The 5 Biggest Tax Mistakes New Retirees Make in the First 5 Years

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Most people assume their taxes will decrease once they retire. After all, their paycheck stops coming — so their tax bill should shrink too.

But for many retirees, the opposite happens. The first few years of retirement often trigger a series of tax surprises that quietly drain cash flow and limit flexibility.

Required minimum distributions (RMDs) haven't even started yet, but decisions made during this early window can determine whether future withdrawals are taxed gradually — or are hit all at once.

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Add the taxation of Social Security benefits and Medicare premium surcharges, as well as shifting tax brackets, and it's easy to see why so many retirees are caught off guard.

What makes these mistakes especially costly is timing. The years immediately after you stop working — typically your early to mid-60s — may be the last period in which you still have meaningful control over your tax picture. Miss that opportunity, and later options often become narrower, more expensive or irreversible.

Here are five of the biggest tax mistakes retirees make in the first five years — and why they can be costly.

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1. Ignoring the RMD 'tax time bomb'

Many retirees take a "do nothing until forced" approach with their retirement accounts, leaving IRAs and 401(k)s untouched until RMDs begin.

Under current law, RMDs generally start at age 73 for those born between 1951 and 1959 and at age 75 for those born in 1960 or later. While waiting may feel prudent, it often creates what retirement expert Ed Slott called the "tax time bomb."

The issue isn't the RMD itself — it's missing the early retirement window, when income is often lower and planning flexibility is highest. Once RMDs begin, large, fully taxable withdrawals are required every year, whether you need the income or not. At that point, options narrow, and taxes are often higher than necessary.

Using the years before RMDs begin to strategically withdraw or convert portions of tax-deferred accounts can help spread income more evenly and reduce the risk of higher taxes later.

2. Poor timing of Roth conversions

Roth conversions can be one of the most powerful tax tools in retirement — and one of the most misused.

Some retirees avoid conversions altogether, missing opportunities to convert during lower-income years. Others go to the opposite extreme, converting too much in a single year without fully considering the ripple effects. Both approaches can be costly.

Roth conversions tend to work best when done gradually in the years after work income ends, when retirees often have greater control over their tax brackets.

Converting too aggressively can push income into unnecessarily higher tax brackets, increase Medicare or Affordable Care Act premiums and lead to additional taxes on Social Security benefits or capital gains income that would not have been taxable otherwise.

State income taxes also matter: If a retiree plans to relocate to a lower-tax state, it may make sense to delay some conversions until after the move.

Conversions can still make sense after Social Security benefits begin or RMDs are required, but they are often more constrained, since additional income may increase taxes or health care costs.

Roth conversions aren't bad. Poorly timed Roth conversions are.

Another common mistake is not realizing that additional income can increase taxes on Social Security benefits, not just overall taxable income.

Social Security taxation is based on provisional income, which includes adjusted gross income, any tax-exempt interest and half of Social Security benefits. As provisional income rises, more of those benefits become taxable.

This often surprises retirees because an extra dollar of income — such as an IRA withdrawal or a capital gain — doesn't just get taxed itself. It can also lead to previously untaxed Social Security benefits becoming taxable, raising the effective tax rate.

For retirees with IRA withdrawals, pensions or investment income, these thresholds are quickly crossed. Coordinating withdrawals — such as using Roth accounts or smoothing income across years — can sometimes reduce the amount of Social Security that's taxed.

4. Accidentally triggering Medicare IRMAA surcharges

Medicare premiums aren't the same for everyone. Higher-income retirees pay more through income-related monthly adjustment amounts (IRMAA), which apply to Medicare Parts B and D.

IRMAA is based on income from two years prior, a delay that often catches retirees off guard. Large Roth conversions, IRA withdrawals or one-time capital gains can raise Medicare premiums years later.

What makes IRMAA especially costly is that it works on income cliffs, not gradual phase-ins. Going even just one dollar above a threshold can result in meaningfully higher premiums — often thousands of dollars per year for married couples.

In limited cases, retirees may appeal IRMAA if higher income resulted from a qualifying life event, such as retirement, the death of a spouse, divorce, loss of income-producing property or certain employer settlement payments.

5. Failing to plan for heirs and the surviving spouse

The final mistake often shows up later — but the opportunity to address it exists early.

Many retirees don't adjust their plans for the 10-year rule on inherited IRAs, which generally requires non-spouse beneficiaries to empty inherited accounts within 10 years. This can create a significant tax burden for adult children in their peak earning years.

Couples also frequently overlook the "widow's penalty." When one spouse passes away, tax brackets compress, Medicare thresholds drop and one Social Security benefit disappears. The surviving spouse can end up paying higher taxes on less income.

The years during which both spouses are alive — and filing jointly — are a valuable planning window. Decisions made then can significantly reduce future taxes for both the survivor and the next generation.

Why early decisions matter

The first five years of retirement aren't just about lifestyle changes — they're about tax positioning. Decisions made early can ripple through the rest of retirement, affecting income, health care costs and what ultimately passes to heirs.

The goal isn't to completely eliminate taxes — it's to manage them thoughtfully while flexibility still exists. For many retirees, that early window is the difference between staying in control and being forced to react later, when options are fewer and costs are higher.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Travis Babb is the president of Babb Financial Group, headquartered in Flagstaff, Arizona. As a CERTIFIED FINANCIAL PLANNER® professional and Enrolled Agent (EA), he provides investment management, retirement planning and tax-efficient strategies designed to help clients pursue their financial goals. Travis understands that financial planning is more than just numbers — it's about helping clients feel secure and informed in their decision-making.