The Retirement Tax Trap: How to Avoid Hidden Costs in Your Golden Years
Discover how strategic tax planning can help you minimize taxes on Social Security, pensions, and withdrawals from retirement accounts.
Most people head into retirement looking forward to more time, freedom, and less stress. But one thing that can sneak up on you in retirement? Taxes. If you’re not careful, Uncle Sam could end up being your biggest expense during your golden years.
At Seaside, we often meet with folks who are surprised by how much tax they owe in retirement. After years of diligently saving, many are unaware that traditional retirement accounts, Social Security benefits, and even required minimum distributions (RMDs) can trigger unexpected tax bills. Here's how to avoid falling into a retirement tax trap—and what you can do now to stay ahead.
1. RMDs Can Push You Into a Higher Tax Bracket
Once you hit age 73 (as of 2025), the IRS requires you to start taking minimum distributions from your traditional IRAs and 401(k)s—even if you don’t need the income. These RMDs are considered taxable income and can bump you into a higher tax bracket, impact Medicare premiums, and even cause more of your Social Security benefits to be taxed.
What to Watch For: A large RMD could trigger a chain reaction of higher taxes and healthcare costs. Planning ahead and smoothing out income over time can make a big difference.
2. Social Security Isn’t Always Tax-Free
Up to 85% of your Social Security benefits could be taxable depending on your "combined income"—which includes wages, RMDs, pension payments, and investment income. Many retirees are shocked when they see how much of their benefit is eaten away by taxes.
What to Watch For: Know your provisional income and how different income sources impact your benefits. Strategic withdrawals and Roth conversions can help manage this.
3. Not All Retirement Accounts Are Created Equal
Traditional retirement accounts (like a 401(k) or IRA) offer great tax-deferred growth while you’re working, but withdrawals are taxed as ordinary income. This can be a real eye-opener once you start living off those funds. Roth accounts, on the other hand, grow tax-free and can be a powerful tool in retirement.
What to Watch For: Consider a Roth conversion strategy in the years before RMDs begin—especially if you’re in a relatively low tax bracket.
4. Medicare IRMAA Surprises
Medicare premiums are tied to your income from two years ago, and a sudden spike in taxable income—say from an RMD or capital gain—can push you into a higher IRMAA tier. This means higher premiums for Part B and Part D.
What to Watch For: Be aware of income thresholds and keep an eye on the ripple effect of large distributions. Sometimes, a small adjustment in income can save thousands in healthcare costs.
5. State Taxes Still Apply
Even if you move to a state with no income tax, you might still be subject to taxes on retirement income from other states—especially pensions and annuities. And if you stay in a state that taxes retirement income, plan for how that will affect your net income.
What to Watch For: Research state tax laws on retirement income and consider how they align with your retirement plans. It's not just about federal taxes.
Wrapping It All Up
Retirement should be a time to enjoy the fruits of your hard work—not to stress about surprise tax bills. With smart planning, you can keep more of your money in your pocket and reduce your lifetime tax liability. Being tax-aware isn’t about beating the system; it’s about making the system work more efficiently for you.
This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.