Retire Smarter: Avoid These Expensive, Often Irreversible IRS Pitfalls

Retirement should be a season of peace and purpose—not a minefield of silent tax traps. Yet for high-net-worth (HNW) Americans, one overlooked line on a tax return or a poorly timed withdrawal can quietly vaporize six or even seven figures over a few decades. The irony? Many of these mistakes stem not from complexity, but from inertia—failing to act, plan, or adapt.

Tax planning in retirement is fundamentally different from tax planning while earning. The game shifts. So do the rules. Without proactive strategy, affluent retirees often end up subsidizing the Treasury in ways that are both unnecessary and permanent.

Here are the five most financially devastating tax mistakes affluent retirees make—and how to steer clear of them.

1. Letting Required Minimum Distributions (RMDs) Blindside You

The Problem: Forced Income That Inflates Taxes and Premiums

For retirees over age 73, the IRS mandates withdrawals from traditional IRAs and 401(k)s—whether you need the income or not. This “phantom income” can inflate your tax bracket, spike Medicare Part B premiums, and trigger taxes on Social Security benefits.

Why It Hurts HNW Retirees More

High-balance tax-deferred accounts lead to larger RMDs. A $2 million IRA at age 74 can require over $80,000 in mandatory income. Now add that to a pension, investment dividends, or real estate income—and suddenly, you’re in the 32% bracket, paying more than you expected, with fewer deductions than you had during your working years.

Forward-Thinking Solution

Implement Roth conversions before RMD age to flatten your tax curve. Done strategically in lower-income years (e.g., early retirement before Social Security kicks in), this can save hundreds of thousands over time.

2. Failing to Account for the Widow’s Tax Trap

The Problem: Surviving Spouses Pay More in Taxes

When one spouse dies, the surviving spouse often moves from the married filing jointly bracket to single filer—effectively doubling their tax rate on the same income. Yet, most advisors fail to plan for this transition.

Case Example

A couple pulling $200,000 in annual income may stay in the 22% bracket. But once widowed, the survivor could see the same income taxed in the 32% bracket—while also becoming more vulnerable to higher Medicare IRMAA surcharges and Social Security taxation.

Solution

Use the “golden window” of joint filing status during retirement to pre-pay taxes on retirement accounts, gift assets to heirs, and reposition wealth into tax-free vehicles (e.g., life insurance, Roth IRAs). The time to plan is before the first death, not after.

3. Ignoring the Looming Sunset of Tax Cuts and Jobs Act (TCJA)

The Problem: Higher Brackets Are Already on the Horizon

The lower federal tax brackets enacted under the 2017 TCJA are scheduled to expire after 2025. Unless Congress acts, marginal rates will increase across the board, and the standard deduction will shrink. For HNW retirees, that means materially higher lifetime tax liability if planning is delayed.

Why It Matters Now

A retiree with $1M in traditional IRAs may only need to withdraw $70,000 a year. Today, that stays in a moderate bracket. After 2025, that same income could push them into the next bracket—and compound higher over time as RMDs grow.

Solution

Accelerate Roth conversions and asset repositioning now, while taxes are historically low. Consider capital gains harvesting and trust restructuring ahead of 2026 to avoid higher tax bills later.

4. Not Coordinating Investment Withdrawals With the Tax Code

The Problem: Withdrawing in the Wrong Order Costs Real Money

Retirees often pull from whatever account feels most convenient. But order matters. Withdrawing from pre-tax IRAs too early can increase taxes unnecessarily. Drawing from taxable accounts too late can spike capital gains and increase Medicare premiums.

Strategic Withdrawal Sequence

• Early retirement years (pre-RMD): Spend from taxable accounts (brokerage), then do Roth conversions.
  
  

• Mid-retirement (70s+): Balance withdrawals to avoid large RMD spikes and bracket creep.
  
  

• Late retirement: Use Roth accounts for large purchases or legacy transfers—tax-free.
  
  

A thoughtful withdrawal order can dramatically reduce taxes and extend portfolio longevity by years, if not decades.

5. Overlooking State-Level Tax Landmines

The Problem: Federal planning doesn’t always translate to state savings

Some retirees relocate for better weather, only to face worse tax conditions. Others stay in high-tax states unaware of how their Social Security, pensions, and capital gains will be treated locally.

Example: California vs. Florida

In California, IRA withdrawals are taxed as ordinary income and there’s no exemption for Social Security income. In contrast, Florida levies no state income tax at all.

What To Do

Before you move—or decide to stay—evaluate your state’s tax treatment of retirement income, inheritance rules, and estate taxes. A wrong decision could cost six figures over 20 years.

Conclusion: The Hidden Cost of Inaction

The tax code does not reward passive participants. It penalizes them. For HNW retirees, the absence of a proactive, forward-looking tax plan is not just a missed opportunity—it’s a financial liability.

The good news? Each of these pitfalls is avoidable with proper timing, strategy, and coordination between your tax advisor, investment manager, and estate planner. Retirement isn't the end of tax planning—it's the beginning of a different kind. One that rewards foresight and punishes delay.

The question isn't whether you'll pay taxes in retirement.
The question is how much more than necessary you're willing to pay.

Sources

• https://www.irs.gov/retirement-plans/required-minimum-distributions
  
  

• https://www.kitces.com/blog/widows-tax-penalty-marginal-tax-rate-bracket-planning-strategy/
  
  

• https://www.congress.gov/bill/115th-congress/house-bill/1
  
  

• https://www.taxfoundation.org/state-tax-retirement-income/
  
  

• https://www.medicare.gov/basics/costs/medicare-costs