The Most Common Retirement Tax Mistakes, and How to Avoid Them

The most common mistake is pulling money from retirement accounts in whatever order is easiest, usually draining one account until it runs low. Because different accounts are taxed differently, the order you draw from can raise or lower your tax bill by a lot, even for the same amount of spending.

How to Avoid This Mistake: Build a Coordinated Withdrawal Strategy

Blend your withdrawals across account types each year instead of emptying one at a time. Money from a traditional 401(k) or IRA is taxed like a paycheck, money from a Roth is usually tax-free, and money from a regular account is often taxed at a lower rate. Coordinating withdrawals across account types and tax brackets may help manage taxable income over the course of retirement.

Many people assume Social Security is tax-free. It often isn’t. Depending on your other income, up to 85% of your benefits can be taxed.² The mistake is taking large withdrawals or gains without realizing they can pull more of your Social Security into taxable territory.

How to Avoid This Mistake: Coordinate Social Security With the Rest of Your Taxable Income

Look at your Social Security and your other income together, rather than separately. In years when you plan a big withdrawal or a Roth conversion, check how it affects the tax on your benefits first. In some circumstances, spreading income across years or coordinating withdrawals from different account types may affect how much of your Social Security benefits are subject to federal income tax.

When you sell an investment in a regular account for more than you paid, the profit (a capital gain) is taxed. Selling without a plan, especially selling a lot in one year, can create a large tax bill and even bump you into a higher tax rate on those gains.

How to Avoid This Mistake: Manage Basis, Gains, and Losses Before You Sell

Plan your sales instead of reacting. Spreading sales across years keeps any single year’s gains lower. Selling some losers alongside winners (called tax-loss harvesting) can offset gains. And in low-income years, long-term gains may even be taxed at 0%.³Knowing your basis can help you evaluate the potential tax consequences of selling particular investments or shares.

1. What are common tax mistakes retirees make?

The most common are taking withdrawals in the wrong order, ignoring future required withdrawals until they hit, underestimating the tax on Social Security, triggering Medicare surcharges with a big income year, selling investments without planning for gains, and using outdated tax rules. Nearly all of them come down to a lack of year-ahead planning.

2. What is the most overlooked retirement tax break?

The low-income window early in retirement, the years after you stop working but before Social Security and required withdrawals begin. In that window, your income is often low enough to do Roth conversions or take investment gains at very low, sometimes 0%, tax rates. Many retirees miss this chance entirely.

3. What are the most overlooked tax deductions?

Common ones include the extra standard deduction for people 65 and older, medical expenses above a certain share of income, and charitable giving done through a Qualified Charitable Distribution from an IRA. Which ones help depends on your situation, so it’s worth reviewing them each year.

4. How can I reduce taxes on retirement account withdrawals?

Blend your withdrawals across account types, fill up your lower tax brackets on purpose, and use Roth conversions in low-income years to shrink future taxable withdrawals. Timing large withdrawals to avoid Medicare surcharges and higher Social Security taxation helps too. The order and timing matter as much as the amount.

5. Can Roth conversions help lower taxes in retirement?

Potentially. A Roth conversion generally creates current taxable income in exchange for the potential for qualified tax-free Roth withdrawals later. It may reduce future RMDs, but whether it lowers lifetime taxes depends on individual circumstances, future tax rates, investment performance, and other factors. The amount converted should be evaluated in the context of your broader tax situation.

6. When should I start tax planning for retirement?

Earlier than most people think. The most valuable moves often happen in the years right before and after you retire, before required withdrawals and other income lock in. Even if you’re already retired, a yearly review may help identify planning considerations. Starting earlier may provide additional planning flexibility.