(Image credit: Getty Images)
Most people spend decades following the same advice: Save consistently, invest wisely, defer taxes. It works — until you retire.
Retirement doesn’t eliminate taxes. It changes how and when they show up. Most people aren’t ready for that shift.
After working with hundreds of pre-retirees, I’ve found the same pattern again and again: It’s not the markets that derail retirement plans. It’s the tax surprises people never saw coming.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
The good news? Most of them are predictable and avoidable with the right strategy. Here are nine of the most common.
1. Not all income is created equal
In your working years, income is straightforward: a paycheck, some withholding, done. In retirement, you’re pulling income from a mix of source accounts, and each source is taxed differently.
- IRA and 401(k) withdrawals. Fully taxable
- Social Security. Partially taxable
- Investment income. Varies
- Roth withdrawals. Tax-free (if structured properly)
What matters isn’t just how much you make but what shows up on your tax return. Many retirees rely heavily on tax-deferred accounts, which means nearly every dollar they spend increases their taxable income. That lack of flexibility can quietly drive up taxes across the board.
The solution: Well-planned Roth conversions before and in the early years of retirement.
2. Taxes on Social Security
A lot of people are surprised to learn that up to 85% of their Social Security benefits can be taxed. These taxes are triggered by something called provisional income. How much tax you pay on Social Security is determined by your other taxable income.
The more you withdraw from tax-deferred accounts, the more likely your Social Security becomes taxable. It’s not a smooth, predictable curve. Changes in your provisional income can create what’s often called a “tax torpedo,” when small increases in income lead to disproportionately higher taxes.
The solution: Coordination matters. Claiming and withdrawal strategies shouldn’t be separate decisions. They need to work together to optimize your overall tax picture.
3. Medicare IRMAA
Most retirees don’t expect their Medicare premiums to be tied to their income. Through what’s known as income-related monthly adjustment amount (IRMAA), higher reported income can increase your Medicare premiums significantly.
Here’s the catch: It’s based on income from two years prior, so your planning window can get complex.
A large IRA withdrawal, Roth conversion or asset sale today can increase your premiums down the road …. often by thousands per year.
The solution: The planning window matters. If you’re still a few years from Medicare, that’s your best window for larger conversions. If you’re already on Medicare, it’s about keeping annual income below the IRMAA thresholds, and coordinating every withdrawal, conversion and asset sale.
4. Forced withdrawals (RMDs)
For decades, you were told to defer taxes. Eventually, the IRS always collects. required minimum distributions (RMDs) force you to withdraw money from tax-deferred accounts starting in your early to mid-70s, whether you need the income or not.
Those withdrawals are fully taxable — and they can push you into higher brackets, increase Medicare premiums and trigger taxes on Social Security all at once. I’ve seen clients reporting twice the income they need to live.
The solution: The years between retirement and your early 70s are your best window to shrink future RMDs. Converting strategically during that gap, while staying within your current bracket, can reduce the forced withdrawals that cause downstream problems.
5. The surviving spouse tax increase
When one spouse passes away, the surviving spouse moves from married filing jointly to single tax brackets.
- Same assets
- Similar income
- Dramatically higher taxes
That shift alone can push the surviving spouse into a significantly higher bracket, especially when combined with RMDs and Social Security.
It’s not just an emotional loss. It’s often a financial one, too.
The solution: Convert early. A surviving spouse with a meaningful Roth balance has a source of income that won’t push them into a higher bracket at the worst possible time.
6. No tax diversification plus bad timing
Many retirees have done a great job diversifying investments. But no one told them they needed to do the same for their taxes.
If most of your money sits in tax-deferred accounts, you’ve effectively created a single “tax funnel.” That becomes a problem when markets are down. If you need income and your only option is to withdraw from a declining account, you’re forced to sell more shares at lower prices and still pay taxes on the withdrawal.
Tax diversification means having assets in pre-tax, Roth and after-tax buckets, to give you options when timing matters most. You don’t get to choose what the market does.
The solution: Build flexibility now. Spreading assets across pretax, Roth and taxable accounts means you can choose which bucket to draw from based on what the market and your tax situation look like.
7. Future tax law
Today’s tax rates are historically low compared with long-term averages. But they’re not permanent.
The challenge with tax-deferred savings is simple: You’re betting on future tax policy — and you don’t get to set the rate.
The solution: You can’t control future tax rates, but you can control how much of your money is exposed to them. The more you’ve moved into tax-free accounts before rates change, the less it matters what Congress does next.
8. The burden your family inherits
Many retirees assume their accounts will pass cleanly to their children. But recent legislation such as the SECURE Act, changed that.
Most nonspouse beneficiaries have just 10 years to fully withdraw inherited retirement accounts. Every dollar is taxed as ordinary income. For children in their peak earning years, that can mean a substantial tax hit that could reduce the value of the inheritance by 40% or more.
What was intended as a legacy can quickly become a tax liability.
The solution: Estate planning that moves your money into a trust upon your death could provide your family with some tax relief.
9. The 1990s underspending strategy
A lot of retirement advice still reflects outdated thinking:
- Don’t touch principal
- Follow the 4% rule
- Spend conservatively
On the surface, that sounds responsible. But for many retirees with large tax-deferred balances, it leads to unintended consequences:
- Larger account balances later
- Bigger RMDs
- Higher lifetime taxes
In other words, underspending early can increase taxes later. I know that’s counterintuitive after a lifetime of saving. But early in retirement, you’re healthy enough to enjoy it — and saving too aggressively just means handing more to Uncle Sam later.
The solution: A realistic retirement income and spending plan that accounts for the typical spending patterns across a long retirement.
The bottom line
None of these tax surprises are random. They’re built into the system.
Today’s retirees need to focus just as much on distribution — how and when money comes out, and how it’s taxed along the way.
Retirement isn’t just about how much you’ve saved. It’s about how much you get to keep.
The difference between the two often comes down to one thing: having a plan for taxes before they show up, not after.
