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8 Things Almost Every Retiree Gets Wrong About Taxes

Taxes can hurt your savings, even in retirement.

By Will Vitka

Edited by Chris Kissell

Updated Jan. 29, 2025

Retirement offers the promise of relaxation, adventure, and enjoying the fruits of your labor. However, taxes remain an unwanted guest at the party.

Navigating the complex web of tax laws can be tricky when you are trying to manage your retirement plan. Mistakes can cost you dearly, reducing savings and limiting the joy of this well-earned chapter of life.

Here are eight things almost every retiree gets wrong about taxes. Understanding these factors can help you better navigate your post-work financial life.

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Imagining Social Security taxes won't impact them

Depending on how much you earn in what is known as "provisional income," as much as 85% of your Social Security benefits can be subject to federal taxes.

To calculate provisional income — sometimes known as “combined income” — add your modified adjusted gross income (MAGI), half of your Social Security benefits, and any tax-exempt interest.

Here’s how it breaks down:

Provisional income below $32,000 for married couples filing jointly ($25,000 for singles) means Social Security benefits are not taxed.
Provisional income between $32,000 and $44,000 for couples ($25,000 to $34,000 for singles) results in up to 50% of benefits being taxable.
Provisional income of more than $44,000 for couples ($34,000 for singles) will leave up to 85% of benefits exposed to taxes.

Also, don’t overlook state taxes. While most states exempt Social Security benefits, there are exceptions.

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Failing to give to charity in a tax-efficient way

There are significant benefits to donating to charity if you are a retiree.

For example, if you are in your 70s or older, you can use qualified charitable distributions (QCDs) to donate up to $100,000 from your IRA tax-free. This helps you avoid paying taxes on required minimum distributions.

Other options are available for giving to good causes and lowering your tax bill at the same time. Consult your tax advisor to learn more.

Forgetting that tax deductions tend to dry up in retirement

Retirees often lose key tax deductions. With your home paid off or nearly so, the value of the mortgage interest deduction often disappears. Without dependents, you won’t get a child tax credit. You even lose the ability to defer taxes in a 401(k) account.

More of your income may become taxable during retirement, a reality that requires careful planning if you want to minimize what you owe.

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Purchasing mutual funds that are not tax-efficient

When you invest through IRAs and 401(k)s, you can defer taxes and not have to worry about them for a long time. However, investments in taxable accounts often result in the need to pay taxes on gains and dividends year after year

Mutual funds in taxable accounts are often tax-inefficient due to high turnover that leads to taxable distributions. Investors may face unexpected tax bills on embedded gains.

Alternatives such as tax-efficient mutual funds are available. These can lower your tax burden year to year, so don’t overlook them. Consulting a financial planner can be helpful if you are looking for these options.

Thinking annuities offer tax-free income

If you purchased an annuity for retirement income, the part of your payment representing your principal is tax-free. However, the remainder is taxable.

The insurance company is required to inform you of the taxable amount. If you bought the annuity with pretax funds — such as via a traditional IRA — however, the entire payment will be taxed as ordinary income.

Additionally, any taxes owed on the annuity will be taxed at your ordinary income rate, rather than the lower capital gains rate.

Not realizing that the standard deduction is higher at age 65

The standard deduction for most taxpayers in 2025 is $15,000 for singles and $30,000 for married couples filing jointly.

Those 65 and older get a higher standard deduction, however. In 2025, they get an additional $2,000 if filing as a single and $1,600 per qualifying individual for those married filing jointly.

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Not taking their RMD

When you turn 73, you are generally required to start withdrawing a minimum percentage from your pre-tax retirement accounts, such as traditional IRAs and 401(k)s.

If you fail to take the required distribution, you could face a hefty penalty — 25% of the amount you were supposed to withdraw.

While there are a few exceptions to this rule, the penalty is steep and serves as a strong reminder to manage your withdrawals carefully. Be sure to stay on top of your required minimum distributions to avoid this costly mistake.

Not preparing for the possibility of higher tax rates

Many people assume they'll fall into a lower tax bracket when they retire. But that’s not always the case.

Retirees typically lose tax deductions, such as mortgage interest and 401(k) deductions. That can result in a higher tax bill.

In addition, retirees may pull large amounts from their retirement accounts to fund travel and hobbies, which might keep their income elevated.

Finally, there is the possibility that tax rates could rise in the future. While today’s rates are low by historical standards, there is no guarantee they will stay that way.