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The 3 Biggest Tax Planning Mistakes Retirees Make and How to Avoid Them Thumbnail

The 3 Biggest Tax Planning Mistakes Retirees Make and How to Avoid Them

You've worked tirelessly your whole life, diligently saving for retirement. Every time you hear someone discuss tax strategies, you get excited, only to realize they mainly apply to business owners and real estate investors. But here's the thing: even in retirement, there are plenty of tax planning opportunities that can save you a significant amount of money. Oftentimes, retirees don’t take advantage of these strategies and instead make big mistakes with their taxes. Today, we'll explore 3 common tax planning mistakes retirees make and show you how to avoid them.

1. Tax Gain Harvesting

Tax gain harvesting is a powerful strategy that many retirees overlook. It involves taking advantage of the varying tax brackets for capital gains. The bottom tax bracket for long-term capital gains is 0%, meaning if your income falls below a certain threshold, you pay no taxes on these gains. The key is understanding the tax thresholds and using them to your advantage. 

During years when you are in the 0% bracket, sell your long term winners and pay nothing in taxes. You might find yourself in this bracket during the first few years of retirement. We encourage our pre-retirees to save up cash to live on during the beginning stages of retirement which we have coined “the gap years". These are the years between retirement and when you start taking Social Security (which we like to see you delay as long as you can in order for the benefit to grow larger). By saving up cash to live on during your gap years, you can effectively realize a lot of gains in your taxable account without paying anything in taxes.

By doing so, this can help you create a tax-efficient retirement income strategy that minimizes your tax liability.

To make the most of tax gain harvesting, consider these steps:

  • Understand the tax thresholds: Familiarize yourself with the income limits for the 0% long-term capital gains tax rate and plan your withdrawals accordingly. For 2023, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly.
  • Delay your Social Security benefit for as long as possible: The latest age you can claim your benefit is age 70. By delaying your Social Security benefit it can be as much as 70% larger than if you claim it at age 62. This makes a big difference! It also enables you to be in a lower bracket during the gap years allowing you to tax gain harvest.
  • Consult a tax professional: Working with a tax expert can help you fine-tune your tax gain harvesting strategy and ensure you don't miss out on potential savings.

2. Social Security Tax Torpedo

Many retirees are unaware of the Social Security Tax Torpedo, which can significantly impact your tax liability. Social Security taxation is based on provisional income; as your income increases, more of your Social Security benefits become taxable. To avoid this tax torpedo, it's crucial to plan your retirement income sources carefully. Understanding which income streams are included in provisional income and how to optimize them can help you minimize the taxes on your Social Security benefits.

To steer clear of the Social Security Tax Torpedo:

  • Coordinate your withdrawals: Plan your retirement account withdrawals strategically to minimize provisional income and reduce the taxation of your Social Security benefits.
  • Consider tax-efficient investments: Invest in assets that generate tax-favored income, such as municipal bonds or Roth IRAs, to reduce the impact on your provisional income.

3. Roth Conversions

Retirees often struggle to strike the right balance when converting traditional IRAs to Roth IRAs. The goal is to convert enough to optimize your taxes without overpaying. Under-conversion can leave you with a higher tax bill in the future, while over-conversion can lead to unnecessary upfront taxes. To find the sweet spot, project your future tax brackets, consider your other income sources, and adjust your Roth conversions accordingly.

To make informed decisions about Roth conversions:

  • Project your future tax brackets: We like to do multi year tax projections for you to help you keep an eye on the big picture and see the benefit of doing small Roth conversions over many years. We will help you to estimate your future tax rates based on your expected income and retirement account balances.
  • Gradual conversions: Consider a series of smaller conversions over several years rather than one large conversion to minimize the immediate tax impact.
  • Reevaluate annually: Continuously monitor your financial situation and make adjustments to your conversion strategy as needed to optimize your taxes.


Retirement should be a time of financial security and enjoyment, not a period of unnecessary tax burdens. By avoiding these three common tax planning mistakes—failing to utilize tax gain harvesting, overlooking the Social Security Tax Torpedo, and mishandling Roth conversions—you can ensure that your hard-earned retirement savings go further. We look forward to helping you stay informed about tax laws and strategies to make the most of your retirement years.