Short explainer by Craig Wear, CFP® about the tax risks of traditional IRAs: yearly pre-tax contributions grow tax-deferred, then are subject to required minimum distributions (RMDs) starting at age 73. Those RMDs raise taxable income, can push taxpayers into higher brackets, increase the taxable portion of Social Security, and raise Medicare Part B/D premiums via IRMAA — potentially leaving heirs with large tax burdens.
But that's the common misconception is that you should always defer and leave it deferred. I would say tax free is better tax free and deferred is better than just deferred. Let's first remember that when you have an ira the problem exists because you make these contributions year after year after year and they grow and they're tax deferred and taxes are due on every dollar that you withdraw and if you don't withdraw them then they force you withdraw them through these things called required minimum distributions. So I call that kind of a tax domino effect. So you got these RMDs that begin when you're 73 and they grow each year. That increases your taxable income pushing you into a higher bracket. Now your Social Security becomes more taxable and your Medicare premiums through something called IRMAA also rise for Part B and Part D. And at the end of the day then it ends up leaving your heirs with this huge tax bill as they receive their inherit.
