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If you’re nearing retirement with a large pre-tax 401(k) plan or individual retirement account balance, you need a plan for managing future levies, experts say.
With required withdrawals approaching, great savers could face a “tax time bomb” in retirement, said Scott Bishop, partner and managing director of Presidio Wealth Partners.
Only 3 in 10 Americans have a plan to reduce taxes on retirement savings, according to a January study from Northwestern Mutual.

Vladimir Vladimirov | E+ | Getty Images

If you’re nearing retirement with a large pre-tax 401(k) plan or individual retirement account balance, you need a plan for managing future levies, financial experts say.
Great savers could face a “tax time bomb” in retirement when required withdrawals kick in, said certified financial planner Scott Bishop, partner and managing director of Presidio Wealth Partners in Houston.

Starting in 2023, Secure 2.0, a $1.7 trillion legislative package signed by President Joe Biden in December 2022, raised the age that savers must start taking required minimum distributions, or RMDs, to 73. RMDs are typically tied to pre-tax retirement accounts, which incur regular income taxes for withdrawals.
Those RMDs could push some retirees into a higher tax bracket, according to Bishop, who is also a certified public accountant.
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Plus, the Tax Cuts and Jobs Act of 2017 temporarily reduced federal income tax brackets, with the top rate falling to 37% from 39.6%. Those lower rates are scheduled to sunset after 2025 without an extension from Congress.

Meanwhile, only three in 10 Americans have a plan to reduce taxes on retirement savings, according to a January 2024 study of roughly 4,600 U.S. adults from Northwestern Mutual.

However, once retirees reach age 59½, there’s no longer a penalty on most withdrawals from IRAs, which could offer tax planning opportunities, Bishop said.
Here are some key tax planning strategies to consider before RMDs begin.

Weigh ‘partial Roth conversions’

“The most obvious strategy is partial Roth conversions at lower tax rates,” said CFP George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts.
Roth conversions transfer pretax or nondeductible IRA money to a Roth IRA, which begins tax-free future growth. But you’ll owe regular income taxes on the converted balance in the year you make the conversion.

The temporary 22% and 24% federal income tax brackets “offer the best opportunity” to convert large pretax balances to Roth IRA, Gagliardi said. Without action from Congress, those rates will revert to 25% and 28%.

Withdraw retirement funds sooner

If you retire around age 59½ and you’re in a lower tax bracket, you could also consider withdrawing pretax retirement funds sooner, said Bishop. Typically, investors can tap IRAs and 401(k)s without penalty for any reason at age 59½.
“You can use some of the lower brackets now versus hitting higher brackets with RMDs later,” he said.

The strategy could be appealing before collecting Social Security income, particularly between age 59½ and 63, since added income can impact Medicare premiums, experts say.
In some cases, higher income can trigger income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums. Your IRMAA is based on so-called modified adjusted gross income, which is your adjusted gross income plus tax-exempt interest, from two years prior.

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The size of homes newly under construction in 2023 dropped to an average of 2,411 square feet, or a median of 2,179 square feet, the smallest size in 13 years, according to the National Association of Home Builders.
As the typical home size in the U.S. continues to come down, here’s what to consider as a buyer.

Thana Prasongsin | Moment | Getty Images

Buyers want smaller homes

Smaller homes help slash building costs, but much of the trend stems from buyer demand. Homebuyers are expressing a desire for smaller homes, whether as a reaction to high prices or because they simply want a smaller space, experts say.
The typical buyer today wants a 2,067-square-foot home, according to the NAHB’s 2024 What Home Buyers Really Want study. In 2003, the desired home size was 2,260 square feet.

“Buyers are shaped by the environment when they’re in a low-inventory, low-housing-affordability environment,” said Robert Dietz, chief economist for NAHB. “They make certain compromises.”
In some cases, buyers might simply desire a compact home. In the U.S., nearly 30% of recent homebuyers are single, said Jessica Lautz, deputy chief economist at the National Association of Realtors.
“They may not need 2,000 square feet or even want that for themselves,” she said.
About 28% of polled buyers recently purchased a home between the sizes of 1,501 to 2,000 square feet; while 26%, purchased a home between 2,001 to 2,500 square feet, according to the NAR’s 2024 Home Buyers and Sellers Generational Trends Report. Another 16% bought a home that’s 1,500 square feet or smaller.
The survey received 6,817 responses from homebuyers aged 18 and up who had purchased a home between July 2022 and July 2023.

How zoning influences home sizes

About 38% of builders say they built smaller homes in 2023, and 26% said they plan to build even smaller homes this year, according to NAHB.
While buyer demand is driving the trend, an area’s zoning rules may also play a role.
Some jurisdictions have “exclusionary zoning practices,” which may require builders to make homes of a minimum lot size, said Dietz.
“If you’re building a home in a certain neighborhood and that home has to sit on a half acre lot, or a lot close to a full acre, you’re not going to be building a small home on that lot,” said Dietz.

The growth in such zoning rules and regulatory costs made it difficult for builders to make new, smaller homes in the years after the Great Recession, he said.
Now, builders can make smaller homes in the form of townhouses as some areas relax their zoning rules, said Dietz.
In the first quarter of 2024, about 42,000 townhouses, or single-family attached homes, began construction, according to U.S. Census data. The new figure is 45% higher than in the first quarter of 2023, NAHB found.
“I don’t think it’s limited to one region, one type of geography,” said Dietz. “I think it’s really in places where jurisdictions are permitting zoning for that kind of medium-density environment.” 

‘A shrinking of the space in the required rooms’

If you’re a buyer on the market considering a home around the median size, or roughly 2,000 square feet, “what you’re really talking about going from a medium-sized home to a smaller home is a shrinking of the space in the required rooms,” Dietz said.
You could consider using your spaces for multiple purposes, experts say.
“We don’t have a dedicated office,” said Dietz, who lives in a two-bedroom townhouse with his wife, a college professor, and their children. “Our dining room/kitchen doubles as basically my wife’s office.”

Space-saving storage around the house is key for a smaller property, he said.
“Literally every part of our home that has got a space that can be turned into storage, we’ve converted that,” Dietz said.
During the pandemic, many homeowners looked at their homes in new ways, Lautz said.
“Some asked, ‘Do I actually need an extra bedroom or could I use that as a home office or gym?'” she said.
A smaller property can also result in lower energy and maintenance costs, she said.
But if you’re a buyer who desires traditional home spaces like dining rooms, you can still find an existing home on the market with such features, Lautz said.
“There’s always going to be that ebb and flow within properties and how that space is being used,” she said.

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About half of Americans feel optimistic about the year ahead, according to a recent report.
Still, concerns about inflation are also rising.
“Vibecession” is the term used to describe the disconnect between how the economy is doing and how some households feel about their financial standing.

Even as fears of recession subsided, new economic worries took their place.
Concerns about inflation and interest rates are now at a two-year high, according to a recent report by credit reporting agency TransUnion.

Although Americans have seen their buying power rise amid cooling inflationary data and a strong job market, 84% of all adults still rank inflation among their top concerns, followed by housing prices and interest rates, TransUnion’s consumer pulse study found.
“There continues to be positive progress against bringing down inflation,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. However, “consumers continue to feel worse about it.”

Are we in a ‘vibecession’?

At the same time, more than half, or 55%, of Americans are optimistic about their household finances over the next year, TransUnion’s report found. That upbeat feeling is driven, in part, by confidence in the labor market and continued wage increases.
But while consumer sentiment has been improving, workers remain at least somewhat sour on the state of the economy. The disconnect between the economy’s overall strength and its perceived weakness among households is characterized by the term “vibecession.”
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To be sure, prices are still rising. They’re just growing at a slower pace than they had been.
The consumer price index, a key inflation measure that tracks average prices across a broad basket of consumer goods and services, increased 3.3% in May relative to a year earlier, according to the Bureau of Labor Statistics. That’s down from a pandemic-era peak of 9.1% in June 2022.
“We are seeing now a price level that is much higher than two or three years ago and that feels bad,” Wise said.
“From filling up a tank of gas to making a rental payment to buying groceries, most consumers are paying more today for everyday expenses than they ever have,” he added. “And if they’re using a credit card to make these purchases, their interest rates are at much higher levels, so costs also are rising for those consumers carrying a balance.”

A growing divide in sentiment

TransUnion’s report found a widening gap between those who say their household incomes are keeping up with inflation versus those who say their incomes are not.
“If you’re a homeowner or if you own financial assets, you’ve done very well, but you’re leaving out huge segments of the population,” Joyce Chang, JPMorgan’s chair of global research, said at the CNBC Financial Advisor Summit last month.
“The wealth creation was concentrated amongst homeowners and upper-income brackets, but you probably have about one-third of the population that’s been left out of that — that’s why there’s such a disconnect,” Chang said of the last few years.

Relief for those hardest hit

What’s more, the Federal Reserve’s string of 11 rate hikes since 2022, coupled with higher inflation, have hit working-class Americans particularly hard. 
Many of these households have exhausted their savings and are now increasingly leaning on credit cards to make ends meet.

But credit cards are one of the most expensive ways to borrow money. The average credit card charges almost 21%, a near-record, according to Bankrate.
For now, those rates are likely to stay where they are, which also means there may not be much help on the way for those struggling with a vibecession.
“Interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers,” said Greg McBride, chief financial analyst at Bankrate.com.
“Utilize zero-percent credit card balance transfer offers, shop around for lower fixed-rate personal loans and home equity loans, and channel as much income as possible toward paying down this debt as quickly as possible,” McBride advised.

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Two federal judges have blocked significant parts of President Joe Biden’s new student loan repayment plan.
The preliminary injunctions stop the U.S. Department of Education from implementing provisions of The Saving on a Valuable Education, or SAVE, plan, including the lower payments set to begin in July.
The Biden administration also won’t be able to forgive any more debt under the plan until the cases are decided.

The U.S. Department of Education in Washington, D.C.
Caroline Brehman | CQ-Roll Call, Inc. | Getty Images

Two federal judges in Kansas and Missouri have temporarily halted significant parts of President Joe Biden’s new student loan repayment plan, putting debt relief for millions of Americans in jeopardy.
The Monday evening rulings stop the U.S. Department of Education from implementing major provisions of the Saving on a Valuable Education, or SAVE, plan. Until the cases are decided, the Biden administration is prevented from forgiving any more debt under the new income-driven repayment plan and from further reducing borrowers’ payments in July, as it planned to.

More than 8 million borrowers have enrolled in the SAVE plan since it launched in August. Those enrolled were less than a week away from seeing their monthly bills drop by a half or more.
“Borrowers will be disappointed [and] angry that financial relief was yanked away from them at the last minute,” said higher education expert Mark Kantrowitz.
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The preliminary injunctions are a result of lawsuits filed earlier this year by Republican-led states, which hoped to upend the Biden administration’s creation of what it called the most affordable student loan repayment plan in history. Under the plan, many borrowers pay just 5% of their discretionary income toward their debt each month, and anyone making $32,800 or less has a $0 monthly payment.
The states argued that the Biden administration was overstepping its authority and trying to find a roundabout way to forgive student debt after the Supreme Court blocked its sweeping plan last year.

U.S. Secretary of Education Miguel Cardona vowed to fight for the relief.
“Republican elected officials and special interests sued to block their own constituents from being able to benefit from this plan — even though the Department has relied on the authority under the Higher Education Act three times over the last 30 years to implement income-driven repayment plans,” Cardona said in a statement Monday.
“The Department of Justice will continue to vigorously defend the SAVE Plan,” he added.

These rulings do not impact the Biden administration’s second attempt to deliver broad student loan forgiveness, after its first aid package was ruled unconstitutional by the Supreme Court. That do-over effort is still ongoing.
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The pace of inflation has come down from its 40-year peak in June 2022.
But retirees and near-retirees are still feeling the pinch of higher price growth.
Here’s how inflation is upending their retirement plans.

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Savings shortfall worsens financial insecurity

Many respondents to Prudential’s survey say they worry they will outlive their savings. That includes 67% of 55-year-olds; 59% of 65-year-olds and 52% of 75-year-olds.

The age 55 cohort is the “most financially insecure” about their retirement readiness, Caroline Feeney, CEO of Prudential’s U.S. business, said during a Thursday presentation of the survey results.

That comes as 55-year-olds face a deep savings shortfall, with a $47,950 median savings toward retirement versus the $446,565 recommended balance, based on eight times the average U.S. salary, according to Prudential.
“This is the first group that is entering retirement, [with] largely no pensions,” Feeney said. “And then add on top of the feeling of additional financial insecurity because they’re not quite sure if Social Security will be there to fully support them.”

Lower Social Security COLA forecast for 2025

Unlike most other sources of retirement income, Social Security benefits are automatically adjusted for inflation each year.
As current retirees continue to feel the pinch of higher costs, slowing inflation points to a lower Social Security cost-of-living adjustment next year.
The Social Security cost-of-living adjustment may be 3% in 2025, estimates Mary Johnson, an independent Social Security and Medicare analyst.
Beneficiaries saw a 3.2% Social Security cost-of-living adjustment this year — resulting in an average retirement benefit increase of just over $50 per month. That followed record Social Security cost-of-living adjustments of 8.7% in 2023 and 5.9% in 2022.
Social Security’s annual adjustments are based on a certain measure of inflation — the consumer price index for urban wage earners and clerical Workers, or CPI-W.

The latest reading for May shows the CPI-W is up 3.3% from a year ago.
Yet certain categories — including food and services — are still seeing elevated rates of inflation.
While the CPI-W is used to calculate Social Security’s COLA each year, some argue it may not be the best measure to accurately gauge retirees’ costs.
For example, while the CPI-W assumes older adults spend about two-thirds of their income on housing, food and medical costs, those items actually make up about three-quarters of their budgets, according to Johnson.
“This disparity suggests that my COLA estimate, which is based on the CPI-W, may be undercounting real senior inflation by more than 10%,” Johnson said.

Another estimate from The Senior Citizens League points to an even lower COLA for 2025: almost 2.6% based on the latest inflation data.
The discrepancy between the COLA estimates is due to different methods used to come up with the calculations.
If inflation continues to subside, Johnson said her COLA estimate may fall even lower. More

Problems with the new FAFSA rollout are persisting, putting more pressure on families worried about how they will afford the high costs of college.
To that end, The Princeton Review ranked colleges by how much financial aid is awarded and how satisfied students are with their packages.
At some schools, the average scholarship given to students with need was more than $68,000 in 2023-24.

Ongoing problems with the new Free Application for Federal Student Aid have delayed financial aid award letters — and have even prevented many high school seniors and their families from applying for aid at all.
As of June 14, only 45% of high school graduates have completed the FAFSA, according to the National College Attainment Network. A year ago that number stood at 52%.

“That’s over 300,000 students that simply didn’t apply for financial aid, and many of those students have the highest need,” said Robert Franek, The Princeton Review’s editor-in-chief. “That is a crushing blow.”

Without financial aid, the price tag at some four-year colleges and universities — after factoring in tuition, fees, room and board, books, transportation and other expenses — is now nearing $100,000 a year.
But even though college is getting more expensive, students and their parents rarely pay the full amount.
Beyond federal aid, many may also be eligible for financial assistance from their state or college.
To that end, The Princeton Review ranked colleges by how much financial aid is awarded and how satisfied students are with their packages. The 2024 report is based on data from its surveys of administrators and students at over 650 colleges in the 2023-24 school year.

“Because of the difficulty with the FAFSA, some colleges have really stepped up and addressed financial aid and cost of college directly and aggressively,” Franek said.
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That, in turn, will bring more families in the door, according to Nancy Goodman, founder of College Money Matters, a nonprofit focused on helping high school students and their families make informed decisions about paying for college.
“Some colleges are known for more financial aid and I think they will be more attractive, for sure, to students,” she said.

Top 5 private colleges for financial aid

Among the top five schools on The Princeton Review’s list, the average scholarship grant awarded in 2023-24 to students with need was more than $68,000. Of all the financial aid opportunities the FAFSA opens up, grants are the most desirable kind of assistance because they typically do not need to be repaid.

Yale University
Yana Paskova / Stringer (Getty Images)

1. Yale UniversityLocation: New Haven, ConnecticutSticker price: $87,150Average need-based scholarship: $71,577Average total out-of-pocket cost: $15,573
2. Vassar CollegeLocation: Poughkeepsie, New YorkSticker price: $85,220Average need-based scholarship: $61,252Average total out-of-pocket cost: $23,968
3. Williams CollegeLocation: Williamstown, MassachusettsSticker price: $85,820Average need-based scholarship: $70,764Average total out-of-pocket cost: $15,056
4. Pomona CollegeLocation: Claremont, CaliforniaSticker price: $86,814Average need-based scholarship: $65,925Average total out-of-pocket cost: $20,889
5. California Institute of TechnologyLocation: Pasadena, CaliforniaSticker price: $82,758Average need-based scholarship: $74,013Average total out-of-pocket cost: $8,745

Top 5 public colleges for financial aid

Among the five schools on this list, the average scholarship grant awarded in 2023-24 to students with need was more than $20,000.  

University of Virginia in Charlottesville, Virginia.
Win McNamee | Getty Images

1. University of VirginiaLocation: Charlottesville, VirginiaSticker price (in-state): $35,284Average need-based scholarship: $27,233Average total out-of-pocket cost: $8,051
2. University of North Carolina at Chapel HillLocation: Chapel Hill, North CarolinaSticker price (in-state): $22,814Average need-based scholarship: $17,853Average total out-of-pocket cost: $4,961
3. New College of FloridaLocation: Sarasota, FloridaSticker price (in-state): $20,271Average need-based scholarship: $17,607Average total out-of-pocket cost: $2,664
4. University of Michigan — Ann ArborLocation: Ann Arbor, MichiganSticker price (in-state): $31,688Average need-based scholarship: $26,613Average total out-of-pocket cost: $5,075
5. Truman State UniversityLocation: Kirksville, MissouriSticker price (in-state): $22,354Average need-based scholarship: $11,610Average total out-of-pocket cost: $10,744
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In 2023, the average 401(k) plan savings rate maintained a record 11.7%, including employee deferrals and company contributions, according to Vanguard.
The company suggests a combined target savings rate of 12% to 15%, depending on income.
However, the right percentage can vary based on your age, goals, timeline and other factors, financial experts say.

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The average 401(k) savings rate — including employee deferrals and company contributions — has maintained historic levels as plan designs make it easier for workers to set money aside.
In 2023, the average combined savings rate was an estimated 11.7%, which matched a record high from 2022, according to Vanguard’s yearly analysis of more than 1,500 qualified plans and nearly 5 million participants.

A separate Fidelity report also found record savings with a combined rate of 14.2% for the first quarter of 2024. That report was based on almost 26,000 corporate plans and nearly 24 million participants.
Vanguard recommends saving 12% to 15% of your earnings, including employer contributions, for retirement every year. Fidelity’s benchmark is 15%.
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“You want to be increasing how much you’re saving by at least 1% every year,” and aim for that combined 12% to 15% benchmark, said Dave Stinnett, Vanguard’s head of strategic retirement consulting.
Nearly 25% of participants deferred more than 10% of earnings in 2023, the analysis found. And 43% of employees increased their savings rate that year, Vanguard reported.

In 2023, an estimated 14% of participants hit the 401(k) deferral limit, which was $22,500 for savers under age 50, Vanguard found. That share of workers who max out plans has been the same since 2020.

401(k) plan designs have boosted savings over time

The average employee deferral rate returned to a record high of 7.4% in 2023 after falling slightly the previous year, the Vanguard report found. Employees deferred an average of 9.4% during the first quarter of 2024, according to Fidelity.
401(k) plan features like automatic enrollment and higher default savings rates have increased employee deferrals over time, Stinnett said.

“They’re coming in at a higher initial savings rate,” he said. “And many of these plans have an automatic increase or step function where people automatically save 1% more every year.” 
Some 60% of 401(k) plans had a default savings rate of 4% or higher in 2023, compared to 35% with that rate one decade ago, Stinnett said.

‘Several factors’ determine retirement-savings target

While financial service companies have identified retirement-savings benchmarks, the right percentage varies based on individual needs, experts say.
“I typically advise a target savings rate of 15%, combining both employee and employer contributions,” but the target can vary based on “several factors,” said certified financial planner Alyson Basso, managing principal of Hayden Wealth Management in Middleton, Massachusetts. 

Each client’s situation is unique, and their savings strategy should reflect their individual needs, goals and circumstances.

Alyson Basso
Managing principal of Hayden Wealth Management

Your age, proximity to retirement, income level, lifestyle expectations and current debt are among the factors used to decide the right percentage, she said.
For example, older clients may need to save more aggressively if they haven’t reached their retirement-savings goals, whereas younger clients may gradually boost deferrals as income grows. However, Generation Z has embraced investing early while Gen X has struggled to catch up.
“Each client’s situation is unique, and their savings strategy should reflect their individual needs, goals and circumstances,” Basso added.

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When couples experience financial stress, they often tend to avoid talking about it, according to new research from Cornell University.
To get the conversation started, it helps to reframe how you think about those issues.

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What successful couples do differently

Couples who say they feel their financial problems are perpetual are more likely to assume they have no solution, according to Cornell’s research.
Partners may feel they have fundamental differences in how they think about money, and therefore it’s not worthwhile to have a conversation where no solution exists, Garbinsky said.

Instead, if the couple views their issues as solvable, and can reflect on times when they previously were able to reach a compromise with their partner, they are likely more willing to talk about money, the research found.
Unfortunately, most couples by default tend to view their financial problems as perpetual, and therefore avoid talking about financial issues, Garbinsky said.

Communication avoidance may also contribute to financial infidelity, where a partner will withhold or hide financial information from their partner. The instinct to hide information may also be a strategy to avoid a fight, Garbinsky said.
Over time, a lack of communication — whether it be simple avoidance or financial infidelity — can harm a relationship.
“If you’re not talking and if you’re hiding things from your partner, it is having negative effects on your relationship quality over time,” Garbinsky said.

How to find a ‘middle ground’

To get past a money stalemate in a relationship, it helps to first acknowledge that it’s human, said Jude Boudreaux, a certified financial planner who is a partner and senior financial planner with The Planning Center in New Orleans.
Often people develop a way of approaching money based on their past and what makes them feel most comfortable, said Boudreaux, who is also a member of the CNBC FA Council. For example, growing up without a lot of money may lead someone to want to have a large savings cushion as an adult.
But rarely do savers marry other savers or spenders marry other spenders, Boudreaux said.
To start to unravel financial conflict, it helps to backtrack and talk about the money memories each partner has and how that shapes their feelings about money now, he said.

It also helps to frame possible decisions in a way that helps each partner feel at ease, Boudreaux said. That includes asking questions like, “What are ways that you might feel more comfortable if we were to make these decisions?” and “What would you need to feel heard going into this conversation, and then to be able to feel confidence coming out of it?”
After years of mediating these kinds of conversations for couples, Boudreaux said it’s important to go in with an optimistic approach. While one partner can take steps to be more conservative, the other may agree to be a little more aggressive.
“Often there’s a middle ground,” Boudreaux said.

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