You’ve worked hard, saved consistently, and finally made it to retirement—but taxes don’t retire when you do. In fact, retirement brings a new set of tax challenges that can catch many people off guard. Between Social Security benefits, required minimum distributions, and multiple income sources, it’s easy to make costly mistakes that eat into your savings. The good news? A little planning can go a long way in protecting your nest egg. Find out how to avoid the most common retirement tax mistakes—and keep more of your money working for you.
Mistake #1: Not Understanding How Social Security Is Taxed
One of the biggest surprises for retirees is finding out that Social Security benefits can be taxable. Whether you pay taxes on your benefits depends on your “combined income,” which includes:
- Adjusted gross income (AGI)
- Nontaxable interest (like municipal bonds)
- Half of your Social Security benefits
If your combined income is above certain thresholds, up to 85% of your benefits could be taxable.
Current IRS thresholds:
- Individual: $25,000 (some benefits taxable), $34,000 (up to 85% taxable)
- Married couples filing jointly: $32,000 (some taxable), $44,000 (up to 85%)
What to do instead:
Work with a tax advisor or use online calculators to estimate how much of your Social Security will be taxed. Consider strategies like withdrawing from Roth IRAs or spreading out income sources to manage your taxable income.
Mistake #2: Forgetting About Required Minimum Distributions (RMDs)
Once you hit age 73 (as of 2023), the IRS requires you to start taking minimum withdrawals from traditional IRAs, 401(k)s, and other retirement accounts. If you miss the RMD—or take too little—you could face a hefty penalty of 25% of the amount you should have withdrawn.
What to do instead:
Mark your calendar, and don’t wait until the end of the year. Calculate your RMD early and spread withdrawals over the year if that works better for your budget. If you don’t need the money, you can reinvest it in a taxable account or use it for charitable giving (more on that below).
Mistake #3: Taking Too Much from Taxable Accounts First
Many retirees assume it’s best to tap into taxable accounts (like brokerage accounts) first to let retirement accounts continue growing. While that might work in some cases, it can also push you into a higher tax bracket later—especially when RMDs kick in.
What to do instead:
Consider a blended withdrawal strategy, taking some money from both taxable and tax-deferred accounts. This approach can help you stay in a lower bracket and smooth out your tax liability over time.
Mistake #4: Overlooking Roth IRA Conversions
If you’re in a lower tax bracket early in retirement (before RMDs or Social Security), that may be a good time to convert some of your traditional IRA into a Roth IRA. You’ll pay taxes on the converted amount now—but future growth and withdrawals are tax-free.
What to do instead:
Explore partial Roth conversions while your income is low. This can reduce future RMDs and give you more tax flexibility down the road.
Mistake #5: Not Factoring in State Taxes
Federal taxes get the most attention, but state taxes can take a serious bite out of your retirement income, depending on where you live. Some states tax Social Security benefits, pension income, or distributions from IRAs and 401(k)s.
What to do instead:
Research your state’s tax rules or consider moving to a tax-friendly retirement state if that aligns with your lifestyle. States like Florida, Texas, and Nevada have no income tax, while others may offer deductions or exclusions for retirees.
Mistake #6: Ignoring Healthcare-Related Tax Opportunities
Healthcare costs rise in retirement—but they can also offer some tax advantages. If your out-of-pocket medical expenses exceed 7.5% of your AGI, they may be deductible.
What to do instead:
- Track all medical costs (including insurance premiums, co-pays, and mileage to appointments)
- Consider long-term care insurance, which may offer partial deductions
- Use a Health Savings Account (HSA), if you have one, as a tax-free way to pay for eligible expenses
Mistake #7: Not Planning for Tax-Efficient Charitable Giving
If you’re already giving to charity in retirement, there are smarter ways to do it. One option is the Qualified Charitable Distribution (QCD), which allows you to donate up to $100,000 directly from your IRA to a qualified charity without counting it as taxable income. QCDs also count toward your RMD.
What to do instead:
Use QCDs if you’re 70½ or older and already planning to give. You’ll reduce your taxable income and potentially lower other tax burdens, like Medicare premiums.
Mistake #8: Underestimating the Impact of Capital Gains
Selling investments during retirement can trigger capital gains taxes, especially if you’ve held assets for a long time. These gains may push you into a higher tax bracket or make more of your Social Security taxable.
What to do instead:
Be strategic with your sales. Offset gains with losses (called tax-loss harvesting), and consider selling gradually over several years instead of all at once.
Mistake #9: Not Updating Your Withholding Strategy
Once you retire, your income sources shift—but many people forget to adjust their tax withholdings accordingly. You might end up with an unexpected tax bill (or refund) at the end of the year.
What to do instead:
Use IRS Form W-4P to adjust withholdings on pension or annuity payments, and use the IRS withholding calculator to help you estimate the right amount.
Mistake #10: Failing to Get Professional Advice
Tax planning in retirement is different than during your working years. With multiple income sources, different tax rules, and the long-term impact of decisions, going it alone can lead to expensive mistakes.
What to do instead:
Talk to a CPA, tax advisor, or financial planner who understands retirement strategies. They can help you create a personalized tax plan that supports your goals.
Final Thoughts
You don’t have to be a tax expert to retire wisely—but understanding the basics and avoiding common traps can save you thousands over time. By staying informed and making thoughtful choices, you’ll keep more of your retirement income, reduce stress, and make your savings last longer. It’s your money—make sure you’re using it wisely.
