5 Small Retirement Moves That Trigger Bigger Tax Bills Later
Your retirement is supposed to be about relaxation, not surprise tax bills. Yet countless retirees stumble into higher-than-expected tax liabilities by making seemingly small decisions around withdrawals and conversions.
Fortunately, these mistakes are totally preventable. Below are five retirement moves that could silently inflate your tax bill — and exactly how to sidestep them so you're not scrambling come April.
Good To Know: 6 Reasons To Think Twice Before Converting to a Roth IRA
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1. Missing Your Required Minimum Distribution (RMD)
Once you hit age 73, the IRS demands you start withdrawing money from your traditional IRA, SEP IRA, SIMPLE IRA and other tax-deferred retirement accounts. These required minimum distributions (RMDs) aren't optional—skip them, and the IRS slaps you with a penalty on whatever amount you failed to withdraw.
So, if you haven’t already, set up automatic withdrawals and calendar reminders so you don't miss the deadline.
2. Waiting Until December To Take Your RMD
Yes, the deadline is December 31st (with some exceptions for your very first RMD). But waiting until the final weeks of the year is playing with fire. A processing error or administrative delay could cause you to miss the deadline through absolutely no fault of your own.
Take your RMD earlier in the year and give yourself breathing room to fix any problems before the clock runs out.
3. Taking Large Withdrawals All at Once
Need extra cash in retirement? Resist the urge to pull it all at once. A single large distribution can bump you into a higher tax bracket, increase the taxable portion of your Social Security benefits, trigger higher Medicare premiums and tank your eligibility for income-sensitive credits and deductions.
The solution? Spread your withdrawals across multiple years. A financial advisor can help you map this out strategically.
4. Ignoring Roth Conversion Opportunities
Most people don't think about taxes until RMDs force them to. That can be a big mistake. The years between retirement and age 73 are your golden window to convert portions of your traditional IRA to a Roth while you're in a lower tax bracket. You'll pay taxes on the conversion upfront, but then your Roth withdrawals are tax-free forever — and there's no such thing as an RMD for Roth IRAs.
Waiting until RMDs kick in means you've already lost this opportunity.
5. Forgetting To Plan for Taxes
Here's what trips up most retirees: they calculate how much they need to withdraw but never calculate how much they'll actually owe in taxes. Come April, the bill arrives and it's brutal.
Work with a tax professional each year to model your expected withdrawals and tax liability. Knowing what's coming beats scrambling to pay it.
The Bottom Line
The difference between a surprise tax bill and a manageable one often comes down to whether you're planning ahead or reacting on the fly. Start the conversation with a tax professional now, map out your withdrawal strategy for the next few years and you'll spend way less time stressed about taxes in retirement.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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