5 Common Retirement Tax Traps and How to Avoid Them

Tax management can be complex, particularly for those who are not well-versed in tax laws and regulations. A variety of tax traps may await you in retirement, which could significantly eat into your income and savings. Common traps include taxes on Social Security benefits, Medicare surcharges, required minimum distributions (RMDs), real estate sales and estimated quarterly tax payments. With some knowledge, though, you can more effectively steer clear of these potential pitfalls.

For more personalized advice on how to prepare for retirement, consider speaking with a financial advisor.

1. Taxes on Social Security Benefits

Social Security benefits are an important part of your retirement income. But these benefits may also get taxed. The IRS calculates taxes on your benefits based on your combined income, which is made up of half of your Social Security benefits and the total amount of all your other income (including tax-exempt interest).

In 2025, individual taxpayers with a combined income under $25,000 do not have to pay taxes. Those with a combined income between $25,000 and $34,000 pay taxes in up to 50% of their benefits. For those with a combined income greater than $34,000, up to 85% of your benefits may be taxable.

Married couples filing a joint return will pay taxes up to 50% of their Social Security income for a combined income between $32,000 and $44,000. Those with a combined income over $44,000 will pay taxes up to 85%.

Some strategies can help you potentially reduce or even avoid taxes on your Social Security benefits, including:

Delaying the start of benefits until full retirement age or later. This might increase the monthly benefit amount, which could offset potential taxation.
Making tax-efficient withdrawals from other retirement accounts. This can lower your other taxable income and make a smaller percentage of your Social Security benefits subject to taxation.

2. Taxes on Medicare Surcharges

A man researching how to avoid common retirement tax traps.

Medicare surcharges, formally known as income-related monthly adjustment amounts (IRMAA), are additional charges appended to Medicare Part B and Part D premiums for those with higher income. You can employ several strategies to reduce or even completely avoid these taxes, including:

Income planning: The practice of income planning involves managing your income to stay below the IRMAA threshold.
Strategic withdrawal strategies: This strategy similarly focuses on coordinating the timing of withdrawals from retirement accounts to reduce or eliminate potential surcharges based on Medicare income thresholds.
Tax-efficient investing: This can help avoid Medicare surcharges by minimizing your taxable income, managing capital gains and using tax-advantaged accounts to stay within lower income thresholds.

3. Taxes on Required Minimum Distributions (RMDs)

RMDs are the minimum amount you need to withdraw from pre-tax retirement accounts, such as 401(k)s and Individual Retirement Accounts (IRAs), annually starting at age 73 (75 for people born in 1960 or later). The minimum amount you need to withdraw is calculated using tables provided by the IRS, which take into account your age and the balance of your account.

When you take these minimum distributions, income taxes apply to the amount that’s withdrawn. Some strategies to minimize or avoid RMDs, and thus the associated taxes, include:

Roth conversions: A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA. This can be beneficial because distributions from a Roth IRA are tax-free. Furthermore, there are no mandatory withdrawals based on age, so your retirement savings can keep growing during your lifetime. Take note, however, that a Roth conversion is a taxable event, meaning you will have to pay taxes upfront for the money you move to a Roth IRA.
Qualified charitable distributions: Another common strategy involves making qualified charitable distributions (QCDs). If you are aged 70 ½ or older, you can donate up to $108,000 from your IRA directly to a qualified charity. This could fulfill your RMD and also allow you to avoid income tax on the distributed amount.
Strategic withdrawal plans: These can also help manage your RMDs and their tax implications. By spreading out withdrawals over a longer period, you may be able to stay within a lower tax bracket.

Understand how required minimum distributions fit into your retirement plan. SmartAsset’s RMD Calculator estimates the withdrawals you’ll need to make and when they’ll start.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

4. Taxes on a Real Estate Sale

Capital gains can eat into your real estate sale by triggering tax obligations on the profit earned from that sale. When it comes to real estate sales, if the property has increased in value since it was bought, the seller could be liable for capital gains tax on that profit.

Common tax exemptions and deductions applicable to real estate sales can greatly reduce the tax burden on capital gains. One such tax break is the home sale exclusion, which allows individuals to exclude up to $250,000 (or $500,000 for married couples) of gain on the sale of their home, provided that they have lived in the home for at least two of the five years before the sale.

5. Penalties on Estimated Quarterly Tax Payments

Estimated quarterly tax payments play a significant role in managing annual tax obligations. These payments are how the IRS collects taxes on income that isn’t subject to withholding, including earnings from self-employment, business earnings, interest, rent or other sources.

Late or missed payments can result in penalties. The IRS calculates penalties separately for each required installment, so you may owe a penalty for an earlier payment due date, even if you paid enough tax later to make up the underpayment.

You can avoid penalties on estimated quarterly tax payments by accurately estimating your income, making timely payments and adjusting your payments as needed throughout the year to align with any changes in your financial situation.

Bottom Line

You can implement specific strategies to avoid common retirement tax traps.

By understanding the common tax traps that can impact your retirement income and savings, and by implementing specific strategies for your situation, you could position yourself for a successful retirement. Certain areas can hold more tax-related pitfalls than others, so make sure to tread carefully there. Doing so can allow you to avoid excess taxes or penalties eating into your hard-earned money you’ve saved for retirement.

Tips for Tax Planning

A financial advisor can help you avoid unnecessary taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you need to estimate your potential tax obligation, consider using a free income tax calculator.