By Neal Templin

Suppose you are fortune enough to retire with the current maximum monthly Social Security benefit of $5,181 at age 70 and a $2 million Roth retirement account. How much will you pay in taxes?

Zero. That's right. If you have no other sources of taxable income besides Social Security, you pay no federal taxes in retirement, as Roth distributions aren't taxable.

Now suppose you are retiring with that same Social Security check and a $2 million tax-deferred 401(k) retirement account. At age 73, you will be required to take a $75,472 required minimum distribution $(RMD)$ from your 401(k), which will be taxed as ordinary income. Your tax bill will be $18,366, according to a calculation by retired Baylor University finance professor William Reichenstein.

The reason: Social Security's so-called tax torpedo. Because you have higher taxable income thanks to the RMD, up to 85% of your benefit will be taxed.

Adding insult to injury, he estimates you will have to pay another $1,315 annual income-related monthly adjusted amount, or IRMAA, surcharge on your Medicare premiums, bringing your total tax bill to $19,681.

"What people need to understand is that IRMAA is a de facto federal income tax," Reichenstein says. "As your income goes up, you owe more to the federal government for Medicare." Your IRMAA taxes will likely be as high -- or higher -- for the rest of your life, since the RMD rate gradually increases as you age.

IRMAA is annoying, but the more expensive problem is the tax torpedo. Barron's asked Reichenstein, who co-wrote Social Security Strategies and created planning software to maximize benefits, to run some numbers to illustrate what happens when every dollar of additional income causes another 85 cents of Social Security income to be taxed The result is an effective tax rate as high as 40.7% for somebody in the 22% tax bracket, Reichenstein says. On top of that, retirees gradually lose the new $6,000 senior tax credit as their adjusted gross income rises, making the marginal tax rate as high as 46% for a married couple, he says.

"We made things so the progressivity of the tax code is a lot higher than the tax brackets would imply," Reichstein says.

In the real world, almost all retirees have some taxable income, even if it's just bank account interest. But understanding how Social Security taxes your benefits can still save you money.

The Social Security Administration takes your income -- including municipal bond interest but not Social Security income -- and adds it to half your Social Security benefit to create what it calls your provisional income. If this number is over $34,000 for a single person or $44,000 for a married couple, up to 85% of your Social Security benefit will be taxed as ordinary income.

How big a tax-torpedo hit you face depends on how much retirement income you receive -- and how it's structured. The more you -- or you and your spouse -- receive in Social Security benefits, the more it will affect you.

Consider a married couple who together get the maximum Social Security of $124,344 annually and have a $3 million Roth account. Once again, they will pay no taxes in retirement if they have no other taxable income. But if that $3 million account is in tax-deferred accounts, they will together need to take a $113,208 RMD when they reach age 73 and will owe $28,951 in taxes, Reichenstein calculates.

Many people use Roth conversions to avoid RMDs and the tax torpedo, moving money from a tax-deferred account to a Roth account and paying taxes on that money. Roth conversions make the most sense for people who have retired but haven't started receiving Social Security benefits. Some, particularly those living on after-tax savings, can make large Roth conversions at low tax rates and slice their RMDs in retirement.

Write to Neal Templin at neal.templin@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 24, 2026 02:00 ET (06:00 GMT)

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