Retirement Retirement Planning

The 15 Biggest Tax Mistakes People Make in Retirement

Avoid these costly tax traps in retirement and keep your nest egg intact.

senior couple walking on the beach holding hands at sunrise,
Updated Sept. 24, 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.

When you prepare for 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 the bank.

Earn cash back on everyday purchases with this rare account

Want to earn cash back on your everyday purchases without using a credit card? With the Discover®️ Cashback Debit Checking account (member FDIC), you can earn 1% cash back on up to $3,000 in debit card purchases each month!1

With no credit check to apply and no monthly fees to worry about, you can earn nearly passive income on purchases you’re making anyway — up to an extra $360 a year!

This rare checking account has other great perks too, like access to your paycheck up to 2 days early with Early Pay, no minimum deposit or monthly balance requirements, over 60K fee-free ATMs, and the ability to add cash to your account at Walmart stores nationwide.

Don’t leave money on the table — it only takes minutes to apply and it won’t impact your credit score.

Apply for a Discover Cashback Checking account today

Failing to stay organized

Elenathewise/Adobe financial documents in folder

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, or you can pay someone to do it for you.

Forgetting health care costs and deductions

goodluz/Adobe Older lady at a clinic

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.

Remember 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.

Earn $200 cash rewards bonus with this incredible card

There's a credit card that's making waves with its amazing bonus and benefits. The Wells Fargo Active Cash® Card(Rates and fees) has no annual fee and you can earn $200 after spending $500 in purchases in the first 3 months.

The Active Cash Card puts cash back into your wallet. Cardholders can earn unlimited 2% cash rewards on purchases — easy! That's one of the best cash rewards options available.

This card also offers an intro APR of 0% for 12 months from account opening on purchases and qualifying balance transfers (then 19.49%, 24.49%, or 29.49% Variable). Which is great for someone who wants a break from high interest rates, while still earning rewards.

The best part? There's no annual fee.

Click here to apply now.

Ignoring taxes on part-time work or side gigs

pikselstock/Adobe Making ceramics from clay

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

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 ranges from 10% to 20%, and Nebraska has an inheritance tax of up to 15%.

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, failing to follow the IRS guidelines for deducting charitable contributions can cause your deductions to disappear and increase the risk of a tax audit.

Misunderstanding taxes on retirement account withdrawals

Sutthiphong/Adobe businessman holding a calculator calculating income and return on investment in percentage

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.

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!

You’ll also get insider info on social security, job listings, caregiving, and retirement planning. And you’ll get access to AARP’s Fraud Watch Network to help you protect your money, as well as tools to help you plan for retirement.

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

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 sitting on a bench

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

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, avoiding 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 an online directory of federal tax return preparers with credentials and specific qualifications.

Underestimating the impact of investment taxes

LALAKA/Adobe virtual symbol of percentage and uparrows for annual expenditures on house,children

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

Vika art/Adobe old funny couple with money flying around them

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.

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