Many people expect taxes to decrease significantly in retirement. But income in retirement comes from multiple sources — retirement accounts, Social Security, investments — each taxed differently. Without coordination, tax surprises are common and costly.
Why Taxes Continue in Retirement
Income in retirement comes from sources that are taxed differently:
Traditional IRA and 401(k) withdrawals: Fully taxable as ordinary income Roth IRA withdrawals: Tax-free (if rules are met) Social Security: Up to 85% taxable depending on your combined income Investment income: Dividends and capital gains taxed at preferential rates (but still taxed) Required Minimum Distributions: Mandatory taxable withdrawals beginning at age 73
Without coordination, these sources can overlap in ways that push you into higher brackets than necessary.
Where Surprises Happen
Required withdrawals increase income: RMDs from traditional accounts are mandatory starting at age 73. For retirees who don't need the income, these forced withdrawals can push them into higher brackets and trigger IRMAA surcharges.
Multiple sources overlap: Social Security, RMDs, and portfolio withdrawals all hitting in the same year can create a tax pile-up that wasn't anticipated.
Timing isn't coordinated: Taking a large IRA withdrawal in the same year as a Roth conversion, a capital gain realization, and a Social Security payment can result in a tax bill that surprises even financially sophisticated retirees.
What to Do This Week
List your income sources and identify how each is taxed. Then consider how the timing of each affects your overall tax picture.
If you haven't had a coordinated tax planning conversation — one that includes your financial advisor, CPA, and estate attorney — that's the most valuable step you can take. Taxes in retirement are not a filing exercise. They're a planning exercise that happens throughout the year.