The ‘Wait Until You Retire’ Tax Myth Only Works for 4% of People, According to This Retirement Advisor

Many retirees are advised to defer paying taxes on their investments until retirement. “So many advisors have helped clients defer, defer, defer, because we all been told this myth, right?” said David Brooks on the Retire SMART podcast. “Defer your taxes because you’ll be in a lower tax bracket when you retire. And that’s a joke. That’s 4% of the people I’ve run into.”

If you spent 30 years stuffing every spare dollar into a traditional 401(k) on the promise of a lower future bracket, consider Brooks’ advice. If you land in a higher tax bracket, the IRS gets a bigger slice of your nest egg than you planned for. Tax planning is a discipline that layers dozens of tactics together; deferral is just one of them.

A traditional 401(k) contribution skips income tax today, then taxes both your original dollars and decades of growth as ordinary income when withdrawn. The bet is that your future rate will be lower than your current rate. That bet only pays off if tax rates do not rise, your retirement income is meaningfully lower than your working income, and your withdrawals stay smooth instead of spiking.

In practice, none of those usually hold, Brooks said. Required Minimum Distributions force withdrawals on the IRS’s schedule, not yours. Social Security becomes partly taxable once provisional income crosses modest thresholds. Medicare Part B and D premiums climb through IRMAA surcharges when income crests certain tiers. A retiree pulling $80,000 from a traditional IRA to cover living expenses can easily trigger taxation on Social Security and a Medicare surcharge in the same year, stacking three tax effects on top of the bracket math everyone focused on.

Brooks’ personal story anchors the point. After selling his restaurants, he owed more in taxes than he had “ever made in a year” because, in his words, he “didn’t get good proactive tax planning.” Running a profitable business requires a different skill set than engineering the exit. The same gap can show up for retirees who built a seven-figure 401(k) and then discover the withdrawal phase rules work against them.

Brooks said his firm actively uses about 170 incentives found in the U.S. tax code, and layers five to eight strategies per client. The default deferral playbook uses only one. That is the gap between handing money to the IRS and keeping it. This matters more now because Americans have less margin to absorb tax surprises.

“Taxes are the No. 1 bill you’re gonna face in life, but it gets even worse in retirement,” Brooks said.  Two groups feel this most: people at or near retirement, and small business owners and entrepreneurs. For entrepreneurs, every dollar overpaid is a dollar that could grow the business or feed the family. For retirees, the damage could be already locked in by decades of one-strategy advice.

Tips for retirement tax strategies

1. Pull your most recent tax return and identify the marginal bracket.
2. Project your first full retirement year of income: Social Security, pensions, RMDs from any tax-deferred account, plus any part-time work. Compare that bracket to your current one. If the future number is equal or higher, the deferral bet is losing.
3. Consider consulting a financial advisor to map out a smart tax strategy.

Remember, the deferral playbook was sold as a universal answer to a question that has different answers for different people.