Is there a tax 'time bomb' hiding in your IRA or 401K?

The U.S. government has made it easy for you to save for retirement in a traditional IRA or 401K.

But there's a hidden risk that most people don't see until it's too late.

Putting money into your IRA or 401K is easy. You set up automatic contributions out of each paycheck. You can easily save a portion of every dollar you earn, and even get your employer to match the dollars you save.

And because these accounts are designated by the IRS as "tax deferred," you don't have to pay taxes on the contributions to your account.

At first glance, this seems like a great way to grow your retirement savings. It's helped millions of Americans save anywhere from a few thousand dollars to a few million dollars in these special retirement accounts.

But when it comes time to withdraw money from your IRA or 401K to help fund your retirement, you may be in for a nasty surprise.

In fact, Kiplinger warned that these accounts can be a "Ticking Time Bomb" when it comes to your taxes in retirement.

Financial advisors Tyson Thacker and Ryan Thacker, founders of B.O.S.S. Retirement Solutions, want retirees to know what they can do to protect themselves from big unexpected tax bills.

B.O.S.S. Retirement Solutions is a five-time winner of Utah's "Best of State" award. They've helped thousands of families throughout the Wasatch Front reduce their taxes as part of planning for retirement.

Understanding taxes and your IRA and 401K

"The first big thing you need to remember is that you still owe taxes on all of your contributions and all of your investment gains in these accounts. So, every time you make a withdrawal in retirement, you will pay taxes on the amount of each withdrawal," Tyson Thacker says.

Because many retirees are relying on the balances in their IRAs and 401Ks to provide income in retirement, this is important to remember. Not all of this money is yours to keep. All withdrawals are treated as "ordinary income" by the IRS.

Unfortunately, attempting to avoid these taxes by not withdrawing money from your IRA or 401K, is not an option.

You're required to make withdrawals and pay taxes

"Even if you have other sources of income, you'll still end up paying taxes on your traditional IRA or 401K," adds Ryan Thacker. "When you turn 73, you're required to start withdrawing money in the form of Required Minimum Distributions, or RMDs. This is a minimum amount you must take out, until the account is empty or until you pass away. And these RMDs are taxed like any other withdrawals."

But this news gets even worse, because of how these withdrawals add to your total taxable income.

You could be pushed into a higher tax bracket

"The real time bomb — or what's sometimes called a tax torpedo — is when RMDs, other withdrawals, Social Security, and other income sources push you into a higher tax bracket," Tyson Thacker explains. "Retirees who have stopped working sometimes end up in a higher tax bracket than when they were gainfully employed."

When this happens, you will be forced to pay higher marginal and capital gains taxes. It can even double your Medicare premiums.

"If you think you're financially prepared for retirement, but you haven't accounted for these taxes, it can be a real shocker," Ryan Thacker says. "The good news is that you have more control over how much you pay in taxes when you retire – than you do at any other time of your life."

The tax time bomb can be diffused, the Thackers assure us, with some simple tax planning.

Certain strategies could reduce your tax obligations

"There are many strategies available to the average family as they retire," Tyson Thacker says. "And we've seen plenty of clients reduce their tax obligations in retirement by tens of thousands - even hundreds of thousands of dollars. It all comes down to finding the right strategies for your situation."

B.O.S.S. Retirement Solutions offers a mix of strategies to help you significantly reduce your future tax bills. Many of these tax-planning strategies you would never get from a conversation with most CPAs, who specialize in filing your annual tax return every April.

B.O.S.S. Retirement Solutions offers a free, customized Retirement Tax-Savings Analysis that shows you exactly how much money you could save.

During this quick appointment, they will gather some basic information from you. Then they determine the tax planning strategies that are best suited for your specific situation. Next, they'll sit down and freely share these strategies with you, so you can see exactly how much money you could save.

While other financial advisors charge hundreds of dollars for similar services, B.O.S.S. Retirement Solutions offers this service for free, even if you're not a client.

To schedule your free, no-obligation B.O.S.S. Retirement Tax-Savings Analysis, click here.

Tyson Thacker and Ryan Thacker are the CEO and President of B.O.S.S. Retirement Solutions. They are a five-time winner of Utah's Best of State Award and have six offices located throughout the Wasatch Front.

This is for illustrative purposes only, results may vary. Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and 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 an individual's situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Our firm is not affiliated with the U.S. government or any governmental agency. Marketing materials provided by Infinity Marketing Services. B.O.S.S. submitted applications and fees to be considered for the Inc. 5000 Fastest Growing Companies and Best of Utah awards. Results were independently determined by each organizations' criteria (https://www.inc.com/inc5000/apply/guide and https://www.bestofstate.org/about.html) and the information B.O.S.S. provided. B.O.S.S. received the Utah Best of State award in 2019, 2020, 2021, 2022, and 2023.

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