5 Ways Retirees Accidentally Increase Their Tax Bill

Tax surprises are more common in retirement than most people expect, and they can be expensive. During your working years, taxes usually feel predictable. Paychecks have automatic withholding, and income tends to come from the same sources each year.

Retirement changes that. Your income can come from Social Security, pensions, retirement accounts, and investments, all with different tax rules. Without careful planning, even small decisions can quietly raise your tax bill and disrupt plans for a stress-free retirement.

Taking large IRA withdrawals or Roth conversions

Large withdrawals from retirement accounts can have a ripple effect on your entire tax picture. When money is withdrawn from a traditional IRA or 401(k), it is usually taxed as ordinary income. Taking a large distribution or converting a large amount to a Roth IRA in a single year can push total income well above planned levels.

That extra income can trigger several tax surprises. It may increase how much of your Social Security benefits are taxable. Depending on total income, up to 85% of Social Security benefits can become subject to federal income tax.

Higher income can also trigger Medicare surcharges through the Income-Related Monthly Adjustment Amount (IRMAA). These surcharges increase premiums for Medicare Part B and Part D once income crosses certain thresholds.

Missing or delaying required minimum distributions

This is one of the most expensive mistakes retirees make. Once retirees reach 73, most tax-deferred retirement accounts require annual withdrawals called Required Minimum Distributions, or RMDs. Failing to take an RMD on time can lead to a significant penalty.

The IRS imposes a 25% excise tax on the amount that should have been withdrawn but was not. If the error is corrected quickly, the penalty may be reduced to 10%, but it can still be costly.

For instance, missing a $20,000 required distribution could lead to a $5,000 penalty before corrections. Many retirees miss an RMD simply because they forget the rule begins at age 73 or because they have multiple retirement accounts and lose track of the calculation.

Financial institutions often provide reminders, but the responsibility ultimately falls on the account holder.

Selling investments without considering taxes

Investment sales can create unexpected tax bills if retirees do not account for cost basis and holding periods. When an investment is sold, taxes are based on the difference between the purchase price and the sale price. That difference is known as the capital gain.

If the investment was held for more than a year, the gain is typically taxed at long-term capital gains rates. If it was held for less than a year, the gain is considered short-term and taxed as ordinary income. That distinction can make a big difference.

Short-term gains can push taxable income higher and may even move a retiree into a higher tax bracket for the year. Selling multiple investments in the same year can compound the issue, especially if the gains were not part of a planned withdrawal strategy.

Reviewing cost basis and holding periods before selling can help retirees better understand the tax impact.

Not withholding taxes from retirement withdrawals

Many retirees assume taxes will work the same way they did when they were working. However, retirement account withdrawals often do not automatically withhold enough tax unless the retiree specifically requests it.

Without withholding, retirees may discover at tax time that they owe a significant balance. Even worse, they could face an underpayment penalty if the IRS determines they did not pay enough tax during the year.

Setting up withholding from IRA or pension withdrawals can help prevent this issue. Some retirees also choose to make quarterly estimated tax payments instead. Either approach can help keep tax payments aligned with income as it arrives.

Overlooking deductible medical expenses

Healthcare costs tend to rise with age, and many retirees accumulate significant medical expenses throughout the year. Some of those costs may qualify for the medical expense deduction if they exceed 7.5% of adjusted gross income and the taxpayer itemizes deductions.

Expenses that may qualify include insurance premiums, prescription medications, doctor visits, dental and vision care, and certain home modifications made for medical reasons. Because many people take the standard deduction, they often stop tracking these expenses altogether.

That can lead to missed deductions in years when medical costs are unusually high, and itemizing might actually produce a larger tax benefit. Keeping records throughout the year can make it easier to determine whether medical expenses exceed the deduction threshold.

New complication in 2026

One more thing to watch starting in 2026: The difference between federal and state tax rules. The One Big Beautiful Bill Act introduced several federal tax changes, including the new senior bonus deduction. However, not every state automatically adopts federal tax law updates.

Some states are choosing not to conform to certain federal changes. That means you could end up dealing with two different tax calculations. A deduction allowed on a federal return may not apply at the state level, which can create a different taxable income amount for state taxes.

Because of this potential mismatch, retirees may need to review both federal and state tax rules when planning withdrawals or deductions. Understanding how state rules differ from federal law can prevent unexpected tax bills later.

Bottom line

Retirement taxes can be more complex than many people anticipate. The good news is that many of these tax increases are preventable with a little planning.

Paying attention to withdrawals, tracking deductions, and understanding how different types of income are taxed can help you avoid costly mistakes instead of falling into common dumb money moves retirees make.

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