News & Trending Tax News

5 Sneaky Tax Penalties All Retirees Need To Know About

Making any of these mistakes can drain your retirement savings.

calculating expenses using calculator
Updated Nov. 14, 2024
Fact checked

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

Saving enough money for retirement is challenging. Many retirees end up with only a relatively small pool of money to live on.

In addition, volatile markets and sneaky tax laws can make it even more difficult to keep hold of the modest savings you already have. Something like an accidental misstep could cost you a lot of money in tax penalties.

Here are some of the common penalties to look out for so you can manage your retirement savings wisely and avoid wasting money.

If you’re over 50, take advantage of massive discounts and financial resources

Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.

How to become a member today:

  • Go here, select your free gift, and click “Join Today”
  • Create your account (important!) by answering a few simple questions
  • Start enjoying your discounts and perks!

Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $12 per year with auto-renewal.

Become an AARP member now

Contributing too much to an IRA

Tamani Chithambo/peopleimages.com/Adobe advice from their financial consultant

Saving aggressively is a great way to get ahead financially, but contributing beyond the allowed limit to your IRA can blow up in your face.

If you accidentally contribute too much, you could face stiff penalties. The IRS imposes a 6% tax on any excess contributions that remain in the account at the end of the year. That penalty applies every year until the mistake is corrected.

To avoid this unhappy result, withdraw the extra contributions — and any earnings they generated — by the tax return deadline for the year you made the contributions.

Making early withdrawals

JackF/Adobe depressed girl without money

In most cases, dipping into retirement funds before age 59½ can be costly. The IRS charges income tax on early withdrawals, along with a 10% penalty. This rule applies to many types of retirement accounts, including 401(k)s and IRAs.

However, some exceptions allow you to avoid this costly penalty. For example, you may use IRA funds to pay for health insurance premiums after a job loss.

Remember, each retirement plan has its own set of exceptions, so consult a financial expert about IRS guidelines.

Forgetting to take your RMDs

nopparat/Adobe working on calculator

If you have certain types of retirement accounts — such as a traditional IRA or 401(k) — you must make required minimum distributions (RMDs) from the account after you have reached a certain age.

Previously, withdrawals had to begin by age 72, but new legislation under the Secure 2.0 Act raised the age to 73. An increase to age 75 is set to take effect in 2033.

If you fail to take your RMD or withdraw less than required, you could be hit with an excise tax. The Secure 2.0 Act reduced the excise tax to 25%, and correcting the oversight within two years can lower the tax to 10%.

To avoid the hassle altogether, you could move all funds from traditional accounts into a Roth IRA or Roth 401(K), as the RMD rules do not apply to Roth accounts. For some people, this makes sense. But for others, it might not. So, consult with a tax professional before making this move.

Resolve $10,000 or more of your debt

Credit card debt is suffocating. It constantly weighs on your mind and controls every choice you make. You can end up emotionally and even physically drained from it. And even though you make regular payments, it feels like you can never make any progress because of the interest.

National Debt Relief could help you resolve your credit card debt with an affordable plan that works for you. Just tell them your situation, then find out your debt relief options.1

How to get National Debt Relief to help you resolve your debt: Sign up for a free debt assessment here. (Do not skip this step!) By signing up for a free assessment, National Debt Relief can assist you in settling your debt, but only if you schedule the assessment.

Try it

Making HSA contributions after enrolling in Medicare

Delmaine Donson/peopleimages.com/Adobe couple arguing about finance

If you diligently contributed to your health savings account (HSA) during your working years, it has hopefully grown to a significant sum and can help you manage health care costs during your retirement years.

But remember, once you enroll in Medicare, you can no longer contribute new money to your HSA. If you continue making contributions, you could wind up paying a 6% excise tax.

To play it safe, many tax experts and financial planners recommend you stop making HSA contributions at least six months before you apply for Medicare.

Many retirees have their HSA contributions on autopilot, so it’s easy to inadvertently continue adding new money to the account. Keep an eye on the clock as your Medicare application day approaches.

Overlooking state-specific tax laws

tirachard/Adobe asian couple reviewing bills at home

Individual states impose their own tax rules and penalties for retirees. This can catch retirees off guard, especially if they retire to a new state where they are less familiar with tax laws.

If you move to a new state for retirement, you might consider meeting with a financial advisor or tax professional in the state to make sure you understand the rules and what is required of you.

Bottom line

Mediaphotos/Adobe holding stack of documents

Even the most diligent retiree can accidentally run afoul of the tax code. So, if you have any concerns, talk to a financial advisor or tax professional to make sure you are correctly following all the federal and state tax rules for retirees.

You have worked hard for a stress-free retirement, and there is no reason to let the government take a bigger whack at your nest egg than is necessary.

Lucrative, Flat-Rate Cash Rewards

5.0
info

Wells Fargo Active Cash® Card

Current Offer

$200 cash rewards bonus after spending $500 in purchases in the first 3 months

Annual Fee

$0

Rewards Rate

Earn unlimited 2% cash rewards on purchases

Benefits and Drawbacks
Card Details