7 Common Tax Planning Mistakes Made in Retirement

7 Common Tax Planning Mistakes Made in Retirement

Taxes shouldn’t just be a priority on April 15. At Montgomery Taylor Wealth Management, we help clients with their tax planning needs all year long. Taxes actually play a huge part in your retirement income, and using the right tax strategies can help you grow your retirement nest egg significantly. 

Unfortunately, people make mistakes when it comes to taxes all the time, and when it happens in retirement, the consequences can be costly. 

Think about it: When you retire, instead of relying mainly on a steady paycheck every two weeks, most people start relying on a number of income sources, such as Social Security, a pension, an IRA, a 401(k), stock dividends and interest. 

The good news is that even though stitching together multiple income streams can be complicated, it can actually give you more control over how much money you earn, which in turn, gives you more control over how much taxes you have to pay. 

The bad news, however, is your tax planning can become more complicated. 

To help, we have identified the 7 most common retirement tax planning mistakes we come across. 


At Montgomery Taylor Wealth Management, we offer tax preparation, financial planning and accounting services. Contact us to see how we can help. 


Mistake #1: Assuming Social Security Benefits Are Not Taxable

A portion of your retirement income undoubtedly comes in the form of Social Security benefits. You might be under the impression that those benefits are not taxable, and you’ll be right most of the time. However, if you earn other forms of retirement income, you should calculate your combined gross income (half of your Social Security benefits plus other income) and see if it’s more than the IRS federal tax threshold. Taxes are capped at no more than 85 percent of your Social Security income.

On the state level, quite a few states also levy taxes on your Social Security benefits under certain circumstances. Some of them calculate tax liabilities the same way as federal taxes, while others have their own way of calculating tax liabilities. 

To find out what your situation looks like regarding tax in Santa Rosa, Ca, talk with us.

Mistake #2: Not Setting Money Aside to Pay Taxes

When you earned a regular paycheck, your employer automatically withheld a certain amount of money from each paycheck for you. Now that you’re on your own, you no longer have this luxury. Come April, you don’t want to be surprised by a big tax bill that you didn’t set aside enough money to pay.

If you think you might owe taxes, you may want to calculate and pay estimated taxes to the IRS each quarter. Another option that may work for you is filling out a Form W-4V to ask the IRS to withhold income taxes for you on your Social Security benefits. 

Mistake #3: Not Considering Your Location

Relocating in retirement is common. Some retirees move to be closer to family. Others move “back home,” now that a work location is no longer a factor. Many choose to live somewhere new simply for a better tax situation. 

If you’re planning to retire in California (or are already enjoying the many benefits of living in this state), consider talking with a local financial advisor who can offer tax strategies you may not have thought about yourself. 

Mistake #4: Not Smoothing Out Your Retirement Income Year Over Year

Whether you’re going on a big dream vacation or renovating your home, there will be some years that require you to spend more money than others. If you didn’t plan ahead, you may not have the funds to make these goals a reality. 

If you withdraw too much money in one year, you might end up jumping to a higher tax bracket. If you can, budget out your withdrawals for a few years so you remain in the lowest tax bracket possible every single year.

Mistake #5: Not Knowing About RMDs

Due to the passing of the SECURE Act in late 2019, the age for Required Minimum Distributions (RMDs) was pushed from 70-½ to 72. 

Now, once you are 72 years old, you’re required to withdraw a certain amount of money from your IRA, 403(b) and 401(k) accounts, even if you don’t need it. Otherwise, the IRS can hit you with a pretty hefty penalty. This means that you’ll be paying taxes for no particular benefit. 

As you approach age 72, take into account your RMDs before withdrawing money from other sources of taxable income.

Mistake #6: Not Lumping Your QCDs

As a result to the previous point, if you’re 72 years of age or older, you may be eligible to redirect your RMDs to charitable contributions. Not only will this allow you to gift money to your favorite charities, but you will also save money on taxes since Qualified Charitable Distributions (QCDs) are deducted from your taxable income. This can be a win-win situation for both you and the charities.

Talk with a financial advisor about your options.

Mistake #7: Not Converting Your Traditional IRA to a Roth IRA

Traditional IRA accounts are pre-tax accounts. You can contribute to these accounts tax-free, but you have to pay taxes upon withdrawal. Roth IRAs are the opposite. You contribute post-tax income into the account, so when you make a withdrawal, the money you receive becomes tax-free.

An often-used strategy is to convert a portion of a Traditional IRA to a Roth IRA during a year when your taxable income is low. By doing so, you effectively pay taxes in the lowest tax bracket on the year that you make the conversion. On top of that, Roth IRAs are not subject to RMDs, leaving your money free to grow for as long as you live.

Final Thoughts

Unlike having taxes automatically withheld from your paycheck every couple of weeks, you’re responsible for paying the right amount of taxes on your retirement income. Retirement tax planning can be complicated with lots of moving pieces, which can often lead to missed opportunities and honest mistakes that lead to bigger tax bills than necessary from Uncle Sam. 

Prevent making costly mistakes by talking with a fee-only financial advisor who can help you maximize your cash flow and minimize the amount of taxes you owe. After all, would you rather be enjoying your retirement or worrying about whether you could have taken advantage of tax-saving opportunities?