Middle millionaires worth $1-$3 million fork out the most to the IRS. Dodge the tax torpedo headed for your nest egg now

Moneywise and Yahoo Finance LLC may earn commission or revenue through links in the content below.

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).

Jeff Bezos backs a platform that lets anyone invest in rental homes for as little as $100 — 6 ways to build wealth like a landlord without actually being one

JPMorgan sees gold hitting $5,000/oz by Q4 — and savvy investors are protecting their wealth with a tax-advantaged Gold IRA. Get your free guide from Priority Gold

The tax breaks in Trump's 'big beautiful bill' expire after 2028. Here are 4 moves to make before the window closes

Meanwhile, the North Star for many Americans is a low-seven-figure nest egg.

For example, the average American adult now believes the "magic number" for a comfortable retirement is $1.46 million in 2026, up from $1.26 million a year earlier, according to Northwestern Mutual's latest Planning & Progress Study (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 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.

That covers many retirees with lower incomes and modest savings.

There's also a new tax break for older Americans in 2026 that can reduce the federal tax bill for some retirees even further.

Under the One, Big, Beautiful Bill Act (OBBBA), taxpayers aged 65 and older may qualify for an additional $6,000 deduction for tax years 2025 through 2028, or $12,000 for a married couple if both spouses qualify. The deduction begins phasing out above $75,000 of modified adjusted gross income for single filers and $150,000 for joint filers (3a).

Meanwhile, the ultra-wealthy 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 ultra-rich, 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).

That's because the thresholds for taxing Social Security benefits are relatively low and have not been adjusted for inflation: Up to 85% of benefits can be taxable once combined income exceeds $34,000 for single filers or $44,000 for joint filers.

If you're single with more than $3 million, a 4% withdrawal ($120,000) could be enough to trigger Medicare IRMAA surcharges (7). And the 2026 thresholds are higher than before: Medicare surcharges kick in when modified adjusted gross income tops $109,000 for single filers or $218,000 for married couples filing jointly. The highest tier starts at $500,000 and $750,000, respectively.

But having $3 million in retirement savings doesn't automatically trigger IRMAA. What matters is your income. A big 401(k) or IRA withdrawal could push you over the line, especially when combined with Social Security and investment income.

A balance this large can also be difficult to draw down before required minimum distributions (RMDs) potentially push you into a higher tax bracket in your 70s (8). Under current rules, most retirees have to start taking RMDs at 73, with the age eventually rising to 75 beginning in 2033.

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.

And that's the frustrating part. The same retirement accounts that help cut your tax bill while you're working can leave you with a bigger tax bill once you start taking the money out.

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

Read More: Millionaires under 43 hold only 25% of their wealth in stocks. Here's where their money is actually going

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

In other words, don't feel like you have to leave every dollar in your 401(k) or traditional IRA until you're forced to take it out. Drawing down or converting some of that money earlier could help shrink your future tax bill.

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.

That can be especially useful during the years before Social Security kicks in, when your taxable income may be lower. You could take enough from a traditional retirement account to stay within a lower tax bracket or convert some of it to a Roth IRA, paying the tax now rather than potentially facing a bigger bill later.

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.

The trick is to coordinate your withdrawals, Social Security and Roth savings so you have more control over your tax bill.

The goal isn't to avoid taxes altogether, of course. It's to avoid leaving yourself with a much bigger bill down the road.

And if you're still working, don't put all your eggs in the traditional 401(k) basket.

For 2026, workers can contribute up to $24,500, plus an $8,000 catch-up contribution for those age 50 and older. Those ages 60 to 63 can contribute an extra $11,250.

Having a mix of traditional and Roth savings can give you more flexibility over where your retirement income comes from — and how much goes to Uncle Sam.

As mentioned, the OBBBA offers some immediate, albeit temporary, relief for those aged 65 and over claiming a bonus tax deduction of $6,000 for single filers or $12,000 for joint filers.

This is on top of the existing standard deduction, potentially shielding a massive chunk of a couple's income from federal taxes.

But the catch here is that they expire after the 2028 tax year. Taking full advantage requires a precise approach to ensure you aren't leaving money on the table — or triggering an accidental audit.

This is especially critical for retirees with a portfolio of $250,000 or more. When larger portfolios are involved, tax decisions become less about filing and more about strategy.

In these cases, working with a financial advisor can help reduce costly oversights. Platforms like WiserAdvisor can connect you with vetted professionals who specialize in this kind of planning.

How it works:

Share your goals: You provide a few details about your savings, retirement timeline and your investment portfolio

Get matched for free: WiserAdvisor scours its network to match you with up to three vetted, reputable advisors who fit your specific needs

Consult for free: You can set up a no-obligation consultation with your matches to see who is the best fit for your long-term goals

Note: WiserAdvisor is a matching service and does not provide financial advice directly. All matched advisors are third parties and specific financial results are not guaranteed.

A gold IRA is one option for building up your retirement fund with an inflation-hedging asset.

Opening a gold IRA with the help of Goldco allows you to invest in gold and other precious metals in physical forms while also providing the significant tax advantages of an IRA.

With a minimum purchase of $10,000, Goldco offers free shipping and access to a library of retirement resources. Plus, the company will match up to 10% of qualified purchases in free silver.

If you're curious whether this is the right investment to diversify your portfolio, you can download your free gold and silver information guide today.

Real estate is another way higher-net-worth investors can put their money to work while potentially taking advantage of tax benefits that other investments may not offer.

Rental properties have long been a proven source of steady, passive income for high-net-worth investors.

It's no wonder that real estate accounts for nearly 25% of the typical family office portfolio. However, the time, effort and costs involved in managing and maintaining multiple properties prevent many from investing. So unless you're a hedge fund titan or an oil baron, you've been shut out of one of the most profitable corners of the market.

Mogul offers to bridge this divide. This real estate investment platform offers fractional ownership in blue-chip rental properties, giving investors any monthly rental income, real-time appreciation and tax benefits — without the need for a hefty down payment or 3 a.m. tenant calls.

Founded by former Goldman Sachs real estate investors, the team handpicks the top 1% of single-family rental homes nationwide for you. Simply put, you can invest in institutional-quality offerings for a fraction of the usual cost.

Each property undergoes a vetting process, requiring a minimum 12% return even in downside scenarios. Across the board, the platform features an average annual IRR of 18.8%. Their cash-on-cash yields, meanwhile, average between 10% and 12% annually. Offerings often sell out in under three hours, with investments typically ranging between $15,000 and $40,000 per property.

Every investment is secured by real assets, not dependent on the platform's viability. Each property is held in a standalone Propco LLC, so investors own the property — not the platform. Blockchain-based fractionalization adds a layer of safety, ensuring a permanent, verifiable record of each stake.

Getting started is a quick and easy process. You can sign up for an account and then browse available properties. Once you verify your information with their team, you can invest like a mogul in just a few clicks.

Investing in farmland is another option to consider — and you don't necessarily need to buy an entire farm to get exposure.

FarmTogether gives accredited investors a way to invest in fractional ownership of U.S. farmland. Investors can potentially earn income from crop production while also benefiting if the value of the land increases over time.

The platform has $217 million in assets under management across 51 funded deals, covering eight states and 15 crop types. FarmTogether says each offering goes through a 105-point due diligence process and less than 1% of deals in its pipeline make it onto the platform.

Farmland has also historically held up differently than other assets during downturns. According to FarmTogether's own data comparing NCREIF indices from 1992-2025, farmland's returns have shown a lower correlation to inflation than stocks, bonds or REITs.

— With files from Vishesh Raisinghani.

A single line on your car insurance policy could be inflating your premium by up to 30% — here's what to change

Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake. Here's what it is and 3 simple steps to fix it ASAP

Robert Kiyosaki says China is 'dumping' the US as America piles on debt. Fortify your riches with 4 key assets

Here are the 7 top habits of 'quietly wealthy' Americans. How many do you follow?

Join 250,000+ readers and get Moneywise's best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.

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); 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.