Retire Smarter: 5 Mistakes That Could Cost You Thousands in Taxes

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)

Coins in a jar labeled retirement
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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 Failure to withdraw the correct amount results in a hefty penalty: a 25% excise tax on the amount you should have withdrawn (recently reduced from 50%).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.