5 Retirement Tax Traps to Watch in 2026
Even in retirement, some income sources can unexpectedly raise your federal and state tax bills. Here's how to avoid costly surprises.
Contrary to what some might believe, retirement doesn’t automatically shrink your tax bill. That's because income sources, like required withdrawals, Social Security benefits, and investment gains, can quietly push you into higher federal tax brackets.
Understanding these and other retirement tax traps can help you avoid surprises in 2026 and make your retirement dollars go further. Let's dive in.
Retirement Tax Traps to Know
1. Required Minimum Distributions (RMDs)
Starting at age 73, retirees must take required minimum distributions (RMDs) from traditional IRAs and 401(k)s. Missing an RMD or withdrawing the wrong amount can trigger a penalty of up to 25%. Under the SECURE 2.0 Act, that penalty can drop to 10% if the mistake is corrected in a timely manner using IRS Form 5329. Large withdrawals can also push other income into higher tax brackets.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
RMD key points:
- RMDs are calculated based on your account balance and IRS life expectancy tables.
- Each account has its own RMD, so multiple accounts require separate calculations.
- Even small miscalculations can cost thousands of dollars.
Example:
Imagine a retiree with a $400,000 IRA whose RMD for the year is $15,000. If they fail to withdraw it on time, the penalty could be $3,750 (25% of the RMD). By correcting it quickly, that penalty drops to $1,500, saving $2,250 — all without changing their overall retirement plan.
Tax Tip: Plan withdrawals strategically. Splitting RMDs across multiple accounts or timing them in lower-income years can help manage your tax burden. Also, always correct any missed RMDs promptly to minimize IRS penalties.
2. Social Security benefits and how they are taxed
Up to 85% of Social Security benefits may be taxable depending on your "combined income." Other retirement income, like IRA withdrawals, pensions, or investment dividends, increases that amount, which can make more of your Social Security subject to federal income tax.
Key points about taxes on SS benefits:
- Combined income = AGI + nontaxable interest + half of Social Security benefits.
- Even a modest 401(k) withdrawal could push you from 50% to 85% of your benefits being taxable.
Example:
Suppose a single retiree receives $20,000 in Social Security and $15,000 from IRA withdrawals. Their provisional income would be $20,000 ÷ 2 + $15,000 = $25,000, putting 50% of their Social Security benefits into taxable income. If they withdraw $10,000 more from their IRA, their provisional income rises to $30,000, and up to 85% of benefits could become taxable.
Tax Tip: Monitor your combined income. Consider timing withdrawals from taxable accounts to reduce the taxable portion of your benefits.
Note: You may have heard that the Trump/GOP 2025 tax and spending bill eliminates taxes on Social Security benefits. It does not. (The new law doesn't change the Social Security benefit tax formula or the IRS "combined income" thresholds.)
But the 2025 Trump tax bill does contain a new tax deduction for older adults.
Senior Bonus Deduction key points:
- Beginning with the 2025 tax year, retirees age 65+ may be eligible for a “senior bonus” deduction of up to $6,000 ($12,000 for joint filers).
- That's even if they take the standard deduction or itemize.
- You must have a valid Social Security Number to claim the credit.
Yes, the new deduction can lower taxable income and potentially reduce the portion of Social Security benefits that are taxable. However, the benefit phases out for higher earners.
For more information, see our report: How the $6,000 Senior Bonus Deduction Works.
3. Taxes on Investment gains and dividends in retirement
Even in retirement, sales of stocks, bonds, and mutual funds can trigger capital gains taxes. Long-term gains are taxed at 0%, 15%, or 20%, depending on income. Additionally, the net investment income tax (NIIT) of 3.8% can apply to higher earners. Dividends are also taxed differently depending on whether they are qualified.
Key points on capital gains taxes in retirement:
- Capital gains rate thresholds are indexed for inflation each year. Knowing those thresholds can help you time investment sales.
- Tax-loss harvesting or strategic sales in lower-income years can help reduce taxable gains.
Example:
A retiree sells $50,000 worth of stock gains in a year with little other income and pays 0% long-term capital gains tax. In a year with higher withdrawals or pensions, that same $50,000 could be taxed at 15% or higher.
Tax Tip: Harvest gains in lower-income years or use tax-loss harvesting to offset taxable gains.
4. Taxes on annuities and pension income
Most pension payments are taxable as ordinary income. With annuities, the portion representing earnings (not principal) is taxed. Large pension payouts or annuity distributions can unexpectedly push you into a higher tax bracket, affecting other income sources like your Social Security benefits.
Key points on annuity and pension income tax in retirement:
- Some states also tax pension income.
- Stacking multiple pension or annuity payments, without planning, can create a surprise tax burden.
Example:
A retiree receiving a $40,000 annual pension and $20,000 in IRA withdrawals could find themselves in a higher federal bracket than expected, causing a larger portion of Social Security benefits to become taxable.
Tax Tip: If you have multiple income streams, consider staggering distributions to avoid stacking taxable income.
5️. State taxes on retirement income
Relatively few states are truly tax‑friendly on all types of retirement income. Many either tax pensions and IRA withdrawals or offer partial tax breaks on retirement income. So even small changes in residency can affect your taxes.
Key points on state retirement taxes:
- State taxes on retirement income can add thousands in extra costs.
- Rules vary by state and income type. For example, some states may tax pensions but not Social Security, or vice versa.
Example:
Some retirees move from low- or no-income-tax states like Texas or Florida to higher-tax states to be closer to family or for lifestyle reasons. For instance, a retiree relocating from Florida to North Carolina might find that their IRA and pension withdrawals are now fully taxable, while Social Security remains fully exempt. That could add anywhere from $5,000–$10,000 or more in state taxes annually, even though their federal tax situation hasn’t changed.
Tax Tip: Before relocating, research both federal and state tax implications of your retirement income. A tax-friendly move can protect more of your nest egg, while an overlooked state rule can create unexpected costs.
To learn more, see our guide: Retirement Taxes: How All 50 States Tax Retirees.
Retirement taxes: Bottom line
Even routine distributions and benefits can carry tax consequences. For retirees, monitoring RMDs, Social Security, investment income, pensions, and new state tax rules now can help you avoid surprises at tax time.
To stay ahead of the curve, review your expected income streams, plan withdrawals strategically, and consult a tax professional to optimize your retirement tax strategy.
Read More
- 2026 State Tax Changes to Know Now
- Calculating Taxes on Social Security Benefits
- Required Minimum Distributions: What You Need to Know
- How the New $,6000 Senior Bonus Deduction Works
-
Trump's New Retirement Plan: What You Need to KnowPresident Trump's State of the Union address touched upon several topics, including a new retirement plan for Americans. Here's how it might work.
-
Your 'Buy and Hold' Retirement Strategy Needs an Update NowOnce you're retired, your focus should shift from maximum growth to strategic preservation and purposeful planning to help safeguard your wealth.
-
Why a Good Legacy Plan Covers Values, Not Just ValuablesLegacy planning integrates your values and stories with legal and tax strategies to ensure your influence benefits loved ones and good causes after you're gone.
-
2026 Tax Refund Delays: 5 States Where Your Money Is StuckState Tax From New York to Oregon, your state income tax refund could be delayed for weeks. Here's what to know.
-
Paper Tax Filers Face Long Wait as IRS Digitization Effort StallsTax Filing Last April, the IRS launched its Zero Paper Initiative to speed up paper tax return processing. The project isn’t going well.
-
How One Extra Dollar of Income Can Cost You Thousands in RetirementRetirement Even modest changes in retirement income can raise Medicare premiums under IRMAA. Here’s how a small increase can affect your retirement costs.
-
First the Penny, Now the Nickel? The New Math Behind Your Sales Tax and TotalRounding Tax A new era of "Swedish rounding" hits U.S. registers soon. Learn why the nickel might be on the chopping block, and how to save money by choosing the right way to pay.
-
Trump Tariffs Supreme Court Ruling: What's Next for Consumers and RetailersTax Law This landmark decision will reshape U.S. trade policy and could define the outer boundaries of presidential economic power for years to come.
-
Over 65? Here's What the New $6K Senior Tax Deduction Means for Medicare IRMAATax Breaks A new tax deduction for people over age 65 has some thinking about Medicare premiums and MAGI strategy.
-
U.S. Congress to End Emergency Tax Bill Over $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.Tax Law Here's how taxpayers can amend their already-filed income tax returns amid a potentially looming legal battle on Capitol Hill.
-
How to Open Your Kid's $1,000 Trump AccountTax Breaks Filing income taxes in 2026? You won't want to miss Form 4547 to claim a $1,000 Trump Account for your child.
