tax-deferred accounts

• Roth accounts

• Taxable brokerage accounts

• Cash reserves

Having multiple sources of retirement income allows retirees to better manage taxable income from year to year.

Why Roth Conversions Become More Valuable

One of the best opportunities to manage future taxes often occurs before RMDs begin.

Many retirees experience several years between retirement and the start of mandatory distributions when taxable income is relatively low.

These years may provide an opportunity to convert portions of traditional retirement accounts into Roth IRAs.

The goal isn't simply to reduce taxes this year.

Instead, Roth conversions may help:

• Reduce future RMDs.

• Lower lifetime taxable income.

• Improve Medicare premium planning.

• Leave more tax-efficient assets to heirs.

• Increase flexibility when generating retirement income.

Every conversion should be evaluated within the context of the retiree's overall tax situation and long-term objectives.

The Emotional Side of Having "Too Much"

Many retirees struggle with a mindset they developed during decades of saving.

They spent their careers accumulating wealth.

Then retirement arrives, and they're suddenly expected to spend it.

That's easier said than done.

Some retirees continue saving out of habit, even when they have more than enough to support their lifestyle.

Others hesitate to enjoy experiences they've worked decades to afford because they're focused on preserving every dollar.

Financial security is important.

But retirement planning should also support the life those savings were meant to fund.

Common Mistakes Successful Retirees Make

Retirees with significant assets often make similar planning mistakes, including:

• Assuming tax-deferred always means tax-free.

• Waiting until RMDs begin before addressing taxes.

• Focusing only on investment returns instead of after-tax income.

• Ignoring future Medicare premium increases.

• Leaving large traditional IRAs to children without considering the tax burden.

• Becoming so focused on preserving wealth that they never enjoy it.

Planning Strategies for High-Net-Worth Retirees

Every situation is unique, but retirees with substantial assets should regularly evaluate strategies such as:

• Multi-year Roth conversion planning.

• Coordinating withdrawals across different account types.

• Harvesting capital gains strategically.

• Qualified Charitable Distributions (QCDs) after becoming eligible.

• Reviewing estate plans alongside tax projections.

• Modeling lifetime taxes instead of focusing only on annual tax returns.

The objective isn't necessarily to minimize taxes every year.

It's to reduce taxes over the course of retirement while creating greater flexibility for both retirees and their heirs.

More Wealth Should Create More Choices

One of the greatest benefits of financial success is flexibility.

Unfortunately, taxes can quietly reduce that flexibility if they aren't considered alongside investment performance.

Retirement planning doesn't end once you've accumulated enough assets.

In many ways, that's when some of the most important decisions begin.

At Greenbush Financial Group, we often remind clients that successful retirement planning isn't measured by the size of a portfolio. It's measured by how efficiently that wealth supports your lifestyle, your family, and your long-term goals.

Final Thoughts

Running out of money isn't the only retirement risk.

For many successful retirees, accumulating substantial wealth creates a different challenge: managing taxes, Medicare costs, Required Minimum Distributions, and legacy planning in a tax-efficient way.

With thoughtful planning, retirees may be able to reduce lifetime taxes, preserve greater flexibility, and leave a more efficient legacy for future generations. The goal isn't simply to build wealth. It's to make the most of it.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Frequently Asked Questions

1. Can you have too much money in a traditional IRA?
   While it's difficult to have "too much" money, very large traditional IRAs can lead to substantial Required Minimum Distributions and higher lifetime taxes if no planning is done.
2. Why do large RMDs increase taxes?
   Required Minimum Distributions are generally taxed as ordinary income. Larger distributions can push retirees into higher tax brackets, increase Medicare premiums, and affect other tax calculations.
3. Should wealthy retirees still consider Roth conversions?
   In many cases, yes. Roth conversions may help reduce future RMDs, improve tax diversification, and create more tax-efficient inheritances. The right strategy depends on the retiree's projected tax situation.
4. Can leaving an IRA to my children create tax problems?
   Potentially. Most non-spouse beneficiaries must distribute inherited retirement accounts within ten years under current law, which can increase their taxable income during peak earning years.
5. Is underspending in retirement a problem?
   It can be. While spending conservatively provides peace of mind, consistently underspending may lead to larger retirement account balances, higher future RMDs, and missed opportunities to enjoy retirement.
6. What's the difference between investment success and tax efficiency?
   Investment success focuses on growing assets. Tax efficiency focuses on how much of those assets you actually keep after taxes over your lifetime and how efficiently they're passed to future generations.

The Widow's Tax Penalty: Why Taxes Often Increase After a Spouse Dies

When one spouse passes away, most families are focused on grieving, supporting loved ones, and adjusting to a new normal. Taxes are rarely at the top of the priority list.

Unfortunately, the tax code doesn't pause during this difficult time.

Many surviving spouses are surprised to learn that although household income often declines after a spouse dies, their tax rate can actually increase. Financial planners often refer to this as the widow's tax penalty.

The reason is simple. Many tax rules are designed around married couples. Once a surviving spouse begins filing as a single taxpayer, those favorable rules largely disappear while much of the household income remains.

Understanding how these changes work before they're needed can help couples make more informed decisions about Roth conversions, retirement withdrawals, Medicare planning, and estate strategies.

What Is the Widow's Tax Penalty?

The widow's tax penalty isn't a separate tax imposed by the IRS.

Instead, it's the combined effect of several tax rules that become less favorable after the death of a spouse.

These changes often occur simultaneously:

• Filing status changes from Married Filing Jointly to Single.

• Tax brackets become much narrower.

• Medicare IRMAA thresholds are cut roughly in half.

• Required Minimum Distributions (RMDs) may continue on large retirement accounts.

• Investment income may remain largely unchanged.

• Social Security benefits may not decrease proportionally.

The result is that many surviving spouses pay a higher percentage of their income in taxes than they did while both spouses were living.

How Filing Status Changes After a Spouse Dies

One of the biggest changes involves tax filing status.

Generally:

• In the year a spouse dies, the surviving spouse can usually still file a joint tax return.

• Beginning the following year, most surviving spouses file as Single, unless they qualify for another filing status such as Qualifying Surviving Spouse for a limited period when dependent children are involved.

This seemingly simple change has significant tax consequences.

Why Single Filers Reach Higher Tax Brackets Faster

The federal tax brackets for single filers are much smaller than those for married couples filing jointly.

That means the same amount of taxable income may be taxed at higher marginal rates simply because the filing status changed.

Example

John and Susan report $220,000 of taxable income while filing jointly.

After John passes away:

• Susan's income falls to $185,000.

• Although her income decreased by $35,000, she's now filing as a single taxpayer.

• More of her income falls into higher tax brackets.

Her total tax bill may increase even though she has less income to spend.

Key Insight

Many people assume taxes automatically decrease after losing a spouse because household income is lower. In reality, the opposite is often true.

Medicare IRMAA Can Increase Even Faster

One of the least understood parts of the widow's tax penalty involves Medicare.

Higher-income retirees pay Income-Related Monthly Adjustment Amount (IRMAA) surcharges on:

• Medicare Part B

• Medicare Part D

While married couples benefit from higher income thresholds, surviving spouses quickly move into the much lower single thresholds.

This means someone whose Medicare premiums were previously unaffected may suddenly begin paying hundreds or even thousands of dollars more each year.

Example

A married couple with modified adjusted gross income just below an IRMAA threshold pays standard Medicare premiums.

After one spouse dies:

• Income declines modestly.

• Filing status changes to single.

• The surviving spouse exceeds the single IRMAA threshold.

Despite earning less, Medicare premiums increase substantially.

Important Note

IRMAA is based on income from two years earlier. This delay can make premium increases feel unexpected if no planning has taken place.

Required Minimum Distributions May Stay Surprisingly High

Many retirees accumulate substantial balances in traditional IRAs and 401(k)s.

When one spouse dies:

• Those retirement accounts often transfer to the surviving spouse.

• The surviving spouse eventually takes RMDs based on the combined account value.

• Filing status has changed to single.

As a result, the surviving spouse may have:

• Large taxable RMDs

• Higher tax brackets

• Higher Medicare premiums

• Increased taxation of investment income

This combination can significantly reduce after-tax retirement income.

Social Security Doesn't Always Offset the Tax Increase

After a spouse dies, one Social Security benefit typically stops while the survivor generally receives the larger of the two benefits.

Although total Social Security income often decreases, the reduction usually isn't enough to offset:

• Higher tax rates

• Larger RMDs

• Higher Medicare premiums

Many surviving spouses discover that they have less income but a larger percentage going toward taxes.

Why Roth Conversions Matter Before Widowhood

One of the most valuable planning opportunities often occurs while both spouses are still alive.

During years when couples file jointly, they may have access to:

• Lower effective tax rates

• Wider tax brackets

• Higher IRMAA thresholds

These factors can make Roth conversions significantly more attractive before the surviving spouse is forced into the single tax brackets.

Example

David and Karen retire at age 64.

Between retirement and age 73, they convert portions of their traditional IRA to a Roth IRA while filing jointly.

Several years later, David passes away.

Because much of their retirement savings has already been moved into Roth accounts:

• Karen's future RMDs are smaller.

• Taxable income is lower.

• Medicare premiums may be lower.

• She has greater flexibility when withdrawing retirement income.

The Roth conversions did not eliminate taxes. Instead, they shifted taxation into years when the couple enjoyed more favorable tax rules.

Key Insight

Many Roth conversion strategies are less about today's taxes and more about protecting the surviving spouse's future tax situation.

Other Tax Issues Surviving Spouses May Face

The widow's tax penalty extends beyond ordinary income taxes.

Additional planning issues may include:

Capital Gains

Selling appreciated investments can trigger larger taxable gains if income already places the surviving spouse in higher brackets.

Net Investment Income Tax

Higher taxable income may expose more investment earnings to additional federal taxes.

Charitable Giving

Without careful planning, charitable deductions may become less effective depending on income levels and deduction strategies.

Estate Planning

Inherited retirement accounts may eventually pass to children, who often must withdraw inherited IRA balances within ten years under current law. Large traditional IRA balances can create significant tax burdens for heirs during their highest earning years.

Common Mistakes Couples Make

Many couples unintentionally increase the future widow's tax penalty by making decisions that seem reasonable today.

Some of the most common mistakes include:

• Assuming taxes will always be lower after one spouse dies.

• Delaying Roth conversions because they focus only on today's tax bill.

• Waiting until RMDs begin before considering tax planning.

• Ignoring future Medicare premium increases.

• Keeping nearly all retirement assets in pre-tax accounts.

• Failing to coordinate investment, tax, and estate planning.

Planning Strategies to Consider

Every family's situation is different, but several strategies may help reduce future tax challenges.

These may include:

• Evaluating Roth conversions during lower-income retirement years.

• Diversifying retirement savings across taxable, tax-deferred, and Roth accounts.

• Coordinating Social Security claiming decisions.

• Managing capital gains strategically.

• Reviewing projected RMDs well before age 73.

• Modeling tax outcomes for both spouses rather than only today's joint return.

The goal isn't simply to reduce taxes this year. It's to improve lifetime after-tax income for both spouses.

Why This Planning Matters

No one likes to think about losing a spouse.

However, proactive tax planning isn't about predicting when that event will occur. It's about recognizing that one spouse will almost certainly outlive the other.

For many couples, the years before widowhood represent their best opportunity to make tax-efficient decisions while they still benefit from married filing status.

At Greenbush Financial Group, we often model retirement income under both spouses' lifetimes rather than looking only at today's tax return. That broader perspective frequently uncovers planning opportunities that could help reduce taxes, manage Medicare premiums, and preserve more after-tax wealth for the surviving spouse and future generations.

Final Thoughts

The widow's tax penalty catches many families by surprise because it isn't a single tax. It's the cumulative effect of filing status changes, compressed tax brackets, Medicare surcharges, and ongoing retirement account distributions.

While these rules can't be avoided entirely, thoughtful planning can often soften their long-term impact. For many couples, strategies such as Roth conversions, coordinated withdrawal planning, and proactive tax forecasting are most effective while both spouses are still living and filing jointly.

Understanding these issues today can help provide greater financial flexibility and peace of mind for the surviving spouse tomorrow.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Frequently Asked Questions

1. What is the widow's tax penalty?
   The widow's tax penalty refers to the higher taxes many surviving spouses pay after transitioning from married filing jointly to single filing status. It often results from narrower tax brackets, higher Medicare IRMAA premiums, and continued taxable retirement income.
2. Do taxes always increase after a spouse dies?
   Not always. However, many surviving spouses experience higher effective tax rates even if their household income decreases because the tax rules become less favorable for single filers.
3. Can Roth conversions reduce the widow's tax penalty?
   Potentially, yes. Completing Roth conversions while both spouses are alive and filing jointly may reduce future RMDs and taxable income for the surviving spouse.
4. Does Medicare become more expensive after a spouse dies?
   It can. The income thresholds for Medicare IRMAA surcharges are significantly lower for single taxpayers, which may cause a surviving spouse to pay higher Part B and Part D premiums.
5. Why are Required Minimum Distributions a concern for surviving spouses?
   A surviving spouse often inherits the combined retirement accounts but must take RMDs as a single taxpayer. Large taxable distributions can push them into higher tax brackets and increase Medicare premiums.
6. When should couples begin planning for the widow's tax penalty?
   Ideally, planning should begin shortly before or during retirement, particularly in the years between retirement and the start of Required Minimum Distributions. Those years often provide the greatest flexibility for tax planning.

2026 Roth IRA Conversions Explained: Smart Timing and Costly Mistakes

Roth conversions can be one of the most powerful tax planning tools in retirement, but they are not always beneficial. A Roth conversion involves moving money from a pre-tax account into a Roth account and paying taxes now to avoid taxes later. At Greenbush Financial Group, our analysis shows that Roth conversions are most effective when done strategically across multiple years, not as a one-time decision.

What Is a Roth Conversion and How Does It Work?

A Roth conversion moves funds from a Traditional IRA or 401(k) into a Roth IRA or 401(k).

Key Mechanics

• Converted amount is taxed as ordinary income

• No early withdrawal penalty if done correctly

• Future growth and withdrawals are tax-free

• No Required Minimum Distributions (RMDs) for Roth IRAs

Example

• Convert $50,000 from an IRA to a Roth IRA

• Pay taxes on $50,000 this year

• Future withdrawals are tax-free

At Greenbush Financial Group, we view Roth conversions as a way to “prepay taxes” at potentially lower rates.

When Roth Conversions Make Sense

There are specific scenarios where Roth conversions can significantly improve long-term outcomes.

1. Low-Income Years in Early Retirement

The period between retirement and starting Social Security or RMDs is often ideal.

• Lower taxable income

• Opportunity to fill lower tax brackets

• Reduce future tax burden

2. Before Required Minimum Distributions (RMDs)**

RMDs can force higher taxable income later in retirement.

• Converting early reduces future RMDs

• Helps avoid higher tax brackets in your 70s

3. Expecting Higher Future Tax Rates

If you believe your future tax rate will be higher:

• Paying taxes now may be beneficial

• Locks in current tax rates

4. Large Pre-Tax Account Balances

High IRA or 401(k) balances can create tax challenges later.

• Large RMDs

• Increased IRMAA surcharges

• Higher Social Security taxation

5. Leaving Assets to Heirs

Roth accounts can be more tax-efficient for beneficiaries.

• Tax-free withdrawals for heirs

• No lifetime RMDs for original owner

At Greenbush Financial Group, Roth conversions are often used as part of a broader estate and tax planning strategy.

When Roth Conversions May Not Make Sense

Roth conversions are not always the right move.

1. Already in a High Tax Bracket

If converting pushes you into a higher bracket:

• You may pay more tax than necessary

• Reduces the benefit of the conversion

2. Short Time Horizon

If you expect to use the money soon:

• Limited time for tax-free growth

• Less benefit from conversion

3. Paying Taxes From the Conversion Itself

Using IRA funds to pay taxes reduces the amount converted.

• Decreases long-term growth potential

• Less efficient overall

4. Expecting Lower Future Tax Rates

If your income will decrease later:

• You may pay more tax now than necessary

5. Impact on Medicare and Social Security

Conversions increase taxable income.

• May trigger IRMAA surcharges

• Can increase taxation of Social Security

At Greenbush Financial Group, we often see Roth conversions backfire when these factors are not considered.

The “Tax Bracket Filling” Strategy

One of the most effective ways to approach Roth conversions is by filling up lower tax brackets.

How It Works

• Identify your current tax bracket

• Convert just enough to stay within that bracket

• Avoid jumping into higher brackets

Example

• Top of 12% bracket = target income level

• Convert enough to reach that limit

• Stop before entering the 22% bracket

This strategy spreads conversions over multiple years, reducing overall tax impact.

Roth Conversions and IRMAA Considerations

Roth conversions increase your income for that year, which can affect Medicare premiums.

Key Impact

• Higher income can trigger IRMAA surcharges

• IRMAA is based on income from two years prior

Planning Tip

Balance Roth conversions with IRMAA thresholds to avoid unnecessary premium increases.

A Multi-Year Roth Conversion Strategy Example

Scenario

• Age 62, recently retired

• $800,000 in IRA

• Low income before Social Security

Strategy

• Convert $40,000–$60,000 annually

• Stay within a lower tax bracket

• Delay Social Security

Outcome

• Reduced future RMDs

• Lower lifetime taxes

• Increased tax-free income later

At Greenbush Financial Group, this type of phased approach is often more effective than a single large conversion.

Common Roth Conversion Mistakes

• Converting too much in one year

• Ignoring tax bracket thresholds

• Overlooking IRMAA impacts

• Not coordinating with Social Security timing

• Failing to plan conversions over multiple years

Final Thoughts

Roth conversions can be a powerful tool, but only when used strategically. The goal is not simply to convert assets, but to reduce lifetime taxes and create more flexibility in retirement income.

At Greenbush Financial Group, our analysis shows that the most successful strategies involve careful timing, tax bracket management, and long-term planning.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

1. Is it a bad idea to retire in a down market?
   Not necessarily, but it increases sequence of returns risk and requires careful planning.
2. How much cash and short-term fixed income should I have in retirement?
   Typically 1 to 3 years of living expenses.
3. Should I stop withdrawals during a downturn?
   Not entirely, but reducing withdrawals can improve long-term outcomes.
4. Can a market downturn ruin my retirement plan?
   It can if not managed properly, especially in the early years of retirement.
5. What is the best strategy during a market downturn?
   Maintain a cash reserve, adjust withdrawals, stay invested, and focus on long-term planning.

2026 Tax-Efficient Retirement Withdrawals: How to Keep More of Your Money

A tax-efficient retirement withdrawal strategy focuses on minimizing taxes while creating consistent income throughout retirement. The order in which you withdraw from taxable, tax-deferred, and Roth accounts can significantly impact how long your money lasts. At Greenbush Financial Group, our analysis shows that strategic withdrawals can reduce lifetime taxes and increase net retirement income.

Understanding the Three Types of Retirement Accounts

Before building a withdrawal strategy, it is important to understand how different accounts are taxed.

1. Taxable Accounts (Brokerage Accounts)

• Capital gains taxes apply when investments are sold

• Long-term capital gains rates are often lower than income tax rates

• Dividends may also be taxed annually

2. Tax-Deferred Accounts (Traditional IRA, 401(k))

• Withdrawals are taxed as ordinary income

• Required Minimum Distributions (RMDs) apply starting in your 70s

3. Tax-Free Accounts (Roth IRA, Roth 401(k))

• Qualified withdrawals are tax-free

• No RMDs for Roth IRAs

• Provides flexibility for tax planning

At Greenbush Financial Group, we view these three “buckets” as the foundation of any tax-efficient withdrawal plan.

The Traditional Withdrawal Order Strategy

A common approach is to withdraw funds in a specific sequence to manage taxes over time.

Standard Withdrawal Order

1. Taxable accounts first

2. Tax-deferred accounts second

3. Roth accounts last

Why This Strategy Works

• Allows tax-deferred accounts to continue growing

• Delays ordinary income taxes

• Preserves Roth accounts for later years or legacy planning

However, this strategy is not always optimal in every situation.

Why a Blended Withdrawal Strategy May Be Better

Strictly following the traditional order can sometimes lead to higher taxes later in retirement.

The Problem

If you delay withdrawals from tax-deferred accounts too long:

• RMDs can become large

• You may be pushed into higher tax brackets

• Social Security may become more taxable

• Medicare premiums (IRMAA) may increase

A More Strategic Approach

At Greenbush Financial Group, we often recommend a blended withdrawal strategy:

• Withdraw from taxable accounts

• Supplement with partial IRA withdrawals

• Use Roth accounts strategically when needed

This helps smooth out taxable income over time rather than creating spikes later.

Roth Conversions: A Key Tax Planning Tool

One of the most powerful strategies in retirement is converting pre-tax money into Roth accounts.

How It Works

• Move funds from a Traditional IRA to a Roth IRA

• Pay taxes now at current rates

• Future growth and withdrawals are tax-free

When It Makes Sense

• Years with lower income (early retirement before Social Security)

• Before RMDs begin

• When tax rates are temporarily lower

Example

• Convert $50,000 from IRA to Roth

• Pay tax today at a lower rate

• Reduce future RMDs and taxes

At Greenbush Financial Group, Roth conversion strategies are often a cornerstone of long-term tax planning.

Managing Your Tax Bracket Each Year

Instead of focusing only on which account to withdraw from, it is often more effective to focus on your tax bracket.

Strategy

• Fill up lower tax brackets intentionally

• Avoid jumping into higher brackets

• Coordinate withdrawals with Social Security timing

Example

If the 12% tax bracket ends at a certain income level:

• Withdraw just enough from IRA to stay within that bracket

• Use Roth or taxable accounts for additional income needs

This approach allows for more control over lifetime taxes.

How Social Security Impacts Your Tax Strategy

Social Security income can change how your withdrawals are taxed.

Key Considerations

• Up to 85% of Social Security benefits can be taxable

• Additional income from IRA withdrawals can increase taxation

• Timing Social Security can impact your tax plan

Planning Insight

Delaying Social Security while using IRA withdrawals or Roth conversions early in retirement can sometimes lead to better long-term outcomes.

Avoiding Common Retirement Tax Mistakes

Many retirees unintentionally increase their tax burden.

Common Mistakes

• Waiting too long to withdraw from tax-deferred accounts

• Ignoring Roth conversion opportunities

• Triggering higher Medicare premiums (IRMAA)

• Not coordinating withdrawals with tax brackets

• Over-withdrawing in a single year

At Greenbush Financial Group, we often see that small adjustments can lead to significant tax savings over time.

A Simple Example of a Tax-Efficient Withdrawal Plan

Scenario

• Age 62, retired

• $1,000,000 in savings

  • $400,000 IRA

  • $300,000 Roth IRA

  • $300,000 brokerage

Strategy

• Withdraw from brokerage for living expenses

• Convert $30,000–$50,000 annually from IRA to Roth

• Delay Social Security until later years

• Use Roth funds strategically after RMD age

Result

• Lower lifetime taxes

• Reduced RMD impact

• Greater flexibility in retirement

Final Thoughts

A tax-efficient withdrawal strategy is not about following a fixed rule. It is about coordinating income sources, tax brackets, and long-term planning.

At Greenbush Financial Group, our analysis shows that retirees who proactively manage taxes throughout retirement often keep significantly more of their income and reduce the risk of large tax surprises later in life.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

1. What is the best order to withdraw retirement funds?
   Typically taxable accounts first, then tax-deferred, then Roth, but a blended strategy is often more effective.
2. Are Roth withdrawals always tax-free?
   Yes, if the account meets the qualified distribution rules.
3. What is a Roth conversion?
   It is when you move money from a pre-tax account to a Roth account and pay taxes now to avoid taxes later.
4. How can I reduce taxes on retirement income?
   By managing tax brackets, using Roth conversions, and coordinating withdrawals across account types.
5. Do Required Minimum Distributions increase taxes?
   Yes, RMDs are taxable and can push you into higher tax brackets if not planned for

Self-Employment Side Hustle? Benefits of a Solo 401(k) Plan

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

‍Today, more and more individuals have side hustles in addition to their main W-2 jobs. Others may be full-time business owners but only generate a modest amount of self-employment income. In both cases, one of the most powerful retirement and tax planning tools available is the Solo 401(k) plan.

In this article, we’re going to walk through some of the tax strategies and wealth accumulation strategies we use with clients who have self-employment income and may benefit from a Solo 401(k). Specifically, we’ll cover:

• What a Solo 401(k) plan is

• How a Solo 401(k) can reduce tax liability

• How to use a Solo 401(k) to build a larger Roth bucket

• How to decide between pre-tax vs. Roth contributions

• What happens when the Solo 401(k) is terminated

What Is a Solo 401(k) Plan?

A Solo(k) plan, also called an Individual(k), is a retirement plan designed for owner-only businesses. This means the business cannot have any full-time employees working more than 1,000 hours per year, other than the owner and possibly their spouse.

Because these plans only cover the business owner, they are typically simple to administer, often have little to no administrative costs, and still provide the full benefits of a traditional 401(k) plan.

Solo 401(k) plans include:

• Pre-tax employee deferrals

• Roth employee deferrals

• Employer contributions

• Potential 401(k) loan provisions

Contribution Limits (2026)

Solo 401(k) plans allow for relatively high contribution limits. For 2026:

• Employee deferral limit: $24,500 (under age 50)

• Age 50+ catch-up: $32,500 total deferral

• Employer contribution: Up to 20% of net self-employment income (sole proprietor/partnership)

• S-Corp employer contribution: Up to 25% of W-2 wages

Example

Let’s say a sole proprietor generates $40,000 in net self-employment income and is under age 50.

They could contribute:

• $24,500 as an employee deferral

• $8,000 as an employer contribution (20% of $40,000)

That’s a total of $32,500 going into a retirement account from just $40,000 of side hustle income.

That’s a powerful savings and tax planning opportunity.

Reducing Tax Liability

One of the primary reasons business owners establish Solo 401(k) plans is to reduce their overall tax liability.

If someone has:

• W-2 income: $200,000

• Self-employment income: $40,000

That self-employment income gets stacked on top of their W-2 income and may be taxed at a high marginal tax rate.

However, if that business owner contributes $30,000 of that $40,000 into a Solo 401(k) using pre-tax contributions, they may only pay income tax on $10,000 instead of the full $40,000.

That can result in significant tax savings.

Solo(K) Plans Can Potentially Eliminate Federal & State Income Taxes

If a business owner has less than the annual employee deferral limit in net income, they may be able to defer 100% of their self-employment income into the Solo 401(k).

Example:

• Net self-employment income: $20,000

• Employee deferral limit: $24,500

Since the income is lower than the limit, they could defer the entire $20,000 pre-tax, avoiding federal and state income tax on that income.

Note: They still must pay self-employment tax, but they can avoid income tax on that portion.

Building a Larger Roth Bucket

Another major benefit of a Solo 401(k) is the ability to build Roth retirement assets, which can be extremely valuable long-term.

Roth contributions are made after-tax, but:

• The money grows tax-deferred

• Withdrawals after age 59½ are tax-free

One major advantage of a Roth Solo 401(k) is:

There are no income limits for Roth 401(k) contributions.

This is very important because many high-income earners are phased out of Roth IRA contributions, but they can still contribute to a Roth Solo 401(k).

Example

Imagine a 29-year-old business owner with a side hustle contributing $24,500 per year to a Roth Solo 401(k). The money grows tax-deferred for 30 years and then all of the earning in the account can be withdrawn tax free after age 59½.

We also see this strategy used for retirees who do consulting work. If someone is 65+ and earning self-employment income but doesn’t need the income, they can contribute to a Roth Solo 401(k) and move that money into a tax-free growth bucket instead of a taxable brokerage account.

This can be a powerful long-term tax strategy regardless of age of the business owner.

To Roth or Not to Roth?

Remember, there are two types of contributions to a Solo 401(k):

1. Employee Deferral → Can be Pre-Tax or Roth

2. Employer Contribution → Typically Pre-Tax

For sole proprietors and partnerships:

• Employer contribution = 20% of net earned income

For S-Corps:

• Employer contribution = 25% of W-2 wages

• Important: Only W-2 wages count — not S-Corp distributions

While SECURE Act 2.0 opened the door for Roth employer contributions, we are still waiting on full IRS guidance for this to be widely implemented in Solo 401(k) plans. So for now, employer contributions are generally still pre-tax, while employee deferrals can be Roth or pre-tax.

General Rule of Thumb

You might consider:

• Pre-tax contributions if you are in a high tax bracket today

• Roth contributions if you are in a lower tax bracket today or want tax-free income later

This is where tax planning and coordination with a financial advisor and CPA becomes very important.

What Happens When the Solo 401(k) Is Terminated?

Eventually, the self-employment income may stop. When that happens, the Solo 401(k) is typically terminated, and the assets are rolled into IRAs.

Typically:

• Pre-tax Solo 401(k) money → Traditional IRA

• Roth Solo 401(k) money → Roth IRA

The money can then continue growing in those IRA accounts, and the Solo 401(k) plan is closed.

Working With an Advisor Who Understands Solo 401(k) Plans

Solo 401(k) plans are extremely powerful, but there are important rules and nuances business owners must be aware of.

For example:

• If you hire employees, you may have to discontinue the plan

• Plan documents must be set up properly

• Once plan assets exceed $250,000, you must file Form 5500 annually

• There are coordination issues between your CPA and financial advisor

• You must choose between pre-tax vs. Roth strategies

• You must compare Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

Because of these moving parts, it’s important to work with an advisor who understands how to design and manage Solo 401(k) plans properly as part of an overall financial and tax strategy.

Our firm offers free consultations for business owners and individuals with side hustle income who want to evaluate whether a Solo 401(k) plan makes sense for their situation. If you’d like help determining whether this strategy is right for you, we’d be happy to help you build a plan around your specific goals. Feel free to schedule your complementary consult via our website.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About Solo 401(k) Plans

1. Who qualifies for a Solo 401(k)?
   Business owners with no full-time employees working more than 1,000 hours per year.
2. Can I have a W-2 job and a Solo 401(k)?
   Yes. As long as you have self-employment income, you can open a Solo 401(k) for that income.
3. How much can I contribute to a Solo 401(k)?
   In 2026, employee deferrals are $24,500 (under 50), plus employer contributions up to 20% of income (or 25% of W-2 wages for S-Corps).
4. Can I contribute 100% of my side hustle income?
   Yes, if your income is below the employee deferral limit, you may be able to defer the entire amount.
5. Do Solo 401(k) contributions reduce taxes?
   Yes, pre-tax contributions reduce your taxable income.
6. Can I make Roth contributions to a Solo 401(k)?
   Yes, employee deferrals can be Roth, with no income limits.
7. What happens when I stop my side hustle?
   The Solo 401(k) is typically rolled into a Traditional IRA and/or Roth IRA.
8. Is a Solo 401(k) better than a SEP IRA?
   In many cases, yes, because it allows Roth contributions and higher contributions at lower income levels.
9. Do I have to file anything for a Solo 401(k)?
   Once the account exceeds $250,000, you must file Form 5500 annually.
10. Can I take a loan from a Solo 401(k)?
    Some Solo 401(k) plans allow participant loans, similar to traditional employer 401(k) plans.

The Hidden Tax Problem in the FIRE Movement (and How to Fix It)

The Financial Independence, Retire Early (FIRE) movement has inspired countless professionals to save aggressively, invest efficiently, and exit the workforce decades ahead of schedule. But there’s one tax mistake many FIRE followers don’t recognize until it’s too late: overloading their savings in tax-deferred accounts.

By focusing too heavily on 401(k)s and traditional IRAs, early retirees often create a tax trap that limits flexibility before age 59½ and exposes them to higher tax bills later in life. Here’s what that mistake looks like—and how strategic balance can prevent it.

How the FIRE Tax Trap Happens

The FIRE community is built on discipline: save 50–70% of income, invest consistently, and let compounding do the rest. The problem is where those savings go. Many early retirees direct most of their contributions into pre-tax accounts to minimize taxes today—but that strategy can backfire once they stop working.

Here’s why:

• Withdrawals from traditional 401(k)s and IRAs are fully taxable as ordinary income.

• You generally can’t access these funds before age 59½ without penalties (unless you use special exceptions).

• After reaching age 73, you must start taking required minimum distributions (RMDs), which can trigger higher brackets and Medicare surcharges later.

As a result, someone retiring at 45 may find most of their wealth locked inside accounts they can’t touch for 15 years—unless they want to pay a 10% early withdrawal penalty.

At Greenbush Financial Group, we have seen FIRE followers realize this only after leaving the workforce—when their living expenses suddenly need to come from taxable or penalty-free sources they don’t have.

The Hidden Cost of Being “Too Tax-Deferred”

In the early accumulation years, it feels great to lower your tax bill with pre-tax contributions. But down the road, the strategy flips. You may have built a seven-figure retirement account, yet each withdrawal comes out as taxable income.

Example:
Imagine a 45-year-old who retires with $1.5 million, all in a traditional 401(k). They need $60,000 per year to live on. Every dollar they withdraw is taxed as ordinary income. Even at a modest 22% bracket, that’s over $13,000 in annual federal taxes—without counting state taxes or future rate increases.

The bigger the pre-tax balance, the larger the future tax burden becomes. What feels like “saving on taxes” during the accumulation phase often becomes deferring a much larger tax bill into your 50s, 60s, and 70s.

What You Should Do Instead

The key is diversification—not just by asset class, but by tax treatment.

Here’s how FIRE investors can fix or prevent the mistake:

1. Build a Roth bucket early.
   Contribute to Roth IRAs or make Roth 401(k) contributions if your income allows. Qualified Roth withdrawals are tax-free in retirement.

2. Create a taxable bridge account.
   Invest in a regular brokerage account for flexibility. Long-term capital gains and qualified dividends are taxed at lower rates—and you can access this money anytime.

3. Plan Roth conversions strategically.
   After leaving work but before Social Security or RMDs begin, your income may temporarily drop. That’s an ideal time to convert pre-tax assets to Roth at lower brackets.

4. Use the 72(t) rule cautiously.
   The IRS allows early withdrawals from IRAs using Substantially Equal Periodic Payments (SEPPs), but they’re inflexible and complex. We usually recommend using this only as a last resort.

5. Think long-term tax balance.
   The goal is to retire with assets spread across three types of accounts—pre-tax, Roth, and taxable—so you can manage your income (and taxes) in any given year.

Our analysis at Greenbush Financial Group shows that households with this “three-bucket” approach could save hundreds of thousands in lifetime taxes compared to those with all assets tied up in pre-tax accounts.

What to Watch Out For

Even within the FIRE community, not all withdrawal strategies are equal. Watch for these pitfalls:

• Underestimating future tax brackets – Low brackets today don’t guarantee low brackets later. Once RMDs and Social Security start, taxable income can spike.

• Neglecting ACA subsidies – For those buying health insurance through the Affordable Care Act, high pre-tax withdrawals can disqualify you from premium tax credits.

• Ignoring Roth conversion windows – The best time to convert is usually the first few years after leaving work, before other income streams begin.

The Bottom Line

Reaching financial independence takes planning, discipline, and sacrifice—but staying financially independent requires thoughtful tax strategy. The biggest mistake FIRE followers make is deferring too much for too long, only to face tax inflexibility later.

By intentionally building a mix of pre-tax, Roth, and taxable assets, you can control when and how you pay taxes, keeping more of your hard-earned savings over a lifetime of early retirement.

If you’re pursuing financial independence or considering an early retirement, our advisors at Greenbush Financial Group can help you run detailed tax projections and withdrawal strategies to help your FIRE plan burn bright without burning through your savings.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQs: FIRE Movement Tax Planning

1. Why is relying only on a traditional 401(k) risky for early retirees?
   Because you can't access most of those funds without penalties until 59 1/2, and every withdrawal is taxable as income.
2. How can I access retirement savings early without penalty?
   Use taxable brokerage accounts, Roth contributions (not earnings), or the 72(t) rule for limited access.
3. Are Roth IRAs better for early retirement (pre-59 1/2)?
   Yes. Withdrawals are tax-free, and contributions can be withdrawn anytime, offering flexibility.
4. What's a good account mix for FIRE planning?
   A balanced approach-roughly one-third pre-tax, one-third Roth, one-third taxable-provides strong tax diversification.
5. Can Roth conversions help early retirees?
   Absolutely. Converting pre-tax funds during low-income years can reduce lifetime taxes and future RMDs.

Tax Rules for Selling Your House to a Family Member

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

This article was inspired by a conversation with a client who is considering selling their primary residence to their child. One of the biggest challenges in today’s housing market is affordability for first-time homebuyers. With housing prices and interest rates rising dramatically over the past five years, many parents who were already planning to downsize, relocate, or move into a more retirement-friendly home are now considering selling their home directly to their children to help them afford their first house.

While this can be a great strategy, there are a number of tax rules, gift rules, and financing considerations that need to be understood before entering into an intrafamily real estate transaction. In this article, we’re going to walk through the key areas families should consider before moving forward.

Discounting the Price of the House

One of the most common questions we get from clients is whether they should sell the house to their child at full market value or discount the price.

For example, if a house is worth $600,000, can you sell it to your child for $400,000?

The answer is yes, you can sell your house for whatever price you want. However, if you sell the home significantly below fair market value, the difference between the market value and the sale price may be considered a gift.

So if:

• Market value = $600,000

• Sale price = $400,000

• Difference = $200,000

That $200,000 could be treated as a gift to the child.

For most families, this does not mean you will owe gift tax. However, you may need to file a gift tax return because the gift exceeds the annual gift exclusion. The amount above the annual exclusion simply reduces your lifetime gift exemption, which is currently $15 million per person at the federal level.

Why Selling at Fair Market Value May Be Better

From a tax standpoint, it may actually make more sense to sell the home at full market value rather than at a discount, because of the primary residence capital gain exclusion.

• Single filer: Can exclude $250,000 of gain

• Married filing jointly: Can exclude $500,000 of gain

Example

• Purchase price: $200,000

• Current value: $600,000

• Gain: $400,000

If the parents are married, the $400,000 gain is below the $500,000 exclusion, meaning they would owe no capital gains tax even if they sell the home for full market value.

But the bigger planning opportunity is actually for the child’s future taxes.

If the child buys the home for $600,000, that becomes their cost basis. If they later sell the home for $1,000,000, their gain is $400,000, which may be fully covered by the primary residence exclusion.

However, if the parents sold the home for $400,000, the child’s cost basis is $400,000. If they later sell for $1,000,000, the gain is $600,000, and $100,000 could become taxable.

So in many situations, a better strategy may be:

Sell the home at fair market value and gift money for the down payment, instead of discounting the purchase price.

This can create a better long-term tax outcome.

Do the Parents Hold the Mortgage?

The next big question is how the child will finance the purchase. There are two main options:

Option 1: Traditional Mortgage

The child gets a mortgage through a bank, and the parents receive cash from the sale.

Option 2: Parents Hold the Mortgage (Seller Financing)

If the parents do not need the cash from the sale, they can hold the mortgage and essentially act as the bank. The child makes mortgage payments directly to the parents.

This is commonly called seller financing or an intrafamily mortgage.

Minimum Interest Rate (AFR)

If parents hold the mortgage, they must charge a minimum interest rate called the Applicable Federal Rate (AFR) to satisfy IRS rules. For a long-term loan such as a mortgage, the long-term AFR applies.

As of March 2026, the long-term AFR is approximately 4.6%.

So the process typically looks like this:

• Determine purchase price

• Determine down payment

• Remaining balance becomes the mortgage

• Mortgage must charge at least the AFR rate

• Child makes monthly payments to the parents

Tax Treatment of Payments

As the child makes mortgage payments:

• The Principal portion is not taxable to the parents

• The Interest portion of each payment is taxable income to the parents

Forgiving the Mortgage

Another question that comes up with intrafamily mortgages is:

“Can we forgive payments or forgive the loan later?”

The answer is yes, but this brings us back to the gift rules.

Forgiving Monthly Payments

Let’s say the child’s mortgage payment is $3,000 per month and the parents decide to waive the payments for a year.

That would equal:

• $3,000 × 12 = $36,000 per year

If the parents are married, they can gift up to the annual gift exclusion amount each year without filing a gift tax return (for example, $38,000 combined in 2026). If the forgiven amount is below the annual exclusion, no gift tax return is required.

If the forgiven amount exceeds the annual exclusion, then a gift tax return must be filed, but again, no gift tax is owed unless the parents exceed their lifetime exemption.

Forgiving the Entire Mortgage

If the parents decide at some point to forgive the remaining balance of the mortgage, that is considered a gift of the remaining loan balance, and a gift tax return would need to be filed for that year.

This shows that there is actually a lot of flexibility when families use intrafamily mortgages. Payments can be structured, forgiven, or adjusted over time, but the gift rules must be tracked.

Summary

If parents are in the fortunate position where they can sell their home to their child, we are seeing this strategy more and more due to the challenges first-time homebuyers face in today’s housing market.

However, it’s important to understand the key planning areas:

• Should you sell at fair market value or discount the price?

• Should the child get a traditional mortgage or should the parents hold the mortgage?

• What are the Applicable Federal Rate (AFR) rules?

• How do the gift tax rules apply if you discount the house or forgive payments?

• How does this affect the child’s future cost basis?

• How does this fit into the parents’ estate plan?

These transactions involve tax planning, estate planning, and financial planning, so we strongly recommend working with a tax professional and financial advisor when considering an intrafamily real estate transaction.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions

1. Can I sell my house to my child for less than market value?
   Yes, but the difference may be considered a gift.
2. Do I have to pay gift tax if I sell the house at a discount?
   Usually no, but you may need to file a gift tax return.
3. Do I pay capital gains tax if I sell to my child?
   You may qualify for the primary residence capital gain exclusion.
4. Is it better to sell at market value and gift the down payment?
   In many cases, yes, for long-term tax planning reasons.
5. Can I be the bank for my child’s mortgage?
   Yes, this is called seller financing.
6. What interest rate do I have to charge?
   At least the IRS Applicable Federal Rate (AFR).
7. Is the interest my child pays me taxable?
   Yes, interest is taxable income to the parents.
8. Can I forgive mortgage payments?
   Yes, but the forgiven amount may be considered a gift.
9. What happens if I forgive the entire loan?
   It is treated as a gift of the remaining balance.
10. Should we work with a professional for this type of transaction?
    Yes, you should coordinate with a CPA, financial advisor, and real estate attorney.

In Retirement, What Healthcare Costs Can Be Paid from an HSA Account?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

As people approach retirement, or enter retirement, healthcare costs often become one of the largest expenses in a financial plan. The good news is that Health Savings Accounts (HSAs) can be a powerful tool to help cover many of these costs using tax-free dollars. However, not every healthcare expense qualifies, so it’s important to understand both what can and cannot be paid from an HSA in retirement.

In this article, we’ll cover:

• Which Medicare premiums are HSA-eligible

• Whether COBRA premiums qualify

• Dental, vision, and hearing expenses

• Out-of-pocket medical costs

• Medical equipment and prescriptions

• Expenses that are not HSA-eligible

• HSA withdrawal rules before and after age 65

• Frequently asked HSA questions in retirement

Medicare Premiums

One of the most common uses for HSA funds in retirement is paying for Medicare premiums. HSA distributions can be used tax-free for:

• Medicare Part B premiums

• Medicare Part D premiums

• Medicare Advantage (Part C) premiums

However, Medigap (Medicare Supplement) premiums are not considered a qualified HSA expense, even though Medicare Advantage plans are. This is a commonly misunderstood rule and an important one for retirees to be aware of when planning healthcare costs.

COBRA Coverage

If you retire before age 65 or leave an employer and elect COBRA coverage, those health insurance premiums can be paid from an HSA. This can be especially helpful for early retirees who need to bridge the gap before Medicare begins.

Dental, Vision, and Hearing Expenses

Dental, vision, and hearing costs are some of the most common out-of-pocket healthcare expenses in retirement — especially since many retirees no longer have employer coverage for these services.

HSA-eligible expenses include:

• Dental cleanings, fillings, crowns, dentures, braces, and X-rays

• Vision exams, eyeglasses, contact lenses, and LASIK surgery

• Hearing aids and hearing aid batteries

Hearing aids alone can cost several thousand dollars, making the HSA a valuable tax-free resource for these expenses.

Out-of-Pocket Medical Expenses

Many routine healthcare costs in retirement are HSA-eligible, including:

• Doctor visits

• Specialist visits

• Hospital services

• Co-pays

• Deductibles

• Coinsurance

• Surgery costs

• Lab work and imaging

These are often the “everyday” medical expenses retirees experience each year.

Medical Equipment

If medical equipment is needed later in retirement, many of these expenses qualify for HSA distributions, including:

• Walkers

• Wheelchairs

• Blood pressure monitors

• Crutches

• CPAP machines

• Glucose monitors

Prescription Medications

Prescription drugs that are prescribed by a doctor are qualified HSA expenses.

However, over-the-counter medications typically do NOT qualify unless they are prescribed by a physician.

Expenses That Are NOT HSA-Eligible

Some healthcare-related expenses are not considered qualified medical expenses. These typically include:

• Gym memberships

• Nutritional supplements

• Cosmetic procedures

• Teeth whitening

• General health items not prescribed by a doctor

Even though these may improve health, they are not considered qualified medical expenses under HSA rules.

Why HSAs Are So Powerful for Retirement

HSAs are one of the most tax-advantaged accounts available because they offer:

• Tax-deductible contributions

• Tax-free growth

• Tax-free withdrawals for qualified medical expenses

Because healthcare costs are often highest in retirement, many individuals choose to pay for medical expenses out-of-pocket during their working years and allow their HSA to grow, using it later in retirement when healthcare costs increase.

HSA Withdrawal Rules: Before and After Age 65

It’s also important to understand the rules around HSA withdrawals:

• Before age 65

  • Non-qualified withdrawals = taxable income + 20% penalty

• After age 65

  • Non-qualified withdrawals = taxable income only (no penalty)

  • Works similar to a Traditional IRA if not used for healthcare

This provides additional flexibility later in retirement.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

1. Can HSA funds be used for Medicare premiums?
   Yes, for Medicare Part B, Part D, and Medicare Advantage premiums.
2. Can HSA funds be used for Medigap premiums?
   No, Medigap premiums are not considered a qualified expense.
3. Can I use my HSA for dental expenses in retirement?
   Yes, most dental expenses qualify.
4. Are vision expenses HSA-eligible?
   Yes, including exams, glasses, contacts, and LASIK.
5. Are hearing aids covered by an HSA?
   Yes, including hearing aid batteries.
6. Can I use my HSA for COBRA premiums?
   Yes, COBRA premiums are a qualified expense.
7. Are prescription drugs HSA-eligible?
   Yes, if prescribed by a doctor.
8. Are over-the-counter medications HSA-eligible?
   Typically no, unless prescribed by a physician.
9. What happens if I use HSA money for non-medical expenses before 65?
   You will owe income tax and a 20% penalty.
10. What happens if I use HSA money for non-medical expenses after 65?
    You will owe income tax, but no penalty.