Three Tax-Planning Risks That Can Raise Lifetime Costs for Retirees and Their Heirs

A modest tax bill in retirement can hide a costly timing problem. Clients may have room to pay tax at lower rates today, while later required distributions, a spouse’s death or an inherited account could push income into higher brackets. For advisors, the key question is whether a client’s current tax rate is lower than the rate the client or family may face later.

That’s the idea behind the “Three Ghosts of Tax Planning”: the tax picture clients face now, the changes likely to arrive during retirement, and the tax burden their heirs may inherit. The framework shifts the conversation from minimizing this year’s bill to considering taxes across a client’s lifetime and the transfer of wealth to family.

The current opening: a gap before retirement income rises

Tax rates are historically low, and the brackets are wide. That can make planning feel less urgent, especially for clients in an income valley between retirement and the start of Social Security and required minimum distributions (RMDs). When current income and taxes are relatively low, clients may see little reason to act. Yet that interval can offer a chance to make decisions before other income sources begin.

A low bill doesn’t establish that a client’s long-term tax position is secure. It may reflect a temporary gap in taxable income. The relevant comparison is between the rate paid on income today and the rates that could apply later to the client, a surviving spouse or the next generation. Delaying until higher taxes become visible can narrow the choices available.

One future source of pressure is a large traditional IRA. RMDs eventually bring taxable income into the picture, whether or not the account owner needs the cash. For example, a $4 million IRA at age 80 requires an RMD of close to $200,000. Combined with Social Security, that income can move a couple from the 22% bracket to the 24% bracket and above the first IRMAA threshold.

The amount in the account matters, but so does when its taxable income arrives. A client who doesn’t need every dollar for spending may still face tax on distributions. Planning during a lower-income period gives the advisor and client a chance to examine the trade-offs before RMDs set a larger taxable-income floor.

A spouse’s death can change the tax calculation

The second risk is the change in filing status that can follow the death of a spouse. Consider a couple with $275,000 of taxable income. If one spouse dies and the survivor’s taxable income remains the same, the move from married filing jointly to single raises the top federal rate from 24% to 35% under 2026 brackets. The survivor’s IRMAA surcharge also moves to a higher tier.

The income in this example doesn’t fall, but the tax brackets available to the surviving spouse change. That can leave one person facing a higher tax rate and Medicare-related surcharge on a similar level of taxable income. The effect can be difficult to address after the fact, particularly if the couple has not discussed how retirement income and account withdrawals might look for the survivor.

These conversations are more useful while both spouses can participate. Advisors can assess each spouse’s likely income needs, account mix and future taxable distributions, then show how the household’s position may change when only one spouse is filing. The aim is to make the potential shift visible early enough for the couple to consider its consequences.

Inherited accounts can concentrate taxes on heirs

The third ghost appears after wealth passes to children or other beneficiaries. Tax rules can change over a long time horizon, so no projection can settle exactly what a family will owe decades from now. Still, current inherited IRA rules create a concrete planning issue: most non-spouse beneficiaries must empty an inherited IRA within 10 years. For heirs who are already earning well, that deadline can stack withdrawals on top of income from work.

Take a $2 million IRA inherited by a married child with $300,000 of taxable income, already solidly in the 24% bracket. If distributions are spread evenly over 10 years, the withdrawals push the child into the 32% bracket every year for a decade, adding more than $550,000 in federal tax. If the child waits until year 10 to take the account, the distribution pushes them into the 37% bracket.

That example illustrates why the account owner’s tax rate is only one part of the family’s picture. The timing and size of withdrawals can matter to a beneficiary whose income is already high. Roth conversions by the parent while in the 22% or 24% bracket could produce a different outcome: the child would inherit a Roth IRA that can be withdrawn tax-free. Estate and inheritance taxes add another layer to the family’s calculations.

Focus on the lifetime bill

The practical objective is not to forecast every future tax change. It is to avoid treating the current year’s bill as the whole planning problem. Advisors can model income and taxes across the client’s lifetime, including the effect of RMDs, a surviving spouse’s filing status and the transfer of retirement assets to heirs. In some cases, that means considering whether to recognize more income during lower-bracket years, before later events push taxable income higher.

Any strategy depends on the client’s circumstances, timing and assumptions about future income and tax rules. Models can clarify how different choices affect the projected lifetime bill, but they cannot remove uncertainty about what rules will apply years from now. The central decision is whether paying tax earlier at a lower rate could reduce the family’s exposure to higher rates later.

For clients in an income valley, the gap before RMDs and other income begins may be the clearest opportunity to ask that question. The plan should account for the client’s needs, the surviving spouse’s likely position and the tax consequences for beneficiaries. Looking at all three stages gives clients a fuller view of where their money may go—and when the family may have to pay tax on it.

Debra Taylor is the managing partner and chief tax strategist of Carson Group and Carson Wealth location in Franklin Lakes, a full-service wealth management firm located in New Jersey.