The 15 Biggest Tax Mistakes People Make in Retirement

MANAGE MONEY - TAXES
Avoid these costly tax traps in retirement and keep your nest egg intact.
Updated Feb. 21, 2024
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When you plan for your retirement you expect relaxation, a touch of adventure if you want it, and the chance to enjoy the rewards of your life’s labor. But it’s not all sunshine and kicking back; you must still deal with taxes.

As retirees embark on this new chapter of life, they can stumble into a labyrinth of tax laws and regulations. Missteps can be costly, hurting hard-earned savings and hampering the fulfillment of retirement dreams.

Here are the 15 biggest mistakes people make in retirement. Avoiding these can help you keep more money in your bank account.

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Failing to stay organized

Elenathewise/Adobe drawer full of colorfull folders of financial documents tagged as bills, savings, investments etc

Not being organized is a serious issue. If you use a shoebox to store your receipts, you're doing it wrong. Keeping all your tax paperwork together is one of the IRS’s top tips to ensure filing goes smoothly.

Thankfully, not being organized is a problem that can be fixed. File folders are cheap and easily labeled. You can also scan your documents to keep digital records. You can even pay someone to do it for you.

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Forgetting health care costs and deductions

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Health care expenses can be substantial in retirement. According to Fidelity, the average 65-year-old retired couple may need around $315,000 saved after taxes to cover medical costs.

Some medical costs are deductible. The amount you pay for medical and dental care over 7.5% of your adjusted gross income is deductible. You can deduct 22 cents per mile if you travel to get treatment.

Forgetting Social Security’s impact on your taxes

tashatuvango/Adobe folder entitled as 'taxes' with many other folders with different titles.

Don't forget that you'll need to pay federal income taxes on your Social Security benefits depending on how you file and your combined income. 

For example, if you file as single and your combined income is between $25,000 and $34,000, you'll have to pay income tax on up to 50% of your benefits. That increases to 85% if your combined income is over $34,000.

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Ignoring taxes on part-time work or side gigs

pikselstock/Adobe senior pottery artist wearing brown apron making ceramics from clay in her art gallery

Nearly half of seniors plan to work part-time or pursue side hustles in retirement. 

However, the additional income generated may have implications that should be considered to avoid tax surprises. 

Part-time work can impact both your taxes and your Social Security benefits. And freelance gigs on the side don't automatically have taxes taken out, but you will still owe them.

Lack of estate planning

DragonImages/Adobe senior couple consulting with estate agent showing terms and policies.

Estate taxes can significantly impact the wealth passed on to your beneficiaries. At the federal level, the IRS threshold for estate tax filing is $13.61 million for 2024, and rates range from 18% to 40%. 

State rules also vary. For example, Hawaii’s estate tax is 20%, and Nebraska has an inheritance tax of 18%.

Proper estate planning, including strategies to minimize estate taxes, is crucial for retirees with substantial assets.

Mishandling charitable contributions

zimmytws/Adobe money to be given in charity saved seprately in annual income

Charitable donations can provide both philanthropic fulfillment and potential tax benefits. 

For example, in addition to deducting your donations, you could use your required minimum distribution to contribute to charity straight from your IRA. This can help you avoid the penalty for not taking the RMD and the income tax on that withdrawal.

However, if you fail to follow the IRS guidelines for deducting charitable contributions, it can lead to seeing your deductions vanish and increase the risk of a tax audit.

Misunderstanding taxes on retirement account withdrawals

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Retirement accounts like traditional IRAs and Roth IRAs have different tax impacts. Withdrawing funds without considering the tax consequences can lead to unexpected tax bills.

Roth IRA withdrawals are tax-free. If you take money out of a traditional IRA before you are 59 1/2, you will get hit with an additional 10% tax on top of income tax.

Not considering the tax consequences of moving

pressmaster/Adobe senior couple shifting to a new house packing their belongings in moving boxes

Retiring to a different state or country can have significant tax implications. Simply put, different states have different tax laws. 

Some, like Florida, have no income or estate taxes but high sales taxes. Others, like Connecticut, have a lot of taxes for retirees.

Ensure you understand the tax laws of the area you relocate to to avoid unforeseen tax burdens.

Not taking RMDs into account

rido/Adobe senior couple planning their investments with financial advisor sitting in her office.

Once you reach the age of 72, you have to withdraw a minimum amount from your retirement accounts each year, known as required minimum distributions, or RMDs. Roth IRAs don't require withdrawals until the owner’s death.

Failing to take these distributions, or withdrawing less than the required amount, can result in significant penalties: A 50% excise tax on the amount not distributed as required.

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Not utilizing tax-efficient withdrawal strategies

Robert Kneschke/Adobe senior couple discussing financial documents with their advisor while sitting in her office

Careful planning of retirement account withdrawals can help minimize taxes. You have to look at it strategically and see what works best for you. 

Conventional wisdom might be to pull money from taxable accounts first and Roth accounts last, so there's more time for the funds to grow. But if you have multiple accounts and a steady income, that might not be best for you.

Overlooking tax deductions and credits

Ljupco Smokovski/Adobe an old blind man holding his white stick sitting on a bench with his dog in a park

People overlook valuable tax deductions and credits, and it’s no different for retirees. For instance, if you or your spouse are 65 and older or blind, you get a higher standard deduction. 

Conversely, if you itemize medical and dental expenses, some taxes and interest expenses can be deducted. When it comes to tax credits that can lower your bill, elderly and disabled taxpayers may be eligible depending on their income.

Talk with a tax professional to make sure you get all the deductions and credits you are eligible for.

Overlooking the tax benefits of an HSA

peopleimages.com/Adobe senior couple reviewing budget sitting in home with a laptop

Health savings accounts (HSAs) offer retirees a unique opportunity to save for those pricey healthcare expenses tax-free. If you are 55 or older at the end of the tax year, your contribution limit gets bumped up by $1,000.

Failing to take advantage of these tax-advantaged accounts means missing out on potential tax savings.

Poor Roth conversion timing

Drazen/Adobe Insurance agent and senior couple analyzing terms of a contract in their meeting in the office of insurance company.

Converting a traditional IRA into a Roth IRA can offer several tax benefits, like tax-free qualified distributions, not having to deal with RMDs, and reducing your taxes in the long term.

However, you need to be wary since a Roth conversion increases your taxable income in the conversion year. 

The best option is to talk with a tax pro or financial advisor to evaluate your circumstances and determine if a conversion aligns with your retirement and tax planning goals.

Relying solely on DIY tax prep

peopleimages.com/Adobe elderly man and woman calculating bills and taxes and worried for payment due to infalation and low annual income

Tax laws are complex and ever-changing. Depending solely on do-it-yourself tax preparation without seeking professional guidance can increase the likelihood of errors and missed opportunities for tax savings.

One of the best ways to avoid these mistakes is to hire a tax professional or a financial advisor specializing in retirement planning. The IRS has a directory of federal tax return preparers with credentials and specific qualifications online.

Underestimating the impact of investment taxes

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Taxes on investment gains and dividends can quickly eat into your retirement income. Failing to consider the tax implications of investment decisions can result in diminished returns.

Bond income and certain dividends from stocks and mutual funds are subject to the usual federal income tax rates. On the other hand, long-term gains are typically taxed at lower rates (0%, 15%, and 20%).

Bottom line

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Navigating the complex world of taxes in retirement is crucial to protecting your wealth and achieving your retirement dreams. And the biggest retirement tax mistake happens long before actually retiring: failing to plan at all.

You may never be truly free of taxes, but by avoiding these mistakes, you can maximize your retirement income, kick back, and enjoy life.

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Author Details

Will Vitka Will Vitka is a D.C. area reporter and writer. He previously worked for WTOP, The New York Post, Stuff Magazine, and CBS News.

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