Middling millionaires with $1-$3 million tend to hand over the most to the IRS. Make sure the ‘tax torpedo’ doesn’t blast your nest egg

Meanwhile, the north star for many of these savers is the low-seven-figures. The "magic number" in retirement savings for the average person in 2025 is $1.26 million, according to a survey by Northwestern Mutual (1).

Accumulating more than $1 million in tax-deferred accounts is rare, but for roughly 654,000 Americans it's a reality. That's how many people have seven-figure retirement accounts as 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 set themselves up to pay more in taxes than many other retirees.

Here's why.

The millionaire tax trap

The U.S. tax code is progressive for those at the bottom and more flexible at the very top.

If you're low- or middle-income, 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.

These protections cover most people with low incomes and modest retirement savings.

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 $10 million (or 10× your investment) in capital gains exclusion under the Qualified Small Business Stock (QSBS) 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 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). If you're single with more than $3 million, a 4% withdrawal ($120,000) could be enough to trigger Medicare IRMAA surcharges.