#112 - Retirement Tax Cliffs: The Hidden Costs Every Woman Should Understand

Eric Blake: Welcome to another episode of the Simply Retirement Podcast, where we want to educate and empower women to live your retirement on your terms. I'm your host, Eric Blake, practicing retirement planner for over 25 years, founder of Blake Wealth Management, and I would not be the man I am today without the women in my life.

Joining me once again is Wendy McConnell. Wendy, how are you?

Wendy McConnell: I'm great. How are you?

Eric Blake: I am very good. So I was going to ask you a question, then I realized that after you've been on vacation yourself, it might be a bad time to ask. Every time we take a little bit of a break from recording, there's always this nervousness, like I'm kind of starting from scratch once we get back to recording.

I was going to ask you, as a seasoned professional, how do you deal with that? Then I thought, well, she's been gone for two weeks herself. What am I...

Wendy McConnell: No. Well, I don't know. As a seasoned professional, you just pick it right back up, I guess. You just do it. Yeah. But I've been doing it a lot longer than you.

Eric Blake: I know. Well, that's what I was going to ask. I'm like, well, she's been off herself. She might not have a great response. I don't know.

Wendy McConnell: No. And I'm not shy. That's always a big help as well.

Eric Blake: There you go. That's always a positive. I would definitely consider myself an introvert for the most part, but it's the one-on-one conversations where I feel much more confident.

Talking to you makes me feel good. How's that?

Wendy McConnell: Aw, that's sweet. But you do a great job, Eric, truly.

Eric Blake: I appreciate that.

Wendy McConnell: All right.

Eric Blake: So today's topic is... A lot of my topics for the show are based on conversations we have with clients in our retirement planning practice, and that's the case with this one as well.

We had a client I met with recently. She had lost her husband a few years ago, and she's going through a shift in tax rates from married filing jointly. In the year her husband passed, she could file married filing jointly. Then she was able to qualify for what's called qualifying widow status the year after that because she had a daughter who was still a dependent, which is one of the requirements.

The key with that status, and we've touched on this in past episodes, is that the tax rates are very similar to married filing jointly. But 2025 was the first year where she actually had to file as single. You're basically saying, okay, the income thresholds for those tax brackets have effectively been cut in half.

Wendy McConnell: Right.

Eric Blake: That's really where we started looking at the fact that a lot of the flexibility we've had the last couple of years has kind of disappeared. It's really not there. She's not eligible for Social Security yet, so there are some factors we're trying to work through.

One of the things we were talking about is something called a retirement tax cliff and how that fits into the bigger picture of retirement planning, especially for women who may be going through these financial decisions on their own after a divorce or after the loss of a spouse.

When we're talking about a retirement tax cliff, we're typically referring to a potentially sharp increase in tax rates, like going from married filing jointly down to single.

Wendy McConnell: And then we can push them off the cliff.

Eric Blake: And we push them off the tax... No more...

Wendy McConnell: Taxes.

Eric Blake: Not exactly. Unfortunately, it's the reverse of that.

It could be a sharp increase in tax rates. It might be a spike in income for different reasons. We'll talk about some of those. What's ultimately important is that sometimes a relatively small income decision in one area of your financial life creates a much larger financial impact somewhere else, and it may not be planned for. You might not even be aware of it.

That's really the purpose of today's episode, to talk through some of those tax traps that might be hiding out there, create awareness, and ultimately encourage you to ask the right questions and seek out the right information so you can make better decisions.

Because in retirement, one single decision might affect Medicare premiums. It might impact Social Security taxation, healthcare costs, or deductions you might otherwise qualify for. Ultimately, it's about how much income you actually get to keep during retirement.

For widows in particular, this becomes even more important because of something we've talked about before called the widow's penalty. We've done episodes on it. It's where household income may decline after losing a spouse, but taxes, and sometimes Medicare costs, can actually increase because the surviving spouse is now filing as single instead of married filing jointly.

Even with divorce, while it's obviously different emotionally and legally, many divorced women experience similar challenges after transitioning from married filing jointly to single.

I think one of the biggest mistakes I see is people assuming retirement taxes work the same way they did during their working years.

Wendy McConnell: They don't?

Eric Blake: Not really. During your working years, people often focus on tax brackets. What tax bracket am I in? How much can I save into retirement accounts to reduce my taxes? During the accumulation years, that can be a perfectly reasonable approach.

But retirement income planning is very different.

Wendy McConnell: Mm-hmm.

Eric Blake: Today we're going to walk through several hidden retirement tax traps, why they matter, and some planning considerations that may help you avoid unintended surprises down the road.

Wendy McConnell: All right, let's do it.

Eric Blake: Let's start with the idea of what a tax cliff actually is in retirement planning.

Most people during their working years think only about tax brackets. They carry that same mindset into retirement. They might say, "Well, I'm in the 22% tax bracket," or, "I'm trying to stay in the 12% tax bracket."

One thing that makes retirement tax planning confusing is that many people assume the rules work just like ordinary tax brackets. If you move into a higher bracket, only the dollars above that threshold are taxed at the higher rate. If you're just one dollar into the 22% bracket, only that one dollar is taxed at 22%.

But that's not necessarily the case when we start talking about retirement tax cliffs.

In some situations, crossing a specific income threshold by even a relatively small amount can create a much larger financial impact somewhere else.

A great example is Medicare IRMAA surcharges, those additional Medicare premiums you may have to pay if your income crosses a certain threshold.

With Medicare, it's literally one dollar. If your income goes into the next threshold by even one dollar, your Medicare premiums increase.

Wendy McConnell: Lovely.

Eric Blake: Lovely, right? But again, it's about awareness.

Then you think about the Affordable Care Act, or what some people call Obamacare. Those subsidies work a little differently, but there are situations where going above certain income limits can significantly reduce, or even eliminate, tax credits or subsidies that help pay your premiums.

Other retirement cliffs are less about one dollar and more about major shifts in income. Required minimum distributions can suddenly introduce a new layer of taxable income into your retirement plan that affects taxes, Medicare premiums, and other parts of retirement planning all at the same time.

Additional income could also cause more of your Social Security benefits to become taxable. It might increase your capital gains exposure depending on your investments or real estate. It could even reduce or eliminate some of the new deductions available under the current tax law.

For women who are widowed or divorced, these changes become even more significant because of the change in filing status. Tax brackets and Medicare thresholds often change dramatically after these major life transitions.

That's why proactive planning matters so much before major life transitions whenever possible. Not because we can control everything, but because understanding these rules can create much more flexibility later if we take proactive steps early.

Wendy McConnell: Okay.

Eric Blake: Let's talk about what's probably the best-known retirement tax cliff, required minimum distributions, or RMDs.

We've covered these before, but I want to focus on the planning strategies because this can be one of the biggest tax planning shifts retirees face later in life.

Part of the challenge is that many people don't actually know when their RMDs begin because we've had so many tax law changes over the last several years. It was age 70½ for years, then 72, then 73 or 75 depending on your birth year. That creates confusion because people remember what they heard years ago and assume it's still true.

Many people spend their entire working careers doing exactly what they were told to do. They contribute to retirement accounts, max out their 401(k), delay taxes as long as possible, and often that works very well during the accumulation years.

But later in retirement, those larger IRA balances can create planning challenges because eventually the IRS requires you to begin taking money out whether you need the income or not. Those distributions are generally taxable.

Many retirees discover those distributions create a domino effect. Not only do they generate taxable income, they can increase Medicare premiums, cause more of your Social Security to become taxable, and push you into much higher effective tax rates than expected.

Wendy McConnell: But if I know you, Eric, I know we can plan for this.

Eric Blake: We can. We're not quite to the planning part yet, but we're getting there.

It's not necessarily because one dollar suddenly changes everything. It's because required distributions introduce a new layer of income.

Going back to widows and divorcees, especially widows, maybe the retirement assets themselves haven't changed. I've used this example before. Perhaps both spouses each had $500,000 in IRA accounts. One spouse passes away, and now the surviving spouse has one million dollars in retirement accounts.

Now required distributions are based on that one individual instead of two people together, and that can significantly affect taxes, Medicare premiums, and everything else we've talked about.

Wendy McConnell: Yeah.

Eric Blake: Hi everyone, it's Eric. I hope you're enjoying today's episode.

I want to take just a quick moment to share a resource I think you'll find valuable.

If you've ever asked yourself, "How much is my Social Security reduced if I file early?" or, "Am I eligible for benefits as a spouse, surviving spouse, or even after divorce?" you're not alone.

That's why we created our Ultimate Guide to Women's Social Security Success. It includes six of our most popular Social Security guides and checklists for women.

Inside you'll find a 2026 quick reference guide with key Social Security amounts and limits, along with five additional guides and checklists to help you make more informed decisions about eligibility and filing strategies.

You can download it for free at womenssocialsecurityguide.com.

Keep it handy wherever you are in the decision-making process.

Now, back to the episode.

Next I want to talk about something that actually has its own name. I still consider it part of this retirement tax cliff discussion, but Social Security has what's called the tax torpedo.

Wendy McConnell: Let's get on it.

Eric Blake: It sounds exciting, but it's actually pretty simple.

Many retirees are surprised to learn that additional income from other sources can cause more of their Social Security benefits to become taxable.

We've covered Social Security taxation before, but it's important to understand that IRA withdrawals, retirement distributions, pension income, capital gains, and even Roth conversions can increase what's called provisional income, which determines how much of your Social Security becomes taxable.

This is where retirement planning becomes interconnected. Additional income from one source may increase ordinary income taxes while also increasing Social Security taxation and Medicare premiums.

For example, maybe an unexpected expense comes up. Perhaps you need an extra $10,000 from your IRA because your air conditioner broke down.

That withdrawal could push you from having only 50% of your Social Security benefit taxable to having as much as 85% taxable.

Wendy McConnell: No emergencies then. Just make sure of it.

Eric Blake: That's right. Plan everything perfectly.

Wendy McConnell: I'm sorry. Please go ahead.

Eric Blake: I was going to make a joke about that being why you use a financial advisor, but that's probably not a great example because life still happens.

It's not just the $10,000 IRA withdrawal that's taxable. Most people understand that part. It's the additional portion of your Social Security that suddenly becomes taxable too.

That $10,000 distribution could actually result in $15,000 of taxable income.

If you don't understand how these rules work and how income stacks together, you can end up paying much more to Uncle Sam than necessary.

Maybe you truly need the extra $10,000. You can't avoid taking it. But if you've diversified your investments from a tax standpoint, perhaps you could have taken that money from a Roth account instead of a traditional IRA.

Wendy McConnell: Okay.

Eric Blake: That alone could potentially make a significant difference.

Wendy McConnell: Gotcha.

Eric Blake: Now I want to touch on healthcare costs because this is another area that surprises people. It's another one of the bigger retirement tax cliffs that people don't anticipate.

If you're already on Medicare, this often shows up as IRMAA, which stands for Income Related Monthly Adjustment Amount.

In simple terms, Medicare premiums increase once your income crosses certain thresholds.

The first threshold may not have a huge impact, but by the second level you're typically paying roughly double the standard Medicare premium. The higher your income, the larger the increase.

What surprises most retirees is that these premium increases are generally based on your tax return from two years earlier.

The financial decision you make today may not affect your Medicare premiums until later, and by then you may have forgotten about it.

For widows and divorced women who are now filing as single, those income thresholds become much tighter. The same retirement income that once worked reasonably well on a joint return can suddenly create much higher Medicare premiums.

Sometimes these spikes happen during major life transitions. Maybe you sell a home, sell investments to generate income, or take a large IRA withdrawal. Any of those decisions could affect your healthcare costs.

Wendy McConnell: Yes.

Eric Blake: Maybe you're not yet Medicare eligible and you're using Affordable Care Act coverage. You simply needed money to live on, so you took it from your IRA without thinking much about it. Suddenly it's increasing future Medicare premiums or reducing ACA subsidies.

A common real-life example is someone who becomes widowed or divorced and decides to sell the family home.

If you're married, you can exclude up to $500,000 of gain on the sale of your primary residence. If you're single, it's only $250,000.

Wendy McConnell: Okay.

Eric Blake: Even if you sold the home for $500,000, you could now have $250,000 of taxable gain. That could also result in much higher Medicare premiums a couple of years later.

Selling a home isn't considered one of the qualifying life events that allows you to request relief from higher Medicare premiums.

If you receive an IRMAA notice, there is Form SSA-44. If your situation falls under one of eight qualifying life events, you may request a reduction. Things like loss of income or the loss of a spouse may qualify.

Selling an asset does not, regardless of why you had to do it.

That's another reason you need to understand these retirement tax cliffs.

Wendy McConnell: Okay.

Eric Blake: If you're under age 65 and not yet Medicare eligible, healthcare planning creates different tax cliffs.

Under the Affordable Care Act, income thresholds determine how much assistance you receive through tax credits or subsidies. Once your income reaches certain levels, those benefits may disappear.

Understanding where those thresholds are becomes especially important when planning healthcare expenses.

Healthcare decisions are already stressful in retirement. Finding out that taking extra money from your IRA caused higher Medicare premiums or reduced valuable tax credits only adds another layer of stress.

All right. You asked about solutions earlier, so let's finally get there.

Wendy McConnell: I knew you would have them.

Eric Blake: Of course.

I know all of this can sound overwhelming when you start layering these different issues together. But understanding them early creates opportunities to plan proactively instead of reacting later.

Sometimes it's simply good planning. It's not always about reducing taxes this year.

Sometimes it actually makes sense to intentionally accept a smaller tax cliff today in order to avoid a much larger one later.

Wendy McConnell: Okay.

Eric Blake: That might mean doing smaller Roth conversions over multiple years instead of waiting until required minimum distributions create a much bigger tax problem.

It might mean recognizing income during lower-income years after retirement but before Social Security begins, before Medicare eligibility, or before required minimum distributions start.

Maybe you take smaller IRA withdrawals. Maybe you sell an appreciated asset before Medicare eligibility so it doesn't increase your premiums later.

If you're going to sell something, perhaps age 61 or 62 is a better time than waiting until you're 63 or 64 and close to Medicare eligibility.

Wendy McConnell: Okay.

Eric Blake: For retirees under age 65, it may simply mean carefully managing income to maximize Affordable Care Act tax credits.

It also means understanding where your income comes from. Have you diversified your investments enough that you can choose between IRA assets and after-tax assets to manage your tax situation?

It might involve qualified charitable distributions, or QCDs, to reduce the impact of required minimum distributions. We've discussed those in previous episodes.

If you're already giving to charity, you may be able to give directly from your IRA. It satisfies your required minimum distribution while avoiding taxes on those dollars.

Often it's not dramatic changes. It's smaller proactive adjustments made over time. Those smaller adjustments can create much greater flexibility later, especially for women who may eventually face the widow's penalty or a change in filing status.

Wendy McConnell: Okay.

Eric Blake: This is where tax projections and ongoing retirement planning become incredibly valuable.

The goal isn't always eliminating taxes entirely. In fact, I'd argue that if you paid absolutely no taxes in a given year, that was probably a missed opportunity.

If your tax bracket was that low, could you have done Roth conversions? Could you have recognized income at a lower tax rate instead of leaving everything in your IRA because you didn't need it?

You might think, "Well, I didn't pay any taxes this year." But then several years later you're paying far more because you chose not to pay some taxes when rates were lower.

Wendy McConnell: Right.

Eric Blake: It's all about being strategic and creating a sustainable, flexible retirement income strategy over time.

For women who are divorced, widowed, or managing finances independently, understanding how these moving pieces fit together can create much greater confidence when making financial decisions.

Those decisions don't necessarily become easier, but they do become much clearer. When you've experienced a major life event, clarity becomes incredibly important.

We've covered several retirement tax cliffs today, including required minimum distributions, Social Security taxation, Medicare premiums, and healthcare costs.

Many parts of retirement planning are far more connected than people realize.

For women navigating retirement after divorce or widowhood, those interactions become even more important because of changes in filing status, income thresholds, and healthcare costs.

One of the biggest themes throughout today's episode is that retirement planning is no longer just about generating income.

You need to coordinate where income comes from, when you take it, and how one financial decision affects several other parts of your financial life at the same time.

That's why proactive planning, tax projections, and understanding your options become so valuable. It's not about making the perfect decision. It's about creating flexibility and avoiding unintended surprises later.

Wendy McConnell: Okay.

Eric Blake: I've referred to several past episodes throughout today's conversation.

If today's discussion raised questions about required minimum distributions, the widow's penalty, or Social Security taxation, we've covered those topics before. We'll include links to those episodes in the show notes so you can take a deeper dive if you'd like.

All right, Wendy, I always ask you this. Was there anything you felt was difficult to understand? Anything we should go back over that would be helpful?

All of it?

Wendy McConnell: Yeah.

Eric Blake: So, RMDs.

Wendy McConnell: Stop asking me this.

Eric Blake: I'll send you the links to the episodes too. How about that?

Wendy McConnell: Okay. All right. That's good.

Eric Blake: Well, thank you so much for tuning in. Thank you, Wendy, as always, for joining me.

If today's episode showed you how easily taxes, Medicare premiums, and required minimum distributions can overlap in retirement, that's exactly why proactive planning matters.

If you're looking for a personalized retirement plan that helps you make smart decisions around income, investments, taxes, Medicare, and long-term retirement planning, you can visit getmysimplyretirementroadmap.com to schedule a call with our team.

That is it for today's episode. For all the links and resources mentioned today, you can visit thesimplyretirementpodcast.com.

Please don't forget to like, follow, and share the show. And until next time, please remember, retirement is not the end of the road. It's the start of a new journey.