Tax Risk. Legislative Risk.
What the heck is the difference?
As things stay hot in Washington, I’m getting asked this question more and more.
Both are intertwined risks that can dramatically impact U.S. savers. And both are risks most savers are under-prepared to address.
So here’s a quick primer, whether you’re a saver yourself or a financial advisor who serves savers.
Tax Risk is the risk that a person’s taxes are higher in retirement than planned. This means more of a retiree’s income is going to the IRS as taxes, and less of the income is staying with the retiree to spend on living expenses.
In short, Tax Risk measures the level of taxation a saver experiences in retirement.
We're about to see tax risk in action. In 2025, several provisions from the 2017 Trump Tax Cuts expire. This includes the reduction in individual income tax bracket rates. So in 2026, many savers will find their tax bracket rates higher than they are today, causing them to pay more in taxes even while maintaining the same amount of income.
Legislative Risk is the risk that Congress changes the rules, and those changes negatively impact a saver’s retirement approach.
Legislative Risk measures the structure of taxation a saver experiences in retirement: what is taxed, when it is taxed, and for whom it is taxed.
We just experienced a good example of legislative risk in 2019. In the Secure Act, Congress included a provision eliminating the Stretch IRA for most Americans. This change impacted when inherited IRAs are taxed, potentially upending tax strategies IRA owners had put in place for their heirs.
Together, Tax & Legislative Risk impact a saver’s total tax burden in retirement and beyond. And that impact could mean less money – even for savers who think they’ve created a solid retirement income plan.
One thing’s for certain: With today’s legislative environment in Washington, tax and legislative risk aren’t going anywhere. So make sure your retirement approach is prepared to address them.