“Retirees often encounter unexpected tax liabilities from Social Security benefits becoming taxable based on income levels, higher Medicare premiums triggered by income thresholds, penalties for missing required withdrawals from retirement accounts, varying state taxes on pension and investment income, and fines for neglecting quarterly estimated tax payments. Proactive strategies like managing combined income, timing distributions, researching state rules, and scheduling payments can help minimize these risks and preserve more of retirement savings.”
Trap 1: Overlooking Taxes on Social Security Benefits
Many retirees assume their Social Security checks are entirely tax-free, but depending on overall income, a significant portion can become taxable at the federal level. This happens through a calculation of combined income, which includes adjusted gross income plus nontaxable interest plus half of Social Security benefits. If this figure exceeds certain thresholds, up to 85% of benefits may be subject to income tax, potentially adding thousands to a tax bill unexpectedly.
For single filers, no tax applies if combined income is below $25,000. Between $25,000 and $34,000, up to 50% of benefits are taxable. Above $34,000, up to 85% can be taxed. For married couples filing jointly, the brackets are under $32,000 for no tax, $32,000 to $44,000 for up to 50% taxable, and over $44,000 for up to 85% taxable. These thresholds haven’t adjusted for inflation in decades, meaning more retirees fall into taxable categories as living costs rise and other income sources grow.
This trap can be exacerbated by one-time events, such as selling investments or taking large withdrawals from retirement accounts, which inflate combined income and push more of the benefits into taxable territory. Additionally, some states impose their own taxes on Social Security, further eroding net income.
To avoid this, focus on income diversification. Delay claiming Social Security until full retirement age or age 70 to increase monthly benefits, which can help offset any taxation. Use Roth accounts for withdrawals since they don’t count toward combined income. Strategically time other income sources, like drawing from taxable investments in low-income years. Consider bunching deductible expenses or making charitable contributions to lower adjusted gross income. Working with a financial planner to project combined income annually can prevent surprises.
Trap 2: Falling into Higher Medicare Premiums via IRMAA
Income-Related Monthly Adjustment Amounts (IRMAA) add surcharges to Medicare Part B and Part D premiums for higher earners, based on modified adjusted gross income from two years prior. What starts as a standard premium can balloon significantly, turning a manageable healthcare cost into a major expense that persists for years.
For 2026, the standard Part B premium is $202.90 monthly. But if income exceeds the base thresholds, surcharges kick in. Here’s a breakdown of the 2026 Part B IRMAA brackets and total premiums:
| Annual Income (Single Filers) | Annual Income (Joint Filers) | Monthly Surcharge | Total Monthly Premium |
|---|---|---|---|
| $109,000 or less | $218,000 or less | $0 | $202.90 |
| $109,001 – $137,000 | $218,001 – $274,000 | $81.20 | $284.10 |
| $137,001 – $171,000 | $274,001 – $342,000 | $202.90 | $405.80 |
| $171,001 – $205,000 | $342,001 – $410,000 | $324.60 | $527.50 |
| $205,001 – $499,999 | $410,001 – $749,999 | $446.30 | $649.20 |
| $500,000 and above | $750,000 and above | $487.00 | $689.90 |
Part D surcharges follow similar brackets, adding $14.50 to $91.00 monthly depending on income level. These are determined by tax returns from 2024 for 2026 premiums, creating a lag that can catch retirees off guard after a high-income year from events like capital gains or Roth conversions.
The trap deepens because RMDs or pension income can push income over thresholds, leading to surcharges that reduce disposable income without providing extra benefits. Appeals are possible for life-changing events like divorce or work cessation, but they’re not guaranteed.
Avoidance strategies include proactive income management. Spread out withdrawals from pre-tax accounts over multiple years to avoid spikes. Convert traditional IRA funds to Roth IRAs in lower-income periods, paying taxes upfront for tax-free growth later. Use qualified charitable distributions to satisfy charitable giving without increasing taxable income. Monitor projected income two years ahead and adjust spending or investments accordingly. Tax-loss harvesting in brokerage accounts can offset gains and keep income below brackets.
Trap 3: Missing Required Minimum Distributions (RMDs)
Retirees with traditional IRAs, 401(k)s, or similar pre-tax accounts must begin taking RMDs at age 73, or face steep penalties. The amount is calculated by dividing the prior year’s account balance by a life expectancy factor from IRS tables, and failure to withdraw enough results in a 25% excise tax on the shortfall (reduced to 10% if corrected within two years).
For example, at age 73, using the Uniform Lifetime Table, the divisor might be around 26.5, so a $500,000 balance requires about $18,868 withdrawn, taxed as ordinary income. This can force retirees into higher tax brackets, increase taxable Social Security, or trigger IRMAA. Delaying RMDs isn’t an option, and accounts grow tax-deferred until then, potentially leading to larger mandatory payouts later.
The trap is common for those who don’t need the money immediately, forgetting the deadline (April 1 the year after turning 73 for the first, then December 31 annually). Inherited accounts have different rules, adding complexity.
To sidestep this, start planning early. Use online calculators or IRS worksheets to estimate future RMDs. Consider Roth conversions before age 73 to reduce pre-tax balances, paying taxes now at potentially lower rates. For charitably inclined retirees over 70½, qualified charitable distributions (QCDs) up to $108,000 count toward RMDs without being taxable. If still working, some 401(k) plans allow delaying RMDs until retirement. Consolidate accounts for simpler management, and set up automatic distributions to ensure compliance.
Trap 4: Not Accounting for State Taxes on Retirement Income
While federal taxes get most attention, state taxes vary widely and can significantly impact net retirement income. Some states fully tax pensions, annuities, and IRA withdrawals, while others offer exemptions or lower rates for retirees. Moving to a low-tax state without understanding rules can lead to unexpected bills.
For instance, states like California and New York tax retirement income at rates up to 13.3% and 10.9%, respectively, treating it as ordinary income. In contrast, states such as Florida, Nevada, and Texas have no state income tax, making them attractive. However, even tax-friendly states might tax dividends or interest. Social Security is exempt in most states, but a handful like Colorado and Connecticut tax it under certain conditions.
This trap arises when retirees relocate without researching or fail to withhold state taxes from distributions, leading to underpayment penalties. Property taxes and sales taxes in new states can compound the issue.
Avoid by reviewing state tax policies thoroughly. Use resources like state revenue department websites to compare effective tax burdens. If staying put, maximize deductions like property tax credits for seniors. For multistate retirees, understand sourcing rules for income. Plan relocations strategically, establishing residency in low-tax areas while minimizing ties to high-tax ones. Withhold state taxes from pensions and IRAs, and consider tax-advantaged municipal bonds from your state for tax-free interest.
Trap 5: Forgetting Estimated Quarterly Tax Payments
Unlike employment where taxes are withheld, retirement income from investments, freelance work, or self-employment often requires manual quarterly payments to the IRS. Missing these—due April 15, June 15, September 15, and January 15—triggers underpayment penalties, calculated as interest on the shortfall.
The safe harbor rule requires paying at least 90% of the current year’s tax or 100% (110% for higher earners) of the prior year’s tax. For retirees with uneven income, like from sporadic stock sales, estimating accurately is challenging. Penalties can add up, especially with rising interest rates.
This oversight is frequent for new retirees accustomed to automatic withholding, leading to a large balance due at filing.
Prevention involves diligent tracking. Use Form 1040-ES to calculate and pay estimates. Adjust for changes like market gains by increasing payments mid-year. Set reminders or automate transfers. If possible, increase withholding from pensions or Social Security to cover other income, treating it as paid evenly. Software or apps can forecast liabilities based on year-to-date income. For complex situations, pay more than the minimum to build a buffer against penalties.
Disclaimer: The information in this news report is for general informational purposes only and does not constitute financial, tax, or legal advice. It is based on publicly available data and should not be relied upon for individual decision-making. Readers are encouraged to consult qualified professionals for personalized guidance regarding their specific situations.