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.
How to Minimize Taxes on Social Security
Many retirees are surprised to find that up to 85% of their Social Security benefits could be taxable. But with the right planning, it's possible to reduce or even eliminate those taxes.
The IRS determines how much of your Social Security is taxable using your provisional income, which includes:
Your adjusted gross income (AGI)
Plus any tax-exempt interest (such as from municipal bonds)
Plus 50% of your annual Social Security benefit
Example:
If your AGI is $20,000, you receive $5,000 in municipal bond interest, and your annual Social Security benefit is $30,000, your provisional income would be $40,000 — putting you in the 50% taxable range if you file your taxes married filing joint.
Based on this calculation, here are the income thresholds that determine how much of your benefit is taxable:
Single filers
$25,000 to $34,000 in provisional income: up to 50% of benefits may be taxable
Over $34,000: up to 85% may be taxable
Married filing jointly
$32,000 to $44,000 in provisional income: up to 50% of benefits may be taxable
Over $44,000: up to 85% may be taxable
Note: This doesn’t mean your benefits are taxed at 85%. Rather, it means up to 85% of your benefit amount is included in your taxable income and taxed at your ordinary income tax rate.
Strategies to Reduce or Eliminate Social Security Taxes
1. Delay Taking Social Security
Delaying benefits until age 70 not only increases your monthly payout, but also creates an income “gap window” where you can take advantage of other planning opportunities — such as Roth conversions — before your benefit starts impacting your tax return.
2. Draw Down Pre-Tax Assets Before Claiming
In the early years of retirement, before beginning Social Security, consider withdrawing from traditional IRAs or 401(k)s. These distributions are taxable now, but doing so may reduce your future required minimum distributions (RMDs), which in turn lowers taxable income once you begin collecting Social Security.
3. Consider Roth Conversions
Similar to item 2, Roth conversions allow you to shift money from a traditional IRA to a Roth IRA, paying tax now in order to avoid higher taxes later. By shifting money from a Traditioanl IRA to a Roth IRA prior to starting your social security benefit, it may keep you in lower tax brackets in future years especially when RMDs (requirement minimum distribution) begin at age 73 or 75. Also, once in a Roth IRA, future withdrawals are tax-free and do not count toward provisional income — helping keep more of your Social Security sheltered from taxation.
Note: Keep in mind that conversions count as income in the year they’re done — and can impact provisional income temporarily.
4. Use Qualified Charitable Distributions (QCDs)
QCDs allow individuals age 70½ or older to donate up to $100,000 per year directly from an IRA to a qualified charity. These donations count toward your RMD but are excluded from taxable income.
Clarification: The $100,000 QCD limit applies per individual IRA owner — so a married couple could potentially exclude up to $200,000 in charitable distributions if each spouse qualifies.
This is another way to reduce the size of a pre-tax retirement account balance which counts toward the RMD calculation. Also since the QCD counts toward the RMD amount it can reduce your taxable income, potentially making less of your Social Security benefit subject to taxation at the federal level.
Example: Sue is 78 and is required to take RMD from her traditional IRA of $10,000. Sue decides to process a QCD from her IRA sending $10,000 to her church. She has met the RMD requirement but the $10,000 does not represent taxable income to Sue. Sue’s provision income as a single filer is $30,000 making her Social Security benefit 50% taxable. If she did not process the QCD, that would have raised her provisional income to $40,000 making 85% of her social security benefit subject to taxation.
5. Be Cautious With Tax-Free Interest
Although interest from municipal bonds is federally tax-exempt and potentially state income tax, it is included in the provisional income calculation. If your portfolio includes significant tax-free bond income, it could unintentionally push you into the 50% or 85% taxable Social Security range.
Final Thoughts
Social Security is a cornerstone of retirement income, but managing how it’s taxed is just as important as deciding when to claim. The key to minimizing Social Security taxes is planning around when you claim benefits and where your income is coming from. Strategies like Roth conversions, QCDs, and pre-Social Security IRA withdrawals can all work together to help you keep more of your benefits.
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):
How does the IRS determine how much of my Social Security is taxable?
The IRS uses your “provisional income” to determine taxation, which includes your adjusted gross income (AGI), tax-exempt interest, and 50% of your annual Social Security benefits. Depending on your filing status and total provisional income, up to 50% or 85% of your Social Security benefits may be taxable.
What are the income thresholds for Social Security taxation?
For single filers, provisional income between $25,000 and $34,000 makes up to 50% of benefits taxable, and income above $34,000 makes up to 85% taxable. For married couples filing jointly, the 50% range applies between $32,000 and $44,000, with anything above $44,000 potentially making up to 85% taxable.
Does “85% taxable” mean I pay 85% tax on my benefits?
No. It means that up to 85% of your Social Security benefit is included in your taxable income and taxed at your ordinary income tax rate. You’re not taxed at 85%; rather, that portion is subject to your regular tax bracket.
How can I reduce or avoid taxes on my Social Security benefits?
You can lower taxable income by delaying Social Security, making Roth conversions before claiming benefits, or drawing down pre-tax accounts early in retirement. Using qualified charitable distributions (QCDs) from IRAs after age 70½ can also reduce taxable income and lower how much of your benefit is taxed.
How do Qualified Charitable Distributions (QCDs) affect Social Security taxation?
QCDs let you donate up to $100,000 per year directly from an IRA to a charity, satisfying required minimum distributions (RMDs) without increasing taxable income. By lowering your income, QCDs can reduce the portion of your Social Security benefits subject to tax.
Does tax-free interest from municipal bonds affect Social Security taxation?
Yes. Although municipal bond interest is exempt from federal income tax, it is included in the provisional income formula. Large amounts of tax-free interest can unintentionally increase the taxable portion of your Social Security benefits.
