Stock Market Surge Could Increase Tax Burden for Retirees, Experts Warn

The surging stock market in New York, NY could spell trouble for some retirees as it may push them into a higher tax bracket, according to experts.

As the S&P 500 index soared by 24 percent at the end of the year, it offered a welcome boost for many 401(K) accounts but posed potential problems for retirees who rely on their nest eggs for daily expenses.

The issue, experts caution, is that older Americans are required to start withdrawing funds from their traditional pre-tax 401(K) and individual retirement accounts (IRAs) by a specific age, or face penalties.

Certified public accountant Tom Wheelwright explains, “The amount you have to take out for 2024 is set on December 31, 2023.” And the higher the balance in the account, the more must be withdrawn the following year, resulting in higher taxes paid.

Before 2020, Americans were required to begin withdrawing funds by the age of 70½, which later increased to 72, and then to 73 due to the Secure 2.0 Act that came into force last year. These mandatory withdrawals are known as required minimum distributions (RMDs).

According to Fidelity, the cumulative RMDs for its clients could reach a record high of $25 billion in 2024. Wheelwright warns that middle-earners are at risk of facing higher tax bills due to the surge in the stock market.

The rising retirement balance at year-end could also impact the cost of Medicare for some Americans, as the premium each year is based on income from the prior year. Wheelwright suggests converting some retirement savings into a Roth account and making charitable contributions directly from IRA accounts to minimize the impact of higher RMDs.

Additionally, staying in work exempts individuals from some withdrawals, and rolling over certain IRAs and 401(K)s from previous employers into a current employer’s plan could also help avoid required distributions on those balances.