Health care or federal income taxes
THE SHORT ANSWER For many middle- and upper-middle-income retirees with substantial traditional IRA and 401(k) balances, lifetime federal income taxes may equal or exceed retirement health-care costs. The answer depends on the household—not a national average. |
Why this comparison deserves a closer look?
Health care is properly viewed as a major retirement expense. Fidelity estimates that a 65-year-old retiring in 2026 may need approximately $185,500 in after-tax savings for health care and medical expenses during retirement. For two 65-year-olds, a simple doubling produces $371,000. Fidelity’s estimate does not include long-term care.
Taxes are often omitted from retirement-spending charts or shown separately. Yet withdrawals from traditional retirement accounts generally create ordinary taxable income; pensions, investment income, and up to 85% of Social Security benefits may also contribute to federal taxable income. As a result, a retiree’s tax bill can be one of the largest lifetime costs under their control.
A simple 25-year comparison
The table below compares the $371,000 two-person health-care benchmark with several hypothetical levels of average annual federal income tax. It is intentionally simple: no inflation adjustment, discounting, state taxes, Medicare IRMAA, or long-term-care costs are included.
Average annual federal tax | Federal tax over 25 years | Compared with $371,000 health care |
$5,000 | $125,000 | Lower by $246,000 |
$10,000 | $250,000 | Lower by $121,000 |
$15,000 | $375,000 | Exceeds by $4,000 |
$20,000 | $500,000 | Exceeds by $129,000 |
$25,000 | $625,000 | Exceeds by $254,000 |
Illustration only. Actual taxes vary by filing status, deductions, tax law, income sources, withdrawal timing, investment results, and longevity.
What is the embedded tax liability in traditional accounts?
A traditional IRA or 401(k) balance is not entirely spendable by the account owner. The federal government may receive a portion as distributions are taxed. The following table is a planning lens—not a tax forecast—and applies assumed effective federal tax rates to total distributions equal to the stated account balance.
Traditional account balance | 10% effective tax | 15% effective tax | 20% effective tax |
$500,000 | $50,000 | $75,000 | $100,000 |
$1,000,000 | $100,000 | $150,000 | $200,000 |
$1,500,000 | $150,000 | $225,000 | $300,000 |
$2,000,000 | $200,000 | $300,000 | $400,000 |
This illustration excludes future growth and ignores the time value of money. A complete retirement projection should calculate taxes year by year.
Why two retirees with the same portfolio can pay different taxes?
· Account mix: Traditional, Roth, taxable, HSA, pension, and annuity assets are taxed differently.
· Withdrawal timing: Large distributions in a single year may push income into higher brackets.
· Social Security taxation: Other income can cause a greater portion of benefits to become taxable.
· Required minimum distributions: RMDs can reduce control over taxable income later in retirement.
· Medicare premiums: Higher modified adjusted gross income may trigger income-related Medicare surcharges (IRMAA).
· Tax-law and family changes: Brackets, deductions, filing status, and survivor taxation can change over a long retirement.
Planning opportunities to discuss
The goal is usually not to eliminate tax. It is to manage the timing and character of income while preserving flexibility throughout retirement.
· Estimate lifetime taxes—not just the tax due this year.
· Evaluate partial Roth conversions during lower-income years.
· Coordinate Social Security timing with portfolio withdrawals and conversions.
· Use qualified charitable distributions when appropriate after age 70½.
· Sequence taxable, tax-deferred, and Roth withdrawals deliberately.
· Review projected RMDs, survivor tax exposure, and potential Medicare IRMAA before year-end actions.
· Revisit the plan annually as income, markets, health, and tax law change.
KEY TAKEAWAY Health care may be one of retirement’s largest expenses, but it should not automatically be assumed to be the largest. For households with meaningful tax-deferred savings, federal income taxes deserve the same lifetime-planning attention. |
Questions to bring to your next planning meeting
· What is our projected lifetime federal income tax under the current strategy?
· How much of our traditional retirement accounts may ultimately go to federal taxes?
· Which years offer the best opportunity for Roth conversions?
· Could future RMDs increase Social Security taxation or Medicare premiums?
· How would the plan change after the death of the first spouse?
· What amount should we reserve separately for health care and possible long-term care?
Important context
This material is educational and uses simplified hypothetical examples. It does not predict any household’s health-care costs or tax liability. It excludes state and local taxes, property and sales taxes, Medicare IRMAA from the tax totals, and long-term-care expenses. Health-care estimates and tax laws can change. Consult the appropriate financial, tax, legal, and health-care professionals regarding your circumstances.
Neither Osaic Wealth, Inc., nor its representatives, offer tax or legal advice.
Sources and further reading
· Fidelity Investments, “2026 Retiree Health Care Cost Estimate” (July 21, 2026).
· Fidelity, “How to plan for rising health care costs.”
· Internal Revenue Service, Publication 575, Pension and Annuity Income.
· U.S. Bureau of Labor Statistics, Consumer Expenditure Surveys.