Are you a middling millionaire with $1-$3 million in retirement savings? Be on the lookout for the ‘tax torpedo’

Aditi GangulyFri, April 24, 2026 at 11:07 AM UTC

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Toast to not overpaying taxes.

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The ideal game plan for retirement seems simple: Accumulate as much money as possible and minimize taxes as much as you can.

To this end, most diligent savers and investors focus on maximizing the use of registered retirement accounts, such as 401(k)s and Individual Retirement Accounts (IRAs).

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Meanwhile, the North Star for many Americans are low-seven-figures savings. For example, the average American adult believes the “magic number” in retirement savings is $1.46 million in 2026, according to a survey by Northwestern Mutual (1).

Accumulating more than $1 million in tax-deferred accounts is rare, but for roughly 655,000 Americans, it’s a reality. That’s how many people had seven-figure retirement accounts as of the fourth quarter of 2025, according to Fidelity data cited by Morningstar (2).

In other words, hundreds of thousands of ordinary people have set themselves up for a relatively comfortable retirement. Unfortunately, many of these millionaires have also put themselves in the sights of the “tax torpedo” — stuck paying more in taxes than many other retirees.

Here’s why.

The millionaire tax trap

The U.S. tax code is progressive for those at the bottom and more flexible at the very top.

If you’re a low- or middle-income earner, there are plenty of protections, exemptions and credits available to shield you from paying too much tax. For instance, individuals with a combined income below $25,000 a year generally do not pay federal income tax on their Social Security benefits (3). Married couples filing jointly are exempt until $32,000 in combined income.

These protections cover most people with low incomes and modest retirement savings.

Meanwhile, the ultrawealthy derive their income in ways that are more tax-efficient. According to the Brookings Institution, wages and withdrawals from retirement accounts like 401(k) plans account for “just 15% and 7% of the income of the top 0.01% and the top 0.001% of households, respectively (4).”

If you’re ultrarich, the majority of your income comes from selling shares of private businesses, collecting dividends, capital gains or rental income from properties — most of which may receive favorable tax treatment. Many wealthy people can even borrow at very low rates against their less liquid assets.

If you sell a small business, for instance, you could qualify for up to $15 million (or 10 times your investment, whichever is more) in capital gains exclusion under the Qualified Small Business Stock exclusion (5). For many entrepreneurs and startup founders, this can become their ticket to generational wealth, with relatively low tax consequences.

But if you’re a conventional millionaire — someone who made much of their money from ordinary income and maxed out their retirement accounts — you could be facing a hefty tax burden.

For example, with $1.5 million in a 401(k) plan, a typical 4% annual withdrawal ($60,000) combined with Social Security income is enough to push your income high enough that up to 85% of your Social Security benefits become taxable (6). If you're single with more than $3 million, a 4% withdrawal ($120,000) could be enough to trigger Medicare IRMAA surcharges (7).

This sum is also probably too large to draw down before required minimum distributions (RMDs) potentially push you into a higher tax bracket in your 70s (8).

Simply put, your tax exposure at this level of wealth is higher than many people with very little wealth or those whose income comes primarily from capital gains.

Fortunately, with a little planning, you can defuse this unfortunate financial bomb.

Read More: This $1B private real estate fund is now accessible to non-millionaires. Start investing with just $10

How to dodge the torpedo

For mass-affluent retirees, Morningstar offers a simple solution to the tax torpedo: Spend some tax-deferred money earlier (9).

For instance, you could retire a little early and delay Social Security benefits to create an ideal window for Roth conversions or withdrawals. If you retire at age 60 and claim Social Security at 70, you create a 10-year window to steadily draw down or convert your retirement accounts.

Not only can this help you avoid the tax torpedo and reduce the future impact of your RMDs, but delaying Social Security can also boost your eventual payout, with delayed retirement credits of up to 8% per year after full retirement age. Coordinating withdrawals, Social Security timing and Roth balances can keep marginal tax rates lower throughout retirement.

Consult an advisor

Executing these strategies can be complicated, so it makes sense to start as early as you can by hiring a professional to help you.

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A well-crafted financial plan devised with an expert at your side should help you avoid unexpected tax consequences without making major lifestyle changes. And if you’re still on the pathway to seven figures, a financial planner can help you get over the finish line.

One option is to find an expert through Advisor.com.

Just enter a few details about your finances and goals, and Advisor.com’s AI-powered matching tool will connect you with a qualified expert based on your unique financial goals and preferences. Advisor.com’s network of experts is also made up of licensed fiduciaries, meaning they are legally required to act in your best interest.

Still, finding the right advisor isn’t always easy — there’s no one-size-fits-all solution. That’s why Advisor.com lets you set up a free initial consultation, with no obligation to hire, to see if they’re the right fit for you.

Max out your tax-advantaged accounts

Another move many higher-income investors rely on is making the most of tax-advantaged accounts. Contributing to a traditional IRA, for example, can reduce your taxable income today, giving you an immediate break at tax time.

You’ll pay taxes when you withdraw the money later, but that often happens during retirement, when your income — and potentially your tax bracket — is lower. That timing difference alone can make a meaningful dent in your lifetime tax bill.

However, if you’re looking for a way to combine the tax advantages of an IRA with the protective benefits of investing in an asset like gold, you might want to consider opening a gold IRA with the help of Priority Gold.

Gold IRAs allow investors to hold physical gold or gold-related assets within a retirement account, making them an attractive option for those looking to potentially hedge their retirement funds against economic uncertainty. Plus, if you’d like to convert an existing IRA into a gold IRA, Priority Gold offers 100% free rollover, as well as free shipping and free storage for up to five years.

To learn more, you can get a free information guide that includes details on how to get up to $10,000 in free silver on qualifying purchases. Just keep in mind that gold is often best used as a wealth preservation tool coupled with a well-diversified portfolio.

Tap into the real estate market

Investing in real estate is another popular strategy among higher-net-worth investors looking to keep more of their money working for them. Property ownership comes with several tax advantages that aren’t always available with other types of investments.

For example, investors may be able to claim bonus depreciation to reduce taxable income or use a 1031 exchange — which defers capital gains taxes when one property is sold and the proceeds are rolled into another similar property (10).

However, if you’re more interested in the long-term earning potential of short-term stays, you can get into this market for a mere $100 minimum with a real estate platform like Arrived, which offers you access to shares of SEC-qualified investments in rental homes and vacation rentals.

Backed by world-class investors like Jeff Bezos, Arrived makes it easy to fit these properties into your investment portfolio regardless of your income level. Their flexible investment amounts and simplified process allow accredited and non-accredited investors to take advantage of this inflation-hedging asset class without any extra work.

You can view their full list of vetted properties, selected for their income-generating and appreciation potential, and start investing today. Plus, for a limited time, when you open an account and add $1,000 or more, Arrived will credit your account with a 1% match.

Diversify your real estate portfolio

In addition to single-family properties, institutional investors have long looked to private-market real estate, such as multifamily or industrial properties, to help stabilize their portfolios.

This asset class offers a mix of potential tax benefits, regular cash flow, a hedge against inflation and returns that are less correlated with public equities. But historically, individual investors haven’t had great options for accessing high-quality, private-market real estate.

In recent years, however, crowdfunding platforms have opened access to a broader demographic in recent years, although outcomes often depend on factors like deal structure, platform incentives and the expertise of the sponsor. And there are opportunities for investors with more capital on hand, too.

Lightstone DIRECT’s direct-to-investor model ensures a high degree of alignment between individual investors and a vertically-integrated, institutional owner-operator — a sophisticated and streamlined option for individual investors looking to diversify into private-market real estate.

With Lightstone DIRECT, accredited individuals can access the same multifamily and industrial assets Lightstone pursues with its own capital, with minimum investments starting at $100,000.

— With files from Vishesh Raisinghani

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.

Northwestern Mutual (1); Morningstar (2), (9); Social Security Administration (3); Brookings Institution (4); Carta (5); Internal Revenue Service (6), (8), (10); U.S. Centers for Medicare & Medicaid Services (7)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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Source: “AOL Money”