How to Avoid a Retirement Tax Bomb
Saving in a 401(k) for decades is one of the best things you can do for retirement. But even with a well-diversified portfolio, you can still face a retirement tax bomb. The types of accounts you save in matter, too. If most of your savings are in pretax 401(k)s and IRAs, large withdrawals can bring a big tax bill and potentially higher Medicare premiums. We explain how diversifying your account types can give you more options when you need money and help you avoid those surprises. We also cover big tech’s AI spending plans, the sell-off in AI stocks, and the debate over an AI bubble. We look at the latest measure of growth in the U.S. economy, along with the increase in job openings. We also look at how stocks have performed after past midterm elections and what investor sentiment tells us. Lastly we discuss the selloff in gold and silver. If you are new to the channel, visit the investing page at sentaracapital.com to learn about our process and some common investing mistakes.
Video Recap
The full breakdown in written form
Account Type Diversification
Account type decides how every retirement withdrawal is taxed, and it gets far less attention than diversification across investments. A household that saved almost entirely in pretax 401(k)s and IRAs can face a tax bomb once withdrawals begin.
For most of the last century, the company pension was the retirement plan. As people lived longer through the 1970s, pensions became expensive to fund, and employers began freezing them for new hires. The 401(k) arrived in the early 1980s and moved the job of funding retirement from the employer to the employee.
A lot of people took that job seriously. They saved steadily for 30 or 40 years, raised their contribution rate along the way, collected the company match and invested sensibly. We regularly meet people with $1 million or $2 million in their 401(k), which is a real accomplishment.
Nearly all of that money went in pretax. Every dollar that comes out of a traditional 401(k) or IRA is taxed as ordinary income, so a retiree living entirely on those accounts often lands in a higher bracket than they planned for, and stays there.
Large Withdrawals and Medicare
A large one-time expense shows the problem most clearly. We recently worked with a retired couple drawing everything from traditional IRAs and 401(k)s, in a 25% combined federal and state bracket, who needed $50,000 for a new car. With auto loan rates where they are, paying cash made sense.
The illustration below shows what it took to put that $50,000 in their hands.
They had to withdraw about $67,000 and send roughly $17,000 to taxes, stacked on top of their normal income for the year. Extra income like that can also make more of a retiree's Social Security taxable. A taxable brokerage account would have covered the same car for a fraction of the tax, since only the gains are taxed and at lower rates.
The worst version of this I have seen in nearly 30 years was a house bought with cash. The buyer needed $300,000 and pulled more than $550,000 out of an IRA to get it, paying about $250,000 in taxes. A second pool of money would have changed that outcome entirely.
Medicare adds another cost. Part B and Part D premiums are set by your income from two years earlier through a surcharge called IRMAA (income-related monthly adjustment amount), and each bracket is a cliff. The table below shows the 2026 brackets.
A married couple with income just under $274,000 pays $284.10 a month each for Part B plus a $14.50 Part D surcharge. One dollar over that line moves both spouses to $405.80 and $37.50, about $145 more per person every month, or roughly $3,470 a year for the household. A one-time withdrawal for a car is exactly the kind of income that pushes a household over one of those lines two years later.
Where to Save From Here
None of this makes the traditional 401(k) a mistake. The upfront deduction is valuable during peak earning years, and for many people it is still the right place for the first dollar saved. As retirement gets closer, the mix of account types deserves a fresh look.
A Roth IRA gives no deduction going in, and all of the growth comes out tax-free. A taxable brokerage account gives you a place to fund a car or a roof without creating ordinary income. For households whose income is too high to contribute to a Roth directly, Roth conversions can do much of the same work later. The years after the paychecks stop and before required minimum distributions begin in your mid-70s are often the best window to convert at a lower rate.
The goal is to reach retirement with more than one place to pull money from, so that a big expense comes with a choice about which account to tap.
Hyperscaler Spending
The four largest AI spenders held their 2026 capital spending plans steady through third quarter earnings. Going into the calls, the question we most wanted answered was whether Amazon, Alphabet, Microsoft and Meta would start trimming what they spend on AI. Their combined guidance sits around $720 billion to $740 billion, essentially where it was in July.
The table below shows each company's guidance before and after the calls.
Microsoft's figure dipped by about $5 billion, which it attributed to delayed third-party capacity, while Meta raised the low end of its range. Every company was asked about 2027, and none signaled a cut. Wall Street's consensus for a broader group of large U.S. hyperscalers is $1.1 trillion next year.
At some point this spending will slow. Based on what the companies told investors last week, that point is not close, and it matters well beyond Big Tech, because their spending becomes revenue and profit for the chip and power companies that supply them.
AI Stocks
Most investors already believe AI stocks are in a bubble, which historically lowers the odds of the damage bubbles tend to cause. In an October reader poll from The Daily Shot, about 85% said AI-related stocks are in a bubble, split between those who expect it to pop within 12 months and those who do not. The October results sit alongside September's below.
The worst bubbles are the ones almost nobody sees coming, and the dot-com era is the clearest example. A bubble that 85 out of 100 people are already worried about is a different animal.
Many AI names have also deflated on their own. In late June we flagged that chip and AI infrastructure stocks had gone parabolic, noting that "the steeper the climb, the harder the fall tends to be on the other side." The chart below shows how far a dozen of those stocks now sit below their highs.
Intel is down about 53% after a 30% drop on Friday alone, and the most speculative names, IREN and CoreWeave, are down roughly 69% and 70%. More than half the group is down at least 46%.
If these names were a bubble, it has largely popped already, and the broader market has held up through it. That gives us confidence in stocks over the coming year.
Growth and Job Openings
The U.S. economy grew at a 3.4% annualized pace in the third quarter, well above the roughly 2% generally viewed as healthy. Underneath the headline, demand was even stronger. We focus on real final sales to private domestic purchasers, which strips out the volatile pieces of GDP such as government spending and trade and keeps consumer spending and business investment, the parts that say the most about underlying demand.
That measure rose 4.9% in the third quarter after an upward revision to 4.6% in the second, as the chart below shows.
The six quarters before that all came in below 3.5%. Back-to-back readings this strong owe a lot to the AI build-out.
Job openings are turning back up as well. The Job Openings and Labor Turnover Survey (JOLTS) showed 7.5 million openings, about 400,000 above expectations, after a low of 6.5 million early this year. The chart below shows the full path since the 2022 peak of 12.1 million.
For two years this has been a low-hire, low-fire economy. Layoffs stayed rare, and anyone looking for work waited longer than usual to find it. We would like to see openings climb back to 8 or 9 million, and the direction is right.
Rapid Fire
Midterms. With the midterm elections behind us, history is on the market's side. Going back to 1950, the S&P 500 has been higher six and 12 months after every midterm, often by a wide margin. Morgan Stanley's chart below plots each one.
Investor sentiment. The CNN Fear and Greed Index is sitting in fear, near the bottom fifth of its readings over the last five years. Readings this low have generally been followed by solid returns, and there is little euphoria in this market. The chart below shows the full five-year history.
Household wealth. Over the last couple of years, the share of U.S. household assets held in stocks has climbed above the share held in real estate, after trailing it for most of the past 35 years. The Fed and TD Securities data below shows the crossover.
Gold and silver. In late January we warned that silver had gone parabolic and urged caution on gold as well. The chart below tracks SLV and GLD, the silver and gold ETFs, since then.
Silver is now down about 60% from our January warning and gold about 30%. Silver went through the same cycle in 2011, and we have watched parabolic moves end this way in crypto and in the dot-com names. Our aim is to keep investors from chasing a move after it has already happened.
Thanks for reading, and take care.
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Digging past the headlines to the data underneath, and to what it means for your taxes and withdrawals, is the kind of analysis we bring to every Sentara Capital client relationship. If you'd like to talk through what this means for your specific situation, we'd welcome the conversation.
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FAQ: Retirement Tax Bomb
How much do I need to withdraw from an IRA to net a specific amount?
Divide the amount you need by one minus your combined tax rate. To net $30,000 at a 28% combined federal and state rate, you would withdraw about $41,670, since $30,000 divided by .72 is $41,667. A large withdrawal can push part of itself into a higher bracket, so the real figure can run above what the simple formula shows.
What income triggers higher Medicare premiums in 2026?
Surcharges start above $218,000 of modified adjusted gross income for married couples filing jointly and $109,000 for single filers, measured on your 2024 tax return. Below those lines, the standard Part B premium is $202.90 a month. If a life-changing event such as retirement has lowered your income since then, you can ask Social Security to use the newer figure by filing Form SSA-44. A one-time withdrawal for a big purchase does not qualify.
How are withdrawals from a brokerage account taxed?
Only the gain is taxed, and the money you originally invested comes back tax-free. Gains on investments held longer than a year are taxed at federal long-term capital gains rates of 0%, 15% or 20%, below ordinary income rates for most retirees. The tradeoff is that a brokerage account owes tax on dividends and realized gains every year along the way, which is why it works best alongside pretax and Roth accounts and not as a replacement for them.
When do required minimum distributions start?
Age 73 for anyone born from 1951 through 1959, and age 75 for anyone born in 1960 or later. From then on, the IRS requires a minimum withdrawal from pretax accounts every year whether you need the money or not. That is why the years before RMDs begin are often used for Roth conversions, though whether converting makes sense depends on how your bracket today compares with the one you expect later.
What is the CNN Fear and Greed Index?
It is a daily reading from 0 to 100 built from seven market indicators, including stock price momentum, options activity, junk bond demand and volatility. Readings below 25 count as extreme fear and readings above 75 as extreme greed. Investors use it as a contrarian gauge, and like any sentiment measure it can stay at an extreme longer than expected.
Another question? Call (770) 509-5305.
Click for Full Transcript
We have all heard that we need to have a diversified portfolio, but what's talked about a lot less is the importance of diversifying by type of investment account. That's important because there are a lot of people who have saved all their lives into 401(k)s who are going to have a tax bomb when they retire. We're going to talk about that today. And then we've heard from the big tech companies on their third quarter earnings, and we said it was really important to find out whether they're going to start cutting their spending on AI. We have that and more. Let's dive into it.
So, it is very important to diversify a portfolio. That is not a surprise to anyone watching this video, but today we're going to talk about the importance of diversifying by your investment account type. This is critical because we are seeing a lot of people who have saved exclusively to 401(k)s, and that is becoming a tax bomb. We're going to explain that in a minute, but let's talk about how we got here.
For most of the last 100 years, company pensions were how most people funded retirement. That was their retirement plan. Starting in the '70s, people were living longer, and companies were having to put more and more money into their pension plans. It was becoming very expensive. So companies stopped funding pensions, froze them, and said, "Going forward, the people we hire won't have a pension from us." The 401(k) plan was created in 1980. Companies started offering those, and it basically handed the responsibility for retirement from the employer to the employee.
So think about someone who, over the last 30 or 40 years, has been consistently saving in their 401(k) plan, doing the right things, increasing the percentage of their pay they save every year. Perhaps the company matched and put money in there too. Over time, if they were invested well inside those plans, their accounts have grown. We've seen a lot of people who have $1 million or $2 million in their 401(k). And all of that money went in pretax, which means when you retire and start taking withdrawals, you pay ordinary income tax on every penny of it.
So what has happened? A lot of the people who have $1 million or $2 million have it all in traditional IRAs and 401(k)s. When they draw money out, it puts them in a much higher tax bracket than they thought, and that changes what their retirement looks like in a big way.
Let's go through an example with some actual numbers. We had someone in this position just a little while ago. They're retired. All of their withdrawals come out of traditional IRAs and 401(k)s, and they're in the 25% tax bracket, combined federal and state. They're withdrawing to meet their expenses, and now they need a new car. Let's say it's $50,000 for the vehicle. Low interest rates aren't available right now, so they want to pay cash. In the example on your screen, to get $50,000 after taxes, you need to withdraw $67,000. That's a big tax bill, right? $17,000 right there. And it goes on top of everything else you're withdrawing for your regular needs. If you're collecting Social Security, it can also make more of that taxable.
Here's why this is important. If this person had had a brokerage account, which is not a retirement account, and could have taken the $50,000 out of it, they would have saved the $17,000 in taxes. We've seen this play out over the years in even bigger situations. One time we saw someone buy a house straight out of cash. They needed $300,000, and they took over $550,000 out of their IRA, paying $250,000 in taxes. It's one of the worst decisions I've seen in my nearly 30 years. If they had had an account with enough money in it to go to, so they didn't have to pay that tax bill, it would have made a big difference.
Medicare can also be affected by what we've been talking about, because your premiums are based on what your income was two years prior. So in this scenario, taking an extra $67,000 withdrawal to net $50,000 could have pushed you into a higher bracket. We'll put the brackets on the screen for you. For example, for someone married filing jointly in the $218,000 to $274,000 bracket, the Part B premium is $284.10, and then there's a Part D surcharge, for drug coverage, of $14.50. If they make even $1 more than $274,000, that jumps them up to $405.80. And with two people in the household, both of them are paying that additional $120 or so. That's a pretty big jump, and it can happen because you didn't have any other kind of investment account to turn to for unexpected expenses or some of the larger expenses homeowners typically have.
Now, we are not saying that saving to a traditional 401(k) is a mistake. Far from it. These are incredibly valuable during your peak working years. But as you get older and closer to retirement, it's important to take a fresh look at where you're saving. Roth IRAs can be a very nice tool. When you save there, you don't get a tax break up front, but all the growth is tax-free. And if your income is too high to contribute to a Roth IRA, doing Roth conversions when you retire can make sense, especially in the window between when you start Social Security and when your required minimum distributions kick in, which is somewhere between 73 and 75. But listen, this stuff is incredibly complex, and if you need some help going through the process, reach out to us. You can go to sentaracapital.com. We'd love to talk to you.
In our last video, we talked about the fact that we're now in third quarter earnings season. It's incredibly important to hear from companies across all the different sectors of the economy about what they're seeing and what their outlook is. And we said the number one thing we wanted to see was what the big hyperscalers, Google, Microsoft, Meta and so on, would have to say about spending on AI. We've talked about the fact that these companies spent $400 billion in 2025. This year, 2026, they're on track to spend over $800 billion, and right now the forecast for 2027 is over $1.1 trillion.
Well, we've heard from all four of the big hyperscalers: Amazon, Google, Microsoft and Meta. You can see that the guidance before the call and after the call is basically in the same area, around $740 billion. These companies were also all asked about their 2027 spending plans, and not a single one said, "We are going to cut spending next year." So listen, at some point in the future, we are going to see these companies start to pull back on their spending. The big question is when. The good news is it's not going to be anytime soon, based on what we heard from the companies last week.
With the hyperscalers spending all that money, a lot of people have been asking, "Are AI-related stocks in a bubble?" What they really mean is, if they are in a bubble, are they going to bring down the entire stock market when they come tumbling down? The Daily Shot did a poll asking its readers, "Are AI-related stocks in a bubble?" In blue is October, the most recent month. Just 15% said no. 85% said yes, split between yes but the bubble won't pop within 12 months, and yes it will pop within 12 months. Basically, almost everybody thinks these names are in a bubble. That's good news, because most bubbles cause the most damage when no one really sees them, and we've seen that time and time again over the last 30 or 40 years with different stocks, especially during the dot-com era.
Speaking of AI-related stocks, they've taken a beating over the last six months. In fact, we talked about this in late June. We pointed out we had seen a parabolic move in a lot of these names and said it's very dangerous to come in and buy them at these nosebleed levels. Since then, things have not gone well. We mentioned some of these a couple of weeks ago, and it's only gotten worse since. You have Intel down over 53%. By the way, it dropped 30% on Friday alone. It's very, very ugly. Lots of the other companies are down anywhere between 40% and 70%, with the most speculative at the bottom, IREN and CoreWeave, down about 70%. Here's why I'm pointing this out: if these names were in a bubble themselves, it has basically popped, but we haven't seen them take down the rest of the market. That's very important, and it gives us every reason to have confidence in stocks over the next 6 to 12 months.
We just got the latest read on the growth of the U.S. economy. GDP came in at 3.4% growth in the third quarter. That's a very strong number. Anything north of 2% is viewed as good. And it's even better if you look under the hood. What we pay the most attention to is consumer spending and business investment, because the other pieces, government spending, trade and inventories, can go up or down a lot from quarter to quarter and don't tell us much about the underlying economy. The number that looks at just consumer spending and business investment is called real final sales to private domestic purchasers. Quite a mouthful, but it came in at 4.9%, as you can see, and that follows an upward revision to 4.6% for the second quarter. If you go back over the previous couple of years and look at the quarters, they ran 1.8% to 3.4%. So 4.6% and 4.9% back to back are very good numbers, and the build-out of AI is definitely part of this and is the reason it's so high.
The other thing I wanted to highlight on the U.S. economy is the most recent job openings report, which we call the JOLTS report. This covers the last 10 years. The big thing to note is that after COVID hit, job openings skyrocketed, getting as high as 12 million. That was when a lot of people were getting very good benefits to stay home, and companies couldn't find enough employees. Openings have been steadily going down over the last five years. They got to a low of 6.5 million early in 2026, but they've since started to go back up and just hit 7.5 million. That was 400,000 higher than expected. So listen, over the last couple of years we've been in what we've called a low-hire, low-fire economy, which meant if you had a job, you were in good shape. There weren't a lot of layoffs happening, but if you didn't have a job, it was taking longer to get one than it had for most of the last five years. We'd like to see this keep going higher, up to 8 or 9 million job openings, but the good news is it's going in the right direction.
Now it's time for rapid fire, where we go over a couple of key charts we think you need to know about. We've got to start by saying, "Hallelujah, the midterms are in the past." Hopefully the nonstop political texts and phone calls can come to an end. Now that the midterms are past, this chart looks at how the stock market did 6 months and 12 months after the midterms, going back to 1950. You can see the stock market has been higher on every single occasion, and there were some very large returns mixed in. So it's good news from a seasonal point of view, with the midterms in our rearview mirror.
The next chart is the CNN Fear and Greed Index. It measures whether investors are greedy or fearful, because at the extremes, when they're very greedy, future returns normally aren't quite as good, and when they're fearful, that's a great buying opportunity. The good news is you can see there's a lot of fear. We're down in the lower 20th percentile of this reading over the last five years, and pretty much every time we've gotten into these lower areas, future returns have been very solid. So we don't have much euphoria in the market. This makes that point very clear.
The next chart looks at the percentage of wealth in real estate compared to the stock market. You can see that for much of the last 35 years, real estate, which is in green, held a lot more wealth than stocks. But that has changed over the last couple of years, and really for the first time, we've seen the amount of wealth in stocks rise above the amount in real estate.
We've got one more chart, and this is interesting. We talked earlier about our call in late June that some of the AI winners, the chip names, had gone parabolic, and that was the correct call. Earlier this year, in late January, we said the exact same thing about silver, and about gold, not quite as much, but we said you still had to be very careful. A lot of money had chased into both of those assets. Silver is up top, that's SLV, the silver ETF, and GLD, the gold ETF, is in orange on the bottom. From 2022 to 2025 they were slowly and steadily heading higher, and then we got the parabolic move. Look what has happened since. Silver is now down 60% from our video in late January where we gave the warning, and gold is down 30%. One thing we've tried to make clear on this channel over time is that we see parabolic moves and bubbles form no matter what the asset class is. We've seen it in EV stocks, in crypto, in the dot-com names, and in gold and silver this is the second time. We saw this exact thing play out in 2011. So again, we're trying to keep people from chasing a lot of these big moves after they've already happened.
So our key takeaways are that a 401(k) is a great tool for saving for retirement, but if you're getting closer to retirement, it's important to diversify your account types, because that can save you from a tax bomb. And the big tech companies reported last week and did not cut their spending, which is good news, because their spending is other companies' revenue and profits. Listen, if you're new to our channel, don't forget to like and subscribe so you don't miss future videos. Thanks for watching, and take care.
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