Monthly Archives: September 2026

Future Tax Hikes On Retirees

In this post, I offer a brief response to a recent thoughtful Reddit post. Credit to the poster for putting his or her views out there in an organized fashion and continuing the discourse.

The poster is concerned about one of the predictions Cody Garrett and I make in the book Tax Planning To and Through Early Retirement. The prediction, oversimplified, is that current readers of the book are unlikely to experience significant tax hikes in retirement.

Below I present the gist of the poster’s comments and then two brief responses. Note that I speak only for myself in this post. I do not speak for my co-author Cody Garrett.

The Reddit Post

If you are not on Reddit, I offer below a bullet point summary of the post’s highlights. I invite you to read the post for yourself.

The poster acknowledges that in December 2023 I correctly predicted that “temporary” tax cuts set to expire at the end of 2025 would not expire. You can listen to the prediction timestamped here.
The poster is quite concerned with the book’s prediction that taxes are not likely to go up on retirees.
The poster believes it is problematic that the book’s historical analysis is limited to 10 years (2015 through publication).
The post cites the 1983 law change that made Social Security potentially up to 50 percent taxable as a tax hike on retirees that had little adverse effects on the politicians who enacted it. Ronald Reagan was famously reelected in 1984 and won 49 states after signing a tax hike on retirees. Doesn’t the 1983 tax hike and the 1984 election result cast doubt on the analysis in Tax Planning To and Through Early Retirement?

Response: Taxes on Retirees Are Unlikely to Significantly Increase Anytime Soon

I have two brief responses to share. They boil down to (A) the comparison to 1983 supports rather than refutes the book’s argument and (B) the 10 year window in the book helps refute the hypothesis that increasing federal debts and deficits are highly likely to result in increased taxes on retirees.

The World, and More Importantly, the Electorate, Have Changed Since 1983

The poster’s invocation of the 1983 tax hike on retirees supports Cody’s and my arguments in the book much more than it supports the hypothesis that taxes on retirees are likely to increase significantly in the near future.

The 1983 tax increase on retirees was relatively modest. It only subjected up to 50 percent of Social Security benefits to income taxation. Further, it only kicked in at certain levels of income, blunting the impact for many retirees.

Much more importantly, let’s compare the electorate in 1984 to today’s electorate.

According to this research, in 1984 42 percent of the electorate was aged 50 and older.

According to this research, in 2024 58 percent of the electorate was aged 50 and older.

In political terms, this shift is a tidal wave. If 2024 is Earth, 1984 might as well be Mars or Venus, at least when it comes to American politics.

To further the point, recent research indicates that the average age of primary voters is 57 and the median age of primary voters is 59. See page 12 of the linked-to research.

Politicians respond to incentives. They don’t respond to fears promoted by big names in the financial industry.

What about an aging electorate in both primaries and general elections screams “Taxes are going up on retirees!”?

Lastly, the poster’s contention that 1983’s tax hike on retirees is somewhat instructive runs up against a wall just 10 years later.

In 1993 Bill Clinton and a Democrat Congress further increased the taxes on Social Security, subjecting up to 85 percent of Social Security benefits to income taxation. A year later the Republicans took back both Houses of Congress in a historic mid-term election wipeout.

I was in high school at the time. I remember that there were other factors at play. But it is interesting to see that the politicians’ behavior seems to have changed since the mid-1990s. It’s hard to find a significant tax hike on retirees since then.

Perhaps the politicians learned a lesson from the ‘93 Social Security tax increase that stuck.

Hypotheses That Repeatedly Fail When Tested Against Real World Conditions Should Be Strongly Doubted

We have heard it for years: Taxes are going up on retirees because of rising federal government debts and deficits.

That’s a contention that is easily tested, but only if real world conditions feature increasing federal government debts and deficits.

Fortunately, we have a 10 year window that is ripe with increasing federal debts and deficits: 2015 to the publication of Tax Planning To and Through Early Retirement in 2025.

As cited in the book, on September 30, 2014, the federal debt was approximately $17.8 trillion. As I write today, the federal debt is approximately $40 trillion.

Thus, one would expect that in the past decade, a decade featuring more than a doubling of the enormous federal debt, Washington politicians enacted numerous tax hikes on retirees if the hypothesis that increasing federal debts and deficits trigger tax hikes on retirees is highly valid.

Real world experience reveals the exact opposite.

During the past decade we have seen tax cut after tax cut for retirees. There were so many tax cuts for retirees during the past decade that we used a summary table instead of in-line narrative to describe them to avoid boring our readers and reduce printing costs 😉

Our book’s analysis selected a time frame that should have played right into the Reddit poster’s concern. The real world conditions were perfect for the concern to have materialized. Not only did the concern, tax hikes on retirees, not materialize–the opposite materialized.

At some point, we have to question the commentators who continuously predict tax hikes on retirees when real world outcomes point in the opposite direction.

The Reddit post states that the book’s “limiting the look-back window to 10 years of tax policy is a problem.” However the book does not limit the look-back window to 10 years. On page 240, the book discusses a retiree tax cut passed by Republicans in 2003 and draws a lesson from the 2008 Democrat election sweep not resulting in repeal even though the Democrats had commanding majorities and the Presidency in 2009. A tax planning book cannot be a tax history treatise. But my view is that the historical data Cody and I present is accurate and relevant in planning.

Conclusion

My prediction is that politicians will continue to act in the politicians’ own best interests.

I offer this post to reason through an often stated concern about taxes on retirees in the future. The above predicts likely outcomes. There are no guarantees when it comes to future tax rates on retirees. But there are the lessons of logic, reason, incentives, and history.

My view is that the most likely outcome for those thinking about retirement planning in 2026 is a future with little in the way of significant tax increases on retirees. Frankly, we’re at the point that some tax increases would not make up for the decade of continuous tax cuts for retirees. Nevertheless, I believe the most likely outcome for those thinking about taxes in retirement in the year 2026 is a future tax environment that looks similar to the very retiree-friendly tax environment we have today.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn: @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

The Best Tax Deduction

Ed Slott says traditional 401(k) tax deductions aren’t real tax deductions. He claims that traditional 401(k) deductions are not real deductions because the deducted amount and future growth must ultimately be taxed at a later date.

My view is different. Not only do I believe traditional 401(k) tax deductions are real tax deductions, I go further. I believe that traditional 401(k) tax deductions are the best tax deductions!

Keep reading to find out why.

A Brief Note on Terminology

Before we proceed, I and other financial advisors often use the term “deduction” when the more technically appropriate term is “exclusion.” At W-2 jobs, employee contributions to traditional 401(k)s (and traditional 403(b)s, 457s, and SIMPLE IRAs) are not deducted from taxable income. Rather, they are excluded from W-2 income. There’s no “deduction” to take. Rather, W-2 income is reduced because the contribution to the traditional 401(k) is excluded from W-2 income (see Box 1 of Form W-2).

Nevertheless, I believe that it is appropriate to use “deduction” as a colloquialism for the tax effect of a traditional 401(k) contribution. From a planning perspective, there’s no real difference between an exclusion and a deduction that reduces adjusted gross income. Further, those not in the personal finance industry might be confused by the term “exclusion” but tend to understand the meaning of “deduction.”

Note that for Schedule C solopreneurs, employee traditional Solo 401(k) contributions and traditional SIMPLE IRA employee contributions are deducted on a tax return on line 16 of Schedule 1. Self-employed employee contributions are not excluded from Schedule C income.

Comparing and Contrasting Tax Deductions

Let’s consider the three most common itemized deductions.

Home mortgage interest is paid to the bank
State and local taxes are paid to state and local governments
Charitable contributions are paid to charities

Yes, the person gets a tax deduction. But they don’t get to keep the money! The bank, a charity, or a government keeps the money.

This is generally true of business deductions as well. People talk about “bonus depreciation” but all that means is the timing of the tax deduction is more advantageous. The vendor or contractor still got the money!

What about the deduction into the traditional 401(k)?

You get to keep the money! Yes, the money legally goes into a 401(k) plan. But later in life, perhaps not that much later in life, the money and its growth is yours!

To my mind, the best deductions are the ones I keep! That is much better than the bank or the county government getting the money. I favor deductions I keep even if I have to later include that amount and its growth in taxable income.

I like myself more than I like the bank!

No offense to the bankers reading this.

Do You Get to Enjoy All the Money in a Traditional 401(k)?

You might be reading this and thinking:

Wait a minute, Sean. There’s no way I will ever personally spend every last penny of a multimillion dollar retirement account. I won’t “Die with Zero.” How then do I ‘get to keep’ the amount I deducted into the traditional 401(k)?

You are correct in terms of actual spending. Will every last penny of your traditional 401(k) go to upgrade you and/or your spouse to a junior suite at the Fairfield by Marriott?

No.

But I contend you get to benefit from every last penny in that traditional 401(k) to a greater extent than buying hotel room upgrades.

Every last penny in your traditional 401(k) supports you as you make the most important financial decisions.

When you are considering when to retire, what do you look at? One of the most important numbers is the amount in your traditional 401(k). The greater that number, the more likely you are to be able to decide to retire.

Without spending a penny of your traditional 401(k) balance, your entire traditional 401(k) balance benefits you when making one of the most important financial decisions you’ll ever make–the decision to retire!

Compare the deduction that can help you make a positive retirement decision to the deduction paid to the bank, paid to the state government, or paid to charity. Outside of a paid off home supporting a positive retirement decision, those deductions have no value to you when you’re looking at your current wealth and trying to make a retirement decision.

Deferring Tends to Reduce Both Tax Rate and Tax Impact

Now you might be thinking:

Sean, sure, your traditional 401(k) balance helps you achieve retirement and other financial goals. But don’t you pay more in taxes by deferring?

For the vast majority of Americans, deferring is the key to reducing taxes. It’s the Pay Tax When You Pay Less Tax concept Cody Garrett, CFP(R) and I discuss in our book Tax Planning To and Through Early Retirement.

Americans tend to pay income taxes at their highest lifetime rates during their working careers. Retirement tends to be accompanied by significant tax cuts. Said differently, retirement tends to be a great time to pay tax because it’s the time most Americans, even most affluent Americans, pay less tax.

On my YouTube channel, I’ve demonstrated that retirees, even very affluent retirees, tend to be lightly taxed. See, for example, a 60 year old retired couple, an 80 year old with RMDs on a $500,000 traditional IRA, an 81 year old widow with RMDs on a $1 million traditional IRA, and an 80 year old married couple with RMDs on a $2 million traditional IRA.

Thus, deduction for traditional 401(k) contributions tends to reduce lifetime taxes. The deduction often enjoys a tax rate benefit greater than the tax rate paid on traditional retirement account distributions in retirement.

Impact of Tax Paid

Outside of unique situations, you or your heirs have to pay tax on retirement account contributions. That tax is paid during one’s career if they choose Roth 401(k) contributions. That tax is generally paid during retirement if one chooses traditional 401(k) contributions. Traditional 401(k) contributions are also likely to trigger some tax paid by beneficiaries after the original owner’s death.

The tax has to be paid (well, it has to be paid in most but not all cases — for example, see these exceptions). When is paying that tax most impactful?

Traditional 401(k) contributions tend to blunt the impact of taxes paid. It gives workers a tax deduction when they need it most: before they’ve accumulated sufficient assets for financial independence or retirement and perhaps when they are paying off their mortgage and feeding their kids.

Compare that to the profile of affluent retirees in their 70s or 80s. These are people who have met their financial goals. Yes, they pay taxes on RMDs. But those taxes have much less impact on the successful retiree’s lived experience than the taxes saved have on a 30-something or 40-something worker trying to pay off the mortgage, build up retirement savings, and possibly feed some kids.

The person electing to pay taxes later in life, which is what a traditional 401(k) contribution does and what avoiding a taxable Roth conversion in one’s 50s or 60s does, elects to pay taxes when taxes are least detrimental–in old age.

In old age either the person will be only moderately financially successful (or worse) and thus will likely have very little in the way of federal income tax, or the person will be very financially successful and any federal income tax is too late to derail their financial success or materially impact their lived experience.

Is it better for your 30- or 40-something self to pay taxes or is it better for your 80-something self to pay taxes?

When our heirs pay tax on our traditional retirement accounts, they pay tax on a windfall. Regardless, they are still the beneficiaries of a windfall, making it unlikely that taxes on the windfall will derail their financial future.

Conclusion

My opinion is the best tax deduction is the one I keep and the one most likely to lower my lifetime tax burden. That’s the contribution to a traditional 401(k) at work.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn at @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.