Retirement should be a time of relaxation, freedom, and the reward of decades of hard work. But for many, poor financial decisions—or simply failing to plan properly—can turn a dream retirement into a tax nightmare. Tax mistakes can quietly eat away at your savings, often without you noticing until it’s too late. Fortunately, many of the most costly retirement tax errors are entirely avoidable.
Below are five of the most common tax-related mistakes retirees make, along with clear, actionable advice to help you retire smarter and keep more of your hard-earned money.
1. Ignoring Required Minimum Distributions (RMDs)
The Mistake:
Once you hit age 73 (or 75 if born in 1960 or later), the IRS mandates that you start taking Required Minimum Distributions (RMDs) from your traditional retirement accounts (e.g., Traditional IRAs, 401(k)s). Failure to withdraw the correct amount results in a hefty penalty: a 25% excise tax on the amount you should have withdrawn (recently reduced from 50%).
Why It’s Expensive:
Skipping an RMD—or miscalculating the amount—could cost you thousands in avoidable taxes and penalties. For example, missing a $20,000 RMD could trigger a $5,000 fine, not to mention added income tax on the distribution.
How to Avoid It:
- Know your RMD start age and account type. Roth IRAs are exempt, but not Roth 401(k)s (until recently—SECURE 2.0 changes that in 2024).
- Consolidate accounts to simplify calculations.
- Use tools or hire a financial advisor to help calculate your annual RMDs.
- If you don’t need the money, consider a Qualified Charitable Distribution (QCD) to donate up to $100,000/year tax-free to charity.
2. Underestimating the Tax Impact of Social Security Benefits
The Mistake:
Many retirees assume Social Security is tax-free. In reality, up to 85% of your Social Security benefits can be taxable depending on your income level.
Why It’s Expensive:
Poor coordination with other retirement income sources (like IRA withdrawals or part-time work) can push you into a higher tax bracket and increase the taxable portion of your benefits.
How to Avoid It:
- Understand your “provisional income”, which includes adjusted gross income (AGI), tax-free interest, and half your Social Security benefits.
- Use tax-efficient withdrawal strategies—consider pulling from Roth accounts before tapping taxable sources.
- In some cases, delaying Social Security (up to age 70) can help minimize taxes while increasing your monthly benefit.
- Consider converting part of your Traditional IRA to a Roth IRA before you start taking benefits to lower future taxable income.
3. Failing to Account for Medicare Surcharges (IRMAA)
The Mistake:
Higher-income retirees can be hit with an Income-Related Monthly Adjustment Amount (IRMAA) surcharge on Medicare Part B and Part D premiums, based on their modified adjusted gross income (MAGI) from two years ago.
Why It’s Expensive:
These surcharges can add hundreds or even thousands in extra annual Medicare costs. For example, in 2025, high earners could pay over $500/month per person in Medicare premiums instead of the standard $174.70/month.
How to Avoid It:
- Keep MAGI below IRMAA thresholds with smart income planning.
- Spread out income: Avoid large capital gains or IRA withdrawals in a single year.
- Use Roth withdrawals, which do not count towards MAGI.
- If your income drops due to retirement, job loss, or other life events, you can file Form SSA-44 to appeal your IRMAA surcharge.
4. Not Leveraging Roth Conversions Strategically
The Mistake:
Many retirees avoid Roth conversions because they don’t want to pay more taxes now. But failing to consider strategic conversions early in retirement (or even before retirement) can lead to ballooning RMDs and higher future tax bills.
Why It’s Expensive:
Every dollar withdrawn from traditional accounts is taxed as ordinary income. If your tax bracket rises in the future (due to RMDs, expiring tax cuts, or other income), you may pay far more than you would today.
How to Avoid It:
- Consider converting small portions of your Traditional IRA to a Roth IRA each year while you’re in a lower bracket (often between retirement and age 73).
- Run tax projections to avoid crossing into higher tax brackets.
- Take advantage of the standard deduction and lower brackets during years with little income.
- Work with a CPA or financial planner who can create a multiyear Roth conversion strategy.
5. Overlooking State Taxes on Retirement Income
The Mistake:
Federal taxes often dominate planning discussions, but state taxes can take a significant bite out of your retirement income too. Some states tax pensions, IRAs, 401(k) withdrawals, and even Social Security.
Why It’s Expensive:
If you retire in a high-tax state without proper planning, you could owe thousands more annually in state income taxes. Worse, some states offer partial or full exemptions—but only for certain income levels or age brackets.
How to Avoid It:
- Research the tax laws of your current and potential future state. Nine states have no income tax (e.g., Florida, Texas), while others partially exempt retirement income.
- Consider retiring to a more tax-friendly state, especially if you’ll rely heavily on IRA or pension income.
- Check for state-specific deductions or exemptions—some states allow retirees to exclude part of their income based on age.
- Be wary of property taxes and sales taxes as well—some states with no income tax may have high living costs elsewhere.
Bonus Tip: Plan Ahead—Don’t Let Taxes Drive the Bus
Tax planning for retirement is complex, but that doesn’t mean it’s optional. A “set it and forget it” approach might leave you vulnerable to shifting tax rules, market volatility, or unanticipated expenses like long-term care.
Practical Steps:
- Work with a fee-only financial advisor or CPA who specializes in retirement planning.
- Create a withdrawal strategy that blends taxable, tax-deferred, and tax-free accounts.
- Revisit your plan annually to adapt to changes in tax law, market performance, and your health or lifestyle.
Final Thoughts
Retirement should be about enjoying the fruits of your labor—not worrying about surprise tax bills. By understanding and avoiding these five common mistakes, you can protect your nest egg, reduce your tax burden, and gain peace of mind.
Remember: smart tax planning isn’t just for the wealthy. It’s for anyone who wants to make the most of their retirement years—because every dollar you save in taxes is another dollar that can fund your freedom.