3 Common Tax Mistakes Retirees Make: Real Client Examples

3 Common Tax Mistakes Retirees Make: Real Client Examples

Jake Skelhorn
March 29, 2024

If you're approaching retirement or have already taken that big step, you’ve probably already given some thought to how taxes will affect your financial plan. Today, we're diving into a topic that's crucial for every retiree: avoiding costly tax mistakes. Unfortunately, taxes don't retire when you do, so understanding these mistakes before you make them can save you thousands. 

We’ll discuss 3 common tax blunders that I have seen as a retirement income planner then dive into a few ways to avoid them where possible.

Mistake 1: Not Understanding RMDs

Once you turn age 73, you need to start taking required minimum distributions annually from pre-tax retirement accounts like IRAs, 401(k)s, 403(b)s. Failing to do so can result in a penalty of 25% of the amount not withdrawn. Note: RMD age will go up to age 75 in 2033 under the SECURE Act 2.0.

Potential for Higher Tax Bracket

Understanding RMDs is important far before age 73, though. Since RMDs are, just that, - required - they involuntarily increase your taxable income in the year you take them. In other words, that money will be added to your gross income whether you actually need to spend it or not. By looking ahead, we can reasonably estimate what those amounts might be and what your total income might be as a result.

Let’s look at an example of why planning in advance for RMDs is so important. 

Say you are age 60 with a balance of $1million in a traditional IRA. Assuming a 7%* rate of return with no additional deposits or withdrawals before RMD age, your IRA balance would be just over $2.4million at age 73. Using this calculator from, your projected first-year RMD would be over $90,000. That’s $90,000 of taxable income that could push you into a higher tax bracket. 

*This is purely hypothetical and not by any means a guaranteed return

RMD Calculator from RMD calculator


If your modified adjusted gross income (MAGI), which includes RMDs, is over $103,000 (filing single) or $206,000 (married filing jointly), you’ll need to pay Medicare Part B and Part D surcharges, known as income-related monthly adjustment amount known or IRMAA. Here are the 2024 brackets that determine just how much those surcharges are:

Part B IRMAA Premiums 2024
Medicare Part B IRMAA Premiums (2024)

Part D IRMAA premiums 2024
Medicare Part D IRMAA Premiums (2024)

Solution 1: Roth Conversions

So, you may be asking “How can I minimize IRMAA and keep my overall taxes lower in the future?” Enter the Roth Conversion. 

In the scenarios highlighted above, Roth conversions may make sense in the years prior to RMD age. Since Roth IRAs do not have RMDs, by strategically converting pre-tax balances to Roth, you can effectively reduce your RMD amounts in the future. 

Why is this useful? Instead of being forced to take $90,000 as an RMD, maybe you only have to take $60,000. This could mean the difference in thousands of dollars in unnecessary taxes down the road.

Not to mention, less RMDs could mean less Medicare surcharges. IRMAA can change each year, as it is based on your income from 2 years prior, reinforcing the importance of these tax planning decisions well ahead of retirement.

With that said, the above reasons should not be the only considerations when it comes to Roth conversions. The higher the tax bracket in the year you complete a Roth conversion, the less and less it makes sense. You may not want to convert to Roth at, say, a 32% rate today, when your expected withdrawals in retirement may only land you in the 24% tax bracket. 

I like to call that “stepping over dollars to pick up pennies”, or “letting the tax tail wag the dog”. Look at the full picture before getting googly-eyed over the tax-free nature of Roth withdrawals. Here’s an example where Roth conversions do not result in a better outcome*.

Snapshot of financial planning software
A client plan where Roth conversions are not recommended

Mistake 2: Underestimating Taxes on Social Security

Many people think Social Security benefits are tax-free. Unfortunately this is not always the case. According to a projection by the Social Security Administration,  about 56% of families will owe tax on some part of their benefit between 2015 and 2050. Depending on your income, up to 85% of your benefit amount could be subject to taxes. The IRS uses your combined income (also known as provisional income) to determine how much of your social security income is taxable:

Combined/Provisional Income = Adjusted Gross Income (AGI) + Nontaxable Interest + 1/2 of Social Security benefits

If you file you are a single filer with a total income that’s less than $25,000, you won’t have to pay taxes on your Social Security benefits. Single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits. 

For married couples filing a joint return, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security payments. 

Keep in mind, this does not mean you will lose 50%-85% of your benefit amount to taxes, it’s just the amount that will be included in your income, which is then taxed at your marginal income tax rate (0% - 37%). 

combined income tax brackets for social security taxation
Combined Income Brackets for Social Security Income Taxation

Solution 2: Social Security Strategy

Many retirees experience what is known as the “retirement spending smile”, named after what spending amounts look like when charted on a graph over time. In the early “go go” years of retirement, initial spending is often relatively high due to increased time for activities like travel and leisure. After this phase wears off, retirees settle into a more calm lifestyle that involves less spending, and finally as medical costs increase in the later years, overall spending increases again.

Knowing this, one solution is to delay social security payments and live off investment accounts in the early years. Not only does this avoid social security becoming taxable (since you’re not drawing it in the higher income years), but delaying social security also increases your benefit amount when you ultimately do claim it.

Mistake 3: Inefficient Distribution Sequence

Understanding which accounts to withdraw from first can significantly reduce your tax bill. Ideally, you’ll want to have a mix of Roth, traditional IRA, and individual/joint brokerage accounts to withdraw funds from. Since each of these accounts have different tax characteristics, the order in which you liquidate funds and withdraw from them can make a 7-figure difference in your retirement plan.

Let’s look at an example. Below is a snapshot of a proposed distribution strategy for a real client of ours. 

Snapshot of financial planning software
A client plan showing the different out comes of different withdrawal strategies

We’ve determined that their goal is to have $12,000 to spend each month in retirement, and they currently have around $3 million between taxable (brokerage accounts), tax-deferred (Traditional IRAs, Deferred Compensation, 401k), tax-free (Roth IRA, HSA) accounts. 

Solution 3: Tax-Conscious Withdrawal Strategy

As a retiree, the first thought might be to take a little bit from each of your accounts to keep from depleting any single account, but this isn’t always the most efficient from a tax perspective.

In the example above, the difference it makes to withdraw from accounts in a specific order versus “pro-rata” is clear. In this scenario, by first taking money from their joint brokerage account until it’s depleted, and then moving on to pre-tax and finally tax-free/Roth accounts, it results in a projected $1.6 million more dollars in their pocket over the life of their plan*.

*Assumes a life expectancy of 90, 7.5% rate of return, RMDs begin at 73, retiree has deferred compensation plans that will cover living expenses for the first 10 years of retirement. Does not include any Roth conversions for simplicity. This is a hypothetical projection and not a guarantee.

Developing a tax-efficient strategy is by far the most complex solution of the 3 mentioned to keep your taxes in check in retirement, since it is so dependent on the amount saved in each type of account, spending goals, and market returns. But the juice can definitely be worth the squeeze.


Between RMDs, social security taxation, and withdrawal strategy, taxes play a big part in a retirement plan. Not addressing each of these properly can mean a six or seven figure difference in your lifetime spending capacity.

Start by assessing what your potential RMDs may be in relation to your spending needs and tax bracket. Review your expected combined income and how much of your social security benefit may be included in your taxable income. And finally, make sure you have money saved in each of the 3 tax buckets to create withdrawal flexibility in retirement.

Schedule a complimentary discovery call to see how we can help incorporate tax plan into your retirement plan.

This post is purely education in nature and should not be treated as tax, legal, or investment advice.