No one likes a tax surprise, yet retirees may be subject to shockingly high marginal rates because of the complex manner in which Social Security income is taxed. Joint filers with $40,000 of total Social Security benefits and as little as $28,000 of other income can find themselves paying up to 185% of the normal marginal tax rate for their income level. IRA distributions and even supposedly tax-free municipal bonds are counted as income in these calculations.

Many baby boomers will confront this tax trap. Unlike previous generations, they are mostly two-wage earner couples, meaning they will collect higher total Social Security benefits. Affluent boomers have accumulated significant assets in IRAs and 401(k)s, which will produce substantial taxable distributions starting after age 70-1/2. Both factors will likely force many boomers firmly into the tax trap.

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