Tax season surprises many retirees who assumed their tax bills would decrease after leaving the workforce. The reality is more complex.
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Hanna Grichanik, private wealth advisor at Northwestern Mutual’s Summit & Sage Wealth Management and Insurance Solutions, identified the biggest dos and don’ts for retirees navigating tax season.
Do: Understand How Retirement Income Is Taxed
One of the biggest surprises retirees face is that not all retirement income is taxed the same way. “Withdrawals from traditional IRAs and 401(k) plans are generally taxed as ordinary income, while Roth withdrawals may be tax-free if certain requirements are met,” Grichanik said.
Understanding how each income source is treated helps retirees plan withdrawals more strategically and avoid unexpectedly high tax bills. Social Security, pensions, traditional retirement accounts and Roth accounts all follow different tax rules.
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Don’t: Take Large Lump Sums Without a Plan
Taking a large withdrawal from a retirement account in a single year pushes you into a higher tax bracket and increases taxes owed on other income. “A more thoughtful approach is spreading withdrawals across multiple years or balancing distributions from different account types to help manage overall tax liability,” Grichanik said.
Large one-time withdrawals for home purchases, medical expenses or gifts often create unnecessarily high tax bills. Breaking those needs into smaller withdrawals across two tax years reduces the total tax burden.
Do: Stay Ahead of Required Minimum Distributions
Once retirees reach the age where required minimum distributions begin, failing to take the correct amount leads to significant penalties. “Planning ahead for these withdrawals and understanding how they affect overall taxable income can help retirees avoid costly mistakes and better manage their cash flow,” Grichanik said.
The penalty for missing RMDs reaches 25% of the amount that should have been withdrawn. That’s an expensive mistake for forgetting a mandatory distribution.
Don’t: Forget the Tax Impact of Social Security Benefits
Many retirees assume Social Security benefits are tax-free. Depending on total income, those benefits can be taxable. “Coordinating Social Security with withdrawals from retirement accounts can help retirees manage how much of those benefits end up subject to tax,” Grichanik said.
Combined income from all sources determines Social Security taxation. Strategic withdrawal planning keeps combined income below thresholds that trigger benefit taxation.
Do: Use Tax-Advantaged Strategies Where Possible
Strategies such as Roth conversions, qualified charitable distributions or carefully timed withdrawals help retirees reduce taxable income over time. “These strategies often work best when implemented gradually and as part of a broader financial plan,” Grichanik said.
Qualified charitable distributions allow retirees over 70½ to donate up to $100,000 annually directly from IRAs to charity. The distribution counts toward RMDs but doesn’t increase taxable income.
Don’t: Overlook Withholding and Estimated Taxes
Even in retirement, staying on top of tax withholding or quarterly estimated tax payments remains important. “Without regular withholding from paychecks, retirees may need to adjust withholding from Social Security or retirement account withdrawals to avoid underpayment penalties,” Grichanik said.
Many retirees forget that retirement income requires tax planning just like working income did. The difference is retirees must proactively manage withholding rather than having employers handle it automatically.
The Bottom Line
Tax season in retirement comes down to understanding where income comes from and planning withdrawals accordingly. “Working with a financial advisor can help retirees coordinate income sources, manage tax exposure and build a strategy that supports both their lifestyle and long-term financial goals,” Grichanik said.
Professional guidance makes the difference between minimizing taxes and paying more than necessary throughout retirement.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planning Expert: Biggest Dos and Don’ts of Tax Season During Retirement
