Personal Finance

We're in our 60s with $9 million in liquid assets but worried about upcoming large tax liabilities

John Seetoo

Published: January 7, 2025 6:18 pm

24/7 Wall Street Key Points

• People who have amassed large retirement nest eggs approaching or already in 8 figures need to start managing those funds years before retirement age to mitigate excessive taxation that can escalate higher when required minimum withdrawal (RMD) age is reached.
• While many people advocate taking early retirement when large nest eggs reach the stage where one’s annual income is a negligible amount by comparison, some people enjoy continuing to work and the sense of accomplishment and productivity worth that it may entail.
• IRS rules can change each year, so careful and proactive monitoring of new guidelines and crafting tweaks to tax-savings strategies already underway or being prepared should be updated at least semi-annually.
• Take this quiz to see if you’re on track to retire (Sponsored)

“Collecting more taxes than is absolutely necessary is legalized robbery.”  None other than President Calvin Coolidge is responsible for that quote. Unfortunately, politicians on both the Left and the Right often forget that fact, and the act of navigating the tax code and deploying effective tax mitigation strategies has become a game of 3-D chess. Even Albert Einstein once said, “The hardest thing in the world to understand is the income tax.”

Nevertheless, President Coolidge’s quote raises an important issue with the “absolutely necessary” part of the quote. The tax code may be labyrinthine, but, like a convoluted treasure map, there are ways to use it to at least attempt to minimize taxes down to their “absolutely necessary” and legal levels. 

A $9 Million Retirement Nest Egg With Concerns About RMD Taxes

A 62-year old Reddit poster recently hit a retirement target milestone of $9 million. However, he was concerned about what his tax bite will be, even more so when RMD compliance kicks in when he reaches his mid-70s. He and his wife have a financial planner, but do not yet have a retirement tax specialist. The planner advises them to change their aggressive savings mindset to one more willing to spend since the couple’s income and taxable investments continue to exceed their spending habits. Their financial profile details include:

• Poster enjoys his $180,000 salaried job and will likely retire next year.
• The employer contributes $22,000 annually to the poster’s 401-K.
• Poster contributes $30,000 annually to his Roth 401-K.
• His 58-year old wife is already retired with a $70,000 annual pension (including a 2% COLA).
• The couple earns $2,000 monthly in passive rental income from two properties (separate from the retirement funds).
• Total cumulative retirement nest egg has $6.5 million in combined tax-deferred 401-K holdings and $2.5 million after tax in Roth accounts.
• Social Security payments are expected to be close to the maximum for his age and for when his wife reaches 62.
• The poster makes no mention of an HSA. 

Strategy and Philosophy

Under the aforementioned scenario, a number of strategies the poster and his wife can undertake come to mind, as well as practical steps suggested by respondents. These include:

• Immediately commence a Roth conversion plan to shift funds towards an after-tax status. Calculating the marriage deduction and Medicare deductions under the new 2025 IRS rules might be able to lower the poster and his wife down a couple of tax brackets, so timing conversions in sync should save on income tax.
• The IRS updates rules every year, so careful monitoring to address any tweaks needed to active or pending mitigation strategies should be conducted at least semi-annually.
• While commencing on Medicare, the poster should open and contribute to an HSA account, as there is no guarantee that Medicare will remain solvent in the next decade. 
• As the poster seems to like working, he and his wife should consider creating a business out of a hobby or side hustle. This would allow regular hobby spending to be deducted as business expenses. Transportation, meals, entertainment, and other expense that can legitimately be deducted may create losses, which can be set against other passive income to lower the overall net taxable base. As long as the business generates a profit in 2 out of 5 years, the IRS will allow it to continue as an ongoing taxable business entity.

Philosophically, some respondents in favor of early retirement cited that once passive investment income exceeds salary net after taxes, that one is essentially working for free, They also note that time is the most precious commodity and that one should spend it living life if they have the luxury of not having to work.

Conversely, others noted that those who truly love their work, like Warren Buffett’s partner, Charlie Munger, who continually worked into his 90s before his demise, don’t view it as work. They may love the social action with colleagues, the sense of purpose, fulfillment and accomplishment, and the perks that may come with their jobs. 

Perhaps the best perspective came from one respondent in a similar situation who listed these points:

• Taxes are an inevitable part of life, but in the bigger picture, $9 million minus even full taxes is still a lot of money.
• Two-thirds of life is spent building the nest egg, so one should enjoy the last third.
• Sufficient cash flow to fund the couple’s chosen lifestyle is the most important part of the equation, and should take precedence over tax concerns. 
• Unduly stressing over taxes undermines quality of life if the overall impact to the couple’s lifestyle is negligible.
• Work is fine if the poster is super happy about it, but it should not be focused purely to get more money or to address taxation fears. 

This article is meant to be purely informative only. Any more comprehensive retirement finance advice should be from a consultation with a financial professional.