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Planning for a secure retirement isn’t just about saving and investing; it’s also about anticipating how changes in Washington might affect your nest egg. Two major threats to retirees’ finances are tax risk and legislative risk.
Tax risk is the chance that you’ll face higher taxes in retirement than you expected, leaving less money in your pocket.
Legislative risk is the possibility that Congress could change the rules on retirement accounts, altering what can be taxed, when it’s taxed or how it’s taxed in ways that undermine your carefully laid plans.
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These risks are real.
In recent years, new laws have changed how inherited IRAs are taxed. Given the current legislative environment, retirees and pre-retirees need to be prepared.
Here are four ways Washington could impact your retirement, along with steps to help protect yourself.
1. Changing the tax brackets
Congress could take a bigger bite out of retirees’ income by changing tax brackets.
Throughout modern history, lawmakers have adjusted federal income tax brackets, altering both the range of income in each bracket and the tax rates applied.
The Tax Cuts and Jobs Act of 2017, for instance, temporarily lowered tax rates for most Americans, but these lower rates were set to sunset at the end of 2025 before Congress passed the One Big Beautiful Bill (OBBB) this year.
Similarly, future legislation could raise tax rates or compress brackets. The impact on retirees is clear: If you’re planning your retirement income using today’s tax rates, be aware that you might owe more tax on the same income in the near future.
2. Limiting tax deductions
Another legislative risk to watch for is the reduction or elimination of tax deductions. Congress could change which deductions or credits taxpayers can claim, effectively increasing taxable income.
We saw this in 2017, when certain deductions were scaled back. For example, the state and local tax (SALT) deduction was capped, and personal exemptions were eliminated.
Changes to deductions directly affect how much of your retirement income is subject to tax. Imagine a retiree who normally deducts medical expenses or charitable contributions. If new laws limit those deductions, more of their income could become taxable.
Although a higher standard deduction for older people, currently in effect, has helped many retirees, it is also subject to legislative change.
The bottom line is that the deductions you rely on today might not be there tomorrow, potentially raising your tax bill in retirement.
3. Adjusting which assets are taxed
Congress also has the power to change which types of income or assets are taxable, altering long-standing rules.
A historical example is Social Security benefits, which were tax-free before 1984. Legislative changes in 1983 and 1993 introduced taxes on Social Security benefits for many retirees.
Similarly, in 2019, the SECURE Act changed the rules for inherited retirement accounts, forcing most beneficiaries to withdraw (and pay taxes on) the entire account within 10 years instead of stretching distributions over a lifetime.
This kind of legislative change can upend the plans that retirees made under the old rules. We might see future laws that make currently tax-free or tax-deferred assets taxable.
For instance, proposals to tax portions of high-value retirement accounts or further limit tax advantages on inherited assets have surfaced.
If the government changes which assets are taxed or how they’re taxed, some retirees could find they have higher tax obligations and less spendable income than they anticipated.
4. ‘Changing the rules’ on retirement accounts
Perhaps the most unsettling way Washington could affect your retirement would be by changing how and when you must withdraw your own money, effectively “changing the rules” of retirement accounts.
We’ve already seen legislation increase the age for required minimum distributions (RMDs), and there are further debates. A recent House bill proposal (part of the initially debated Build Back Better legislation) sought to impose a new type of RMD on very large IRAs and 401(k)s, regardless of the owner’s age.
In this proposal, if an account exceeded a certain balance, the owner would have been forced to withdraw 50% of the excess each year and pay taxes on it, even if they didn’t need the money.
Although this particular provision didn’t become law, it signals the kinds of ideas lawmakers consider to raise revenue. They could require you to withdraw funds under new rules or timeframes that didn’t exist when you were saving.
In short, if Congress changes the structural rules for retirement accounts, you might end up accessing your savings under a different set of conditions than you planned for.
How to prepare for tax and legislative uncertainty
You can’t control what lawmakers do, but you can protect your retirement from tax and legislative risks:
Diversify your tax buckets. Spread your savings across tax-deferred, taxable and tax-free accounts. Roth IRAs and Roth 401(k)s provide tax-free withdrawals, while vehicles such as municipal bonds or cash-value life insurance can add income with little or no tax.
Relying only on tax-deferred accounts leaves you more exposed if tax rates rise.
Plan withdrawals strategically. Use a savvy withdrawal strategy to help minimize taxes over time. Partial Roth conversions in lower-tax years let you pre-pay taxes on your terms.
Coordinate distributions across taxable, tax-deferred and Roth accounts to keep your taxable income steady and avoid surprises such as higher Medicare premiums.
Stay flexible. Laws will change. Revisit your plan when new rules, such as RMD age changes or Social Security adjustments, take effect.
Keep liquidity and backup strategies in place so you can adapt. A good adviser can help you interpret changes and adjust quickly.
In short, expect continuous tax and legislative changes. With a proactive, flexible plan, you can safeguard your retirement income against decisions made in Washington.
Ezra Byer contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.