10 Reasons Your Taxes Won't Be Lower in Retirement

I always hear people say, “Once I retire, my taxes will go down.” But the truth is, for many retirees, that’s just not the case. In fact, your tax bill in retirement could end up being just as high — or even higher — than when you were working.

The reality is, retirement doesn’t mean escaping taxes. Instead, it comes with a new set of financial challenges, and taxes are one of the biggest surprises. Because without proper planning, you could end up paying more in taxes than necessary, leaving you with less money to enjoy retirement.

In this post, I’ll walk you through the 10 biggest reasons people pay more taxes in retirement, the tax traps that could catch you off guard, and, most importantly, the key questions to ask your financial advisor to avoid overpaying. Because the more you plan now, the less you’ll owe later.

Reasons Why Taxes Can Be High in Retirement

Tax Law Changes

The first reason your taxes won’t be lower in retirement is the ever-changing tax laws. Take the current tax system, for example. The Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025, and if that happens, we’ll automatically revert to narrower tax brackets and higher tax rates - which means you’ll likely pay more in taxes.

Yes, I know what you’re thinking: “There’s no way the TCJA will expire under the current administration.” And maybe you’re right. But are you certain about the mid- and long-term?

And here’s the kicker: Congress can change tax laws at any time. That means rules around deductions, retirement accounts, and Social Security taxation could shift, making it crucial to stay informed. If you assume your tax rates will remain the same forever, you could be in for an unpleasant surprise.

Think about this - you’ve been planning your retirement for years, only to find out that a new tax law has eliminated a deduction you were counting on. It’s like building a house only to discover the foundation has suddenly shifted. Staying informed and adaptable is key to navigating these changes.

To make sure you're not caught off guard, here are a few questions you should be discussing with your financial advisor:

1. How can I structure my retirement savings and withdrawals to remain tax-efficient if tax rates rise in the future?

2. What steps can I take now to prepare for potential tax increases in the future?

3. How can I take advantage of today’s lower tax rates before new tax laws take effect?

Social Security Benefits Can Be Taxed

Next, your Social Security benefits are not tax-free, as many retirees falsely believe. Even though there’s been talk of making Social Security income tax-free, up to 85% of your benefits could still be taxable today.

Here’s how it works: If your Provisional Income (your Adjusted Gross Income + Tax-Exempt Interest + 50% of your Social Security benefits) exceeds certain thresholds, a significant portion of your benefits gets taxed.

Think about it: you’ve paid into Social Security your entire working life, and now you might have to pay taxes on it too. And this is where strategic withdrawals and tax planning can make a big difference.

To avoid any unpleasant surprises, ask your financial advisor:

1. Am I at risk of paying taxes on 85% of my Social Security, and what can I do to reduce that?

2. What strategies can you suggest to minimize the tax impact on my Social Security benefits?

3. Should I take Social Security earlier to avoid higher taxes later, or delay benefits for better long-term tax efficiency?

Required Minimum Distributions

Now, let’s talk about Required Minimum Distributions, or RMDs. If you have a Traditional IRA or 401(k), you’re required to start taking withdrawals at age 73. These withdrawals are fully taxable as ordinary income. And if you have a large account balance, your RMDs could push you into a higher tax bracket - leading to more taxes on your Social Security benefits and even higher overall tax liabilities.

Picture this: you’ve spent decades saving in your 401(k), and now the government is telling you how much you have to withdraw - and pay taxes on. It’s a double-edged sword: you’re forced to take money out, but that same withdrawal might push you into a higher tax bracket.

Many retirees don’t realize how much their RMDs will impact their taxes until it’s too late. That’s why managing your pre-tax retirement accounts before RMDs kick in is crucial.

Here’s what you should be discussing with your financial advisor to stay ahead of the game:

1. What specific steps are you taking to prepare me for RMDs and avoid a tax shock?

2. Should I delay my first RMD or take it earlier to manage taxes more efficiently?

Capital Gains, Dividends, & Interest

Retirement also doesn’t mean your investment income becomes tax-free. If you sell stocks, real estate, or other investments, long-term capital gains might be taxed at 0%, 15%, or 20%, depending on your total income.

But here’s where it gets tricky: If you sell an asset and take a big gain in one year, that gain could push you into a higher capital gains tax bracket, or even make more of your Social Security benefits taxable.

Additionally, dividends and interest from taxable accounts - including certain bond interest - are also considered taxable income and can increase your overall tax burden.

With all these moving parts, it’s crucial to make sure your investment income isn’t unknowingly increasing your tax bill. Here are some important questions to go over with your financial advisor:

1. How are you ensuring my investments are as tax-efficient as possible?

2. Could my investment income be causing me to pay more in taxes than necessary, and how can I fix that?

3. What’s the best withdrawal sequence from my accounts to minimize my tax bill?

Delayed Roth Conversions

Another reason taxes won’t be lower is delayed Roth conversions. Many retirees assume they’ll be in a lower tax bracket later, so they put off converting pre-tax accounts to Roth IRAs. But this delay can cost you.

Here’s why: Roth conversions done early - before RMDs kick in - allow you to move money at lower tax rates. If you wait until RMDs start, you’ll be required to take taxable withdrawals, which can increase your overall income and bump you into a higher bracket.

I once worked with a client who delayed their Roth conversions for years. By the time they acted, the account had grown so large that the tax hit was painful. Had they started earlier, they could have paid less in taxes and maintained more control over their retirement income.

To determine the right approach for your situation, consider asking your financial advisor:

1. How will a Roth conversion impact my overall tax situation in the short and long term?

2. How much can I convert to a Roth annually without pushing myself into a higher tax bracket?

3. When is the ideal time for me to start Roth conversions to avoid high RMD taxes?

Lost Tax Credits and Deductions

Now, if you think you'll have the same deductions - think again.

Without dependents, mortgage interest deductions, or work-related credits, taxable income might remain high with fewer ways to offset it.

Understanding what deductions and credits still apply to you in retirement is key to minimizing taxes. For example, if your medical expenses exceed 7.5% of your adjusted gross income, you may be able to deduct them.

There are also specific credits, like the Credit for the Elderly or Disabled, that many retirees overlook. Failing to claim these credits and deductions can result in paying more taxes than necessary.

To make sure you’re not leaving money on the table, here are some questions to ask your financial advisor:

1. What tax credits and deductions will I lose in retirement, and how are you preparing for that?

2. How can I replace lost deductions with other tax-saving strategies?

Pension Income Is Taxable

If you’re lucky enough to have a pension, that’s great news for steady income - but not so great for taxes. Most pensions are fully taxable at ordinary income rates, which means they get added on top of your Social Security benefits and RMDs. That can create a ripple effect, increasing your overall tax liability.

Since pension taxation can vary widely based on your state and financial situation, here’s what you should ask your financial advisor:

1. How is my pension income impacting my overall tax situation, and what are you doing to mitigate it?

2. Should I consider taking a lump-sum payout instead of regular payments, and why or why not?

State Taxes on Retirement Income

While federal taxes often take center stage, state taxes can quietly take a chunk out of your retirement income. Some states are more tax-friendly for retirees than others, but if you live in a state with high income taxes, you could be in for a surprise.

For example, California and Vermont tax most retirement income, while states like Florida and Texas have no state income tax at all. And even if your state doesn’t tax retirement income, high property or sales taxes can still eat into your budget.

If you’re planning to move in retirement, it’s worth researching the tax implications of your new state. A seemingly small difference in state taxes could save - or cost - you thousands of dollars each year.

To make sure your state tax situation aligns with your retirement plan, here are some important questions to ask your financial advisor:

1. How are state taxes impacting my retirement income, and what are you doing to minimize that impact?

2. Should I consider relocating to a more tax-friendly state, and if so, which one and why?

Widow’s Penalty

Another tax trap that many retirees don’t see coming is the widow’s penalty. Here’s how it works: When you’re married and file jointly, you benefit from wider tax brackets. But after one spouse passes, the surviving spouse is moved into the less favorable single filer tax brackets, often causing a sudden tax increase.

And it doesn’t stop there. The standard deduction for single filers is half that of married couples filing jointly - $15,000 vs $30,000 in 2025. That means the same income can suddenly be taxed at much higher rates.

Imagine a couple with a $200,000 taxable income. As a married couple, they stay in the 22% bracket. But when one spouse passes, the survivor may now pay 32% on the exact same income. That’s the widow’s penalty in action.

To prepare for this potential tax jump, here’s what you should discuss with your financial advisor:

1. Will my taxes skyrocket if my spouse passes away first, and how can I prepare now?

2. How are you incorporating this potential tax impact into my financial plan?

Inheritance and Windfalls

Finally, let’s talk about inheritance and windfalls. Receiving a large inheritance or lump-sum payment from a settlement, insurance payout, or unexpected financial windfall can push you into a higher tax bracket for that year. For instance, if you inherit a traditional IRA from someone other than your spouse, you may be required to take distributions - and pay taxes on them - within 10 years under the SECURE Act. This can significantly increase your taxable income.

Now, imagine inheriting a rental property from your parents. You’re excited at first, but then you realize you’ll owe taxes on the rental income and capital gains when you sell it. Without proper planning, that “gift” could become a tax headache.

To make sure an inheritance or financial windfall doesn’t create an unexpected tax problem, talk to your financial advisor about:

1. How can I integrate an inheritance into my existing retirement and investment plan?

2. What strategies can I use to minimize the tax impact of inherited assets?

Final Thoughts

Retirement taxes can sneak up in many ways - from tax law changes and Social Security taxation to RMDs, investment gains, and even the widow’s penalty. But here’s the good news: you don’t have to let taxes drain your retirement savings. By asking the right questions and planning ahead, you can avoid these traps and keep more of your hard-earned money where it belongs - with you.

But smart retirement planning isn't just about taxes - it’s also about making sure your wealth goes to the right people in the most efficient way possible.

If you'd like to explore tax-efficient wealth transfer strategies, feel free to schedule a complimentary meeting or check this post to learn more.