7 Tax Blunders to Avoid in Your First Year of Retirement, From a Seasoned Financial Planner

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Stepping into full retirement — and your first year without a regular paycheck — can feel liberating and a bit unnerving.

If you're entering retirement with a mid to high six-figure portfolio, you may feel prepared. However, just one misstep in tax planning can quietly shave thousands off your nest egg.

As a CERTIFIED FINANCIAL PLANNER™ (CFP®) with more than 15 years of retirement and tax planning experience, I've seen smart, successful clients stumble simply because they treated the transition like a continuation of "business as usual."

But the tax code doesn't pause when you stop working. It often changes. Laws like the SECURE 2.0 Act and the One Big Beautiful Bill (OBBB) could mean your first year off may bring new obligations or opportunities.

Here are seven common tax mistakes retirees make — and how you can avoid them.

Mistake No. 1: Withdrawing too much, too quickly

Many retirees, eager to "live off" their savings, withdraw large chunks from their retirement accounts — for example, $50,000 from a $500,000 portfolio or $80,000 from a $1 million IRA — without considering the tax impact.

That extra income can push you into a higher tax bracket, trigger more Medicare premiums, or increase taxes on Social Security.

Example: Suppose you retire with a $600,000 traditional IRA. You decide to take $60,000 your first year to cover living expenses. You also have $20,000 in Social Security and $10,000 of dividend income. Your taxable income becomes $90,000 before deductions.

For married filing jointly, that could place you in a higher bracket. Check the current IRS brackets for your filing status before setting withdrawal amounts. You might have remained in a lower bracket by withdrawing less.

What to do instead: Estimate your annual income needs first. Break down expected withdrawals (e.g., from IRAs, 401(k)s, investment accounts) and overlay the current IRS tax brackets for your filing status and standard deduction. Then set a withdrawal strategy.

You might withdraw only $40,000 instead of $60,000 to stay in a lower bracket. Revisit this annually.

Mistake No. 2: Ignoring the rise in RMD age under SECURE 2.0

Under the SECURE 2.0 Act, the age at which you must begin required minimum distributions (RMDs) from traditional IRAs and 401(k)s has shifted.

For most people born in 1951 to 1959, the age is 73. For those born in 1960 or later, it will be 75.

Example: A retiree aged 72 in 2025 has a $1 million traditional IRA. If they were unaware and took a large voluntary withdrawal, thinking RMD was due now, they might mistime withdrawals or end up taking too much.

What to do instead: Check your birth year and determine your required beginning date (RBD) for RMDs. If you are not yet at the RBD, you can consider delaying or strategically planning withdrawals.

If you are at or near it, calculate your RMD using the IRS uniform table or your plan's table. For example: Calculate your RMD using the current IRS Uniform Lifetime Table for your age, based on your prior year-end balance. Then treat that as taxable income.

Mistake No. 3: Under withholding or skipping estimated tax payments

When you stop working, your employer stops withholding taxes. But distributions from IRAs, 401(k)s and taxable investment accounts are still taxable. If too little is withheld, or none at all, you could face underpayment penalties.

Example: You withdraw $50,000 from your IRA and $15,000 from dividends and interest, and you have $12,000 in Social Security.

If you don't arrange withholding or make estimated payments, you might owe hundreds or thousands in penalties when you file.

What to do instead: Estimate your taxable income (withdrawals plus other income), subtract the standard deduction, and map it to your bracket.

Then ask your plan custodian to set appropriate federal and, if applicable, state withholding based on your projection, or make quarterly estimated payments. Monitor at midyear and adjust.

Mistake No. 4: Failing to coordinate Social Security and taxable income

Many retirees don't realize that up to 85% of their Social Security benefits can become taxable depending on "combined income" (your AGI plus nontaxable interest plus half of your Social Security benefits).

Adding large IRA withdrawals can tilt you into higher tax treatment of your benefits.

Example: A retiree receives $30,000 of Social Security and withdraws $40,000 from a traditional IRA, plus $10,000 in investment income. Their combined income is $40,000 plus half of $30,000 plus $10,000, totaling $55,000. That could mean up to 50% to 85% of Social Security is taxable.

What to do instead: Estimate how your withdrawals affect Social Security taxation. If necessary, scale withdrawals or convert to a Roth IRA (if appropriate) earlier when your income is lower. Coordinate with your tax adviser to avoid swallowing additional taxes.

Mistake No. 5: Ignoring future tax rate risk

Monitor legislative updates and plan with the possibility of higher future rates in mind. The OBBB made current tax rates "permanent," but that could change under future administrations.

While we can't predict legislation, assuming rates stay fixed may be a mistake. Planning as if future rates could rise is prudent.

Example: Suppose you plan to withdraw $70,000 annually in retirement, assuming your tax bracket remains 22%. If tax legislation changes, that factor may no longer hold.

What to do instead: Build flexibility into your withdrawals. Consider a mix. Take some withdrawals now and leave some invested for later, allowing tax rates to evolve.

Consider "tax bracket harvesting," in which you convert to a Roth IRA when you are in a lower bracket. Even if tax rates rise, you'll have diversified tax buckets.

Mistake No. 6: Taking big withdrawals without considering Medicare IRMAA or net investment income tax

Large withdrawals or taxable income from investments can bump you into thresholds that trigger the Medicare income-related monthly adjustment amount (IRMAA) or the 3.8% net investment income tax (NIIT).

What to do instead: Check the income thresholds for IRMAA and NIIT. Then keep an eye on your modified adjusted gross income (MAGI).

Spread out or time certain income streams (for example, sell investments gradually) to smooth your income over years rather than spiking one year with a large withdrawal.

Mistake No. 7: Forgetting about state taxes or local surtaxes when moving or retiring in place

Federal taxes get all the attention, but state income taxes, state-level RMD considerations or local tax surcharges can affect your first year of retirement significantly.

Example: You retire and relocate to a state that taxes pension and IRA income as ordinary income, or has a surtax on investment income. Unless you plan accordingly, you may be surprised when you file your state return.

What to do instead: Check your state of residence (and any state you plan to move to) for tax rules on retirement income, IRAs and RMDs. Factor state tax into your net retirement income plan. Ask your adviser to project not just federal tax, but combined federal and state taxes.

Conclusion

Your first year without a paycheck doesn't mean your tax planning goes on autopilot. On the contrary, it demands thoughtful choices: setting appropriate withdrawals, coordinating Social Security, monitoring your tax brackets and adapting to new rules from laws such as SECURE 2.0 and the OBBB.

By avoiding these seven pitfalls, you may improve after-tax outcomes and help preserve more of your nest egg. Take time soon to gather your projected income, planned withdrawals and tax withholding settings. Then revisit those numbers annually.

Examples are hypothetical and for illustrative purposes. Information is for educational purposes only and is not tax, legal, or investment advice. Tax laws change. Consult your tax adviser about your specific situation.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.