Retirement Tax Traps and Penalties: 5 Gotchas That Catch People Off Guard
Even the most disciplined retirees can be caught off guard by hidden tax traps and penalties. Our analysis highlights five of the biggest “retirement gotchas” — including Social Security taxes, Medicare IRMAA surcharges, RMD penalties, the widow’s penalty, and state-level tax surprises. Learn how to anticipate these costs and plan smarter to preserve more of your retirement income.
Even the most disciplined savers can be blindsided in retirement by unexpected taxes, penalties, and benefit reductions that derail a carefully built plan. These “retirement gotchas” often appear subtle during your working years but can cost tens of thousands once you stop earning a paycheck.
Here are five of the biggest surprises retirees face—and how to avoid them before it’s too late.
1. The Tax Torpedo from Social Security
Many retirees are surprised to learn that Social Security isn’t always tax-free. Depending on your income, up to 85% of your benefit can be taxed.
The IRS uses something called “provisional income,” which includes half your Social Security benefit plus all other taxable income and tax-free municipal bond interest.
For individuals, taxes begin when provisional income exceeds $25,000.
For married couples, it starts at $32,000.
A well-intentioned IRA withdrawal or capital gain can push you over these thresholds—causing a sudden jump in taxes. Strategic Roth conversions and careful withdrawal sequencing can help smooth this out over time.
2. Higher Medicare Premiums (IRMAA)
The Income-Related Monthly Adjustment Amount (IRMAA) is one of the most overlooked retirement costs. Once your modified adjusted gross income (MAGI) exceeds certain limits, your Medicare Part B and D premiums increase—often by thousands of dollars per year.
For 2025, IRMAA surcharges begin when MAGI exceeds roughly $103,000 for single filers or $206,000 for married couples. The catch? Medicare looks back two years at your income. A Roth conversion, property sale, or large one-time distribution can unexpectedly trigger higher premiums two years later.
Proactive tax planning can prevent crossing these thresholds unintentionally.
3. Required Minimum Distributions (RMDs)
Once you reach age 73, the IRS requires you to start withdrawing from pre-tax retirement accounts each year—whether you need the money or not. These RMDs are taxed as ordinary income and can increase your tax bracket, raise Medicare premiums, and reduce your eligibility for certain deductions.
The biggest mistake is waiting until your 70s to plan for them. Roth conversions in your 60s can reduce future RMDs, and charitable giving through Qualified Charitable Distributions (QCDs) can offset the tax impact once they begin.
4. The Widow’s Penalty
When one spouse passes away, the surviving spouse’s tax brackets and standard deduction are cut in half—but income sources often don’t decrease proportionally. Social Security may drop by one benefit, but RMDs, pensions, and investment income remain largely the same.
The result is a higher effective tax rate for the survivor. This “widow’s penalty” can last for years, especially when combined with RMDs and Medicare surcharges. Couples can reduce the long-term impact through lifetime Roth conversions, strategic asset titling, and beneficiary planning.
5. State Taxes and Hidden Relocation Costs
Many retirees move to lower-tax states hoping to stretch their income, but state-level taxes can be tricky. Some states tax pension and IRA withdrawals, others tax Social Security, and a few impose taxes on out-of-state income or estates.
Additionally, higher property taxes, insurance premiums, and healthcare costs can offset income tax savings. A comprehensive cost-of-living comparison is essential before relocating.
Our analysis at Greenbush Financial Group often reveals that the “best” retirement state depends more on quality of life, healthcare access and total cost of living than on income tax rates alone.
How to Avoid These Retirement Surprises
Most retirement gotchas come down to timing and coordination—especially between taxes, Social Security, and healthcare. A few key steps can make a major difference:
Run retirement income projections that include taxes and IRMAA thresholds.
Consider partial Roth conversions before RMD age.
Sequence withdrawals intentionally between taxable, tax-deferred, and Roth accounts.
Evaluate the long-term impact of home state taxes before moving.
Review beneficiary and trust structures regularly.
The earlier you identify potential traps, the easier they are to fix while you still control your income and withdrawals.
The Bottom Line
Retirement is more complex than simply replacing a paycheck. The interplay between taxes, healthcare, and income sources can turn small decisions into costly mistakes. By spotting these gotchas early, you can preserve more of your wealth and enjoy a smoother, more predictable retirement.
Our advisors at Greenbush Financial Group can help you identify your biggest risk areas and design a plan to minimize the tax and income surprises most retirees never see coming.
FAQs: Retirement Planning Surprises
Q: Are Social Security benefits always taxed?
A: No. But depending on your income, up to 85% of your benefits may be taxable.
Q: How can I avoid higher Medicare premiums?
A: Manage your income below IRMAA thresholds through strategic Roth conversions and tax-efficient withdrawals.
Q: What happens if I miss an RMD?
A: You could face a 25% penalty on the amount not withdrawn, reduced to 10% if corrected quickly.
Q: Why do widows and widowers pay more in taxes?
A: Filing status changes from joint to single, cutting brackets and deductions in half while much of the income remains.
Q: Are all retirement states tax-friendly?
A: No. Some states tax retirement income or have higher overall costs despite no income tax.
Rob Mangold
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
What Happens When You Inherit an Already Inherited IRA?
When you are the successor beneficiary of an Inherited IRA the rules are very complex.
When someone passes away and they have a retirement account, if there are non-spouse beneficiaries listed on the account, they will typically rollover the balance in the inherited retirement account to either an Inherited Traditional IRA or Inherited Roth IRA. But what happens when the original beneficiary passes away and there is still a balance remaining in that inherited IRA account? The answer is that a successor beneficiary inherits the account, and then the distribution rules become complex very quickly.
Beneficiary of an Inherited IRA (Successor Beneficiaries)
As a beneficiary of an inherited IRA, it's important to understand that the options available to you for taking distributions for the account will be determined by the distribution options that were available to the original beneficiary of the retirement account that you inherited it from, which vary from beneficiary to beneficiary.
Non-spouse Inherited IRA Rule
The IRS changed the rules for non-spouse beneficiaries back in 2019 with the passing of the Secure Act, which put original non-spouse beneficiaries in two camps: beneficiaries that inherited a retirement account from someone that passed away prior to January 1, 2020, and beneficiaries that inherited retirement accounts some someone that passed January 1, 2020 or later.
We have a whole article dedicated to these new non-spouse beneficiary rules that can be found on our website but for now I will move forward with the cliff notes version.
Stretch Rule vs 10-Year Rule Beneficiaries
As the beneficiary of an inherited IRA, you must be able to answer two questions:
Was the original beneficiary subject to the “RMD stretch rule” or “10-year rule”?
If that beneficiary was required to take an RMD in the year they passed, did they already distribute the full amount?
Original Beneficiary was the Spouse
A common situation is that a child has two parents - the first parent passes away, and the balance in those retirement accounts are then inherited by the surviving spouse and moved into the surviving spouse’s own retirement accounts. A spouse of an original owner of a retirement account has special rules available to them which allow them to roll their deceased spouse’s retirement accounts into their own retirement accounts and treat them as their own. When their children inherited the remaining balance in the retirement accounts from the second to parent, they are considered non spouse beneficiaries and are most likely subject to the new 10-year distribution rule unless they qualify for an exception.
Non-spouse Beneficiary 10-Year Rule
If the original beneficiary of the Inherited IRA received that account from someone that passed away after December 31, 2019 and they are a non-spouse beneficiary, they are most likely subject to the new 10-Year Rule which requires the original beneficiary to fully deplete that retirement within 10 year of the year following the original decedent’s death.
Example: Sue, the original owner of a Traditional IRA passes away in 2022, and her daughter Katie is the sole beneficiary of her IRA. Since Katie is a non-spouse beneficiary, she would be required to fully deplete the IRA by 2032, 10 years following the year after that Sue passed away.
But what happens if Katie, the original beneficiary of that inherited IRA passes away in 2026, and she is only 4 years into the 10-year depletion cycle? In this example, when Katie set up her inherited IRA, she named her two children Scott & Mara as 50/50 beneficiary on her inherited IRA account. Scott and Mara would move their respective 50% balance into their own inherited IRA account but as beneficiaries of an already inherited IRA, the 10-year rule does not reset. Scott & Mara would be bound to the same 10-year depletion date that Katie was subject to so Scott & Mara would have to deplete the Inherited IRA (2 times inherited) by 2032 which was Katie’s original 10-year depletion date.
10-Year Rule: The basic rule is if the original beneficiary of the inherited IRA was subject to the 10-year rule, as the new beneficiary of that existing inherited IRA, you get whatever time is remaining in that original 10-year period to fully deplete that Inherited IRA. It does not matter whether the inherited IRA that you inherited was a Traditional IRA or a Roth IRA, the same rules apply.
Original Beneficiary was a “Stretch Rule” beneficiary or the Spouse
For original non-spouse beneficiaries that inherited the retirement account from an account owner that passed away before January 1st, 2020, they have access to what is called the Stretch Rule. Those non-spouse beneficiaries are allowed to move the original owners balance of the retirement account to their own inherited IRA and they are not required to deplete the account in 10 years.
Instead, those non-spouse beneficiaries are only required to take an annual RMD (required minimum distribution) each year, which are small distributions from the Inherited IRA each year, but they could effectively stretch the existence of that inherited account over their lifetime. But it’s also important to note, that some non-spouse beneficiaries that inherited a retirement account from someone who passes on or after January 1, 2020, may have qualified for a stretch rule exception which are as follows:
Surviving spouse
Person less than 10 years younger than the decedent
Minor children
Disabled person
Chronically ill person
Some See-Through Trusts benefitting someone on this exception list
If the original beneficiary of the inherited IRA was eligible for the stretch rule, and you inherited that inherited IRA from that individual, you would NOT be eligible for the Stretch Rule, you would be subject to the 10-year rule, but you would have a full 10-years after the owner of that inherited IRA passes away to fully deplete the balance in that inherited IRA that you inherited.
When we are talking about beneficiaries of an already inherited IRA, it does not matter whether you were their spouse or non-spouse because the spouse exceptions only apply to the spouse of the original decedent.
Example: John inherited a Traditional IRA from his father who passed away in 2018. John was a non-spouse beneficiary, but since his father passed before 2020, he was eligible for the stretch provision which allowed John to roll over the Traditional IRA to an inherited IRA in his name and he was only required to take annual RMD’s each year but was not required to deplete the account in 10 years. John passes in 2025, his daughter Sarah is the beneficiary of the Inherited IRA, since Sarah inherited the inherited IRA from John who passes after December 31, 2019, Sarah would be required to deplete the balance in John’s inherited IRA by 2035, 10-year following the year after John passes.
RMD of Beneficiaries of Inherited IRAs
Now we have to move on to the second question that beneficiaries of Inherited IRAs need to ask, which is “does the successor beneficiary of an inherited IRA need to take annual RMD’s from the account each year?” The answer is “it depends”.
It’s common for beneficiaries of Inherited IRAs to be subject to both the 10-year rule and be required to take annual required minimum distributions from the account. Whether or not the beneficiary needs to take an RMD will depend on the whether or not the original beneficiary of the account was required to take RMDs. The basic rule is if the current owner of the Inherited IRA was required to take annual RMD’s from the account, you as the beneficiary of the Inherited will be required to continue to take RMD’s from the account. The IRS has a rule that once an owner of an IRA or Inherited IRA has started taking RMDs, they cannot be stopped.
If the answer is “Yes:”, the person that you inherited the Inherited IRA from was already taking RMD’s from the Inherited IRA account, then you as the beneficiary of that inherited IRA would be subject to whatever time is left in the 10-year rule, and you would also be required to take RMDs from the account each year.
Don’t Forget To Take The Decedent’s RMD
RMD’s are usually required to begin the year after an individual passes away which is true of Inherited IRAs but as the beneficiary of an retirement account, where the decedent was required to take an RMD for that year, you have to ask the question: did they satisfy their RMD requirement before they passed away.
If the answer is “yes”, no action is required in the year that they passed away unless they were in year 10 year of the depletion cycle.
If the answer is “no”, then you as the beneficiary of that existing Inherited IRA are required to take the undistributed RMD amount from that inherited IRA in the year that the decedent passed away.
Example: Kelly inherits an Inherited IRA from her mother Linda. Linda originally inherited the IRA from her father when he passed in 2022. At the time that her father passed, he was 80, which made him subject to RMDs. When Linda inherited the account from her father, since he was subject to RMDs, Linda was subject to the 10-year rule and annual RMDs. Linda passed in 2024, her daughter Kelly inherits her Inherited IRA, and Kelly would be required to fully deplete the inherited IRA by 2032 (Linda original 10 year rule date), she would be required to take annual RMD’s from the account because Linda was receiving RMDs, and if Linda did not receive her full RMD in 2024 when she passed, Kelly would have to distribute any amount that Linda would have been required to take in the year that she passes.
A lot of rules, but all very important to avoid the IRS penalties that await the taxpayers that fail to take the proper RMD amount or fail to adhere to the new 10-year rule.
Summary of 3 Successor IRA Questions
When you are the beneficiary of an inherited IRA, you must be able to answer the following questions:
Was the person that you inherited the inherited IRA from subject to the 10-year rule?
Was the person that you inherited the Inherited IRA from required to take annual RMDs?
Did the decedent take their RMD before they passed?
What was the age of the decedent when that passed?
The last question is important because there are potential situations where someone is the original beneficiary of an Inherited IRA subject to the 10-year rule, based on the age of the original owner when they passed and the age when the original beneficiary when they inherited the IRA may not make them subject to the annual RMD requirement. However, if the original beneficiary passes away after their “Required Beginning Date” for RMDs, the beneficiary of that inherited IRA may be subject to an annual RMD requirements even though the original beneficiary was not.
The IRS has unfortunately made the rules very complex for beneficiaries of an Inherited IRA account, so I would strongly recommend consulting with a professional to make sure you fully understand the rules.
General Rules Successor IRA Rules
If you are a successor beneficiary:
If the owner on the inherited IRA was subject to the stretch rule, you as the successor beneficiary are now subject to the 10-year rule
If the owner of the Inherited IRA was subject to the 10-year rule, you have whatever time is remaining within that original 10 year window to deplete the account balance.
Whether or not you have to take an RMD in the year they pass and in future years, is more complex, seek help from a professional.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What happens when a beneficiary of an inherited IRA passes away?
When the original beneficiary of an inherited IRA dies, the account passes to a successor beneficiary. The successor inherits both the account and the distribution rules that applied to the original beneficiary, meaning the timing and requirements for withdrawals depend on how the first beneficiary inherited the IRA.
Do successor beneficiaries get a new 10-year window to deplete the inherited IRA?
No. If the original beneficiary was subject to the 10-year rule, the successor beneficiary only has the remaining time left in that original 10-year period to fully deplete the account. The clock does not reset when the account passes to a new beneficiary.
What if the original beneficiary was following the stretch rule?
If the first beneficiary inherited the IRA before 2020 and was allowed to “stretch” distributions over their lifetime, the successor beneficiary must follow the 10-year rule instead. They have a full 10 years from the year after the first beneficiary’s death to empty the account.
How do required minimum distributions (RMDs) work for successor beneficiaries?
If the person you inherited the IRA from was already taking RMDs, you must continue taking them each year and still meet the 10-year depletion rule. Once RMDs have begun on an IRA or inherited IRA, they cannot be stopped.
Do successor beneficiaries need to take the decedent’s final RMD?
Yes. If the previous account holder had not yet taken their full RMD for the year in which they passed away, the successor beneficiary is responsible for distributing that remaining amount before year-end to avoid IRS penalties.
Does it matter if the IRA was Traditional or Roth?
The same successor rules apply to both Traditional and Roth IRAs. The difference is that distributions from inherited Roth IRAs are tax-free if the account has met the five-year rule, while withdrawals from inherited Traditional IRAs are taxed as ordinary income.
What key questions should successor beneficiaries ask?
Successor beneficiaries should confirm:
Was the prior owner under the 10-year rule or stretch rule?
Were they already taking RMDs?
Did they complete their RMD for the year of death?
What was their age at death?
