I’m a Financial Planning Expert: Common Tax Mistakes Seniors Make and How They Impact Retirement Income
Written by
Laura Beck
Edited by
Molly Sullivan
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Unfortunately, retirees face a surprising reality about taxes. Many assume tax bills decrease in retirement, but the opposite often happens.
Tyler End, certified financial planner and CEO of retirement advisory company Retirable, and Lance Morgan, founder and CEO of College Funding Secrets, identified common tax mistakes that drain retirement income.
Assuming Taxes Will Decrease
The biggest misconception is that retirement means lower taxes. “What many consider before they retire is that their retirement savings will be in taxable form,” Morgan said. Tax-deferred retirement accounts like 401(k) plans and IRAs contain taxable dollars that were deferred with the understanding they would be taxed when withdrawn.
When required minimum distributions start, retirees discover their tax rates have increased. Higher tax rates lead to higher Medicare premiums and higher taxes on Social Security benefits.
Poor Distribution Sequencing
One of the biggest opportunities for retirees with different account types is taking a thoughtful approach to where withdrawals come from. “Relying on a simple rule-of-thumb strategy like pulling from taxable, then tax-deferred, then tax-free accounts can lead to unnecessary taxes and missed chances to optimize tax brackets,” End said.
This becomes especially problematic for individuals without a plan for required minimum distributions. Strategic placement of high-risk and low-risk investments in different accounts based on distribution timing provides major leverage.
Ignoring Healthcare Cost Impacts
Healthcare costs represent a huge blind spot for seniors. IRMAA Medicare Part B premiums often come as an unpleasant surprise. “Retirees who delay IRA withdrawals as long as possible may end up with larger RMDs later on, pushing income above IRMAA thresholds and triggering higher Medicare premiums,” End said.
Big withdrawals from retirement accounts increase Medicare premiums beyond standard rates. The tax tail shouldn’t wag the dog, but healthcare costs deserve consideration in withdrawal planning.
Over-Indexing on Roth Conversions
Roth conversions work as a powerful planning tool, especially during lower-income years. However, some retirees overdo it. “Some retirees overdo it, creating large upfront tax bills in an effort to avoid potential future taxes,” End said.
Since no one knows how tax rates or markets will change, going all-in can backfire. A dollar today is worth more than a potential dollar tomorrow. “Treat Roth conversions as a hedging strategy, not an all-or-nothing decision,” End said. Partial conversions over several years provide flexibility without creating unnecessary tax pressure.
Overlooking Social Security Taxation
Social Security checks might be partially taxable depending on other income. “If you don’t coordinate withdrawals from your retirement accounts with Social Security, you could pay far more in taxes than necessary,” End said.
Strategies like delaying Social Security for higher future benefits or balancing withdrawals between taxable and tax-free accounts help maximize the money retirees actually keep each year. Understanding how Social Security and other income interact requires professional guidance.
Selling Investments Without Considering Capital Gains
Many retirees assume they can sell stocks, mutual funds or other investments anytime without consequences. Selling investments triggers capital gains taxes, reducing the amount available to spend in retirement.
Real estate presents particular challenges. “If a real estate asset is sold without consideration of capital gains, it could have a material impact on the income of a retiree,” Morgan said. The death-related step up in basis of a primary residence must be considered when planning for property inheritance or serious financial consequences await recipients.
The Solution
“Working with a financial advisor can be one of the smartest steps you take for your retirement,” End said. Advisors help retirees understand how decisions affect income, examine different scenarios and create plans that actually work.
Morgan emphasized that retirement tax planning goes beyond reducing taxes. “It is about designing an income stream to provide optimal after-tax cash flow and long-term financial security,” he said.
Professional guidance makes it easier to feel confident and stay on track while keeping more of the money you’ve worked hard to save.
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