You’ve done everything right. You saved diligently, built a solid nest egg, and finally crossed the finish line into retirement. Then your first few years of tax returns arrive and they’re nothing like what you expected.
This is more common than most people realize. The first few years of retirement (especially the first year typically) are some of the most financially complex of your life, and the tax surprises that come with them can cost thousands of dollars if you’re not prepared. Here’s what to watch out for and what you can do about it.
1. Your Social Security Benefits May Be Taxable
Many retirees are genuinely surprised to learn that Social Security benefits can be taxable. More specifically, up to 85% of your benefit can be included in your taxable income, depending on how much other income you have.
The IRS uses a figure called “combined income” (your adjusted gross income + nontaxable interest + half of your Social Security benefit) to determine how much of your benefit is taxed.
Once combined income exceeds $25,000 for single filers or $32,000 for married couples filing jointly, up to 50% of your benefits may be taxable. Above $34,000 for single filers or $44,000 for married couples filing jointly, up to 85% of your benefits may be taxable.
How do you handle this? Be intentional about what income you draw in retirement and from which accounts. Keeping combined income below those thresholds can make a meaningful difference.
2. Required Minimum Distributions Can Push You Into a Higher Bracket
Required Minimum Distributions (RMDs) generally begin when you reach age 73 (and age 75 if you were born in 1960 or later). Once they begin, the IRS requires you to start withdrawing a minimum amount from your traditional IRA and 401(k) accounts each year.
These RMDs are fully taxable as ordinary income and they don’t care whether you need the money or not.
For retirees who’ve spent decades accumulating in tax-deferred accounts, RMDs can be surprisingly large. In some cases, they push people into higher tax brackets than they were in during their working years, which is the opposite of what most people assume retirement looks like from a tax perspective.
One of the most effective strategies to soften the RMD impact is a Roth conversion, moving money from a traditional IRA to a Roth IRA in the years before RMDs kick in. You pay taxes now at a potentially lower rate, and future withdrawals (including growth) come out tax-free. This is often most valuable in the window between retirement and when RMDs begin.
3. Your Medicare Premiums Could Increase Unexpectedly
Medicare isn’t free in retirement, and your premiums aren’t fixed. If your income exceeds certain thresholds, you’ll pay an Income-Related Monthly Adjustment Amount (IRMAA) which is a surcharge on top of your standard Medicare Part B and Part D premiums.
For 2026, the standard Medicare Part B premium is $202.90 per month. But if your income (based on your tax return from two years prior) crosses the threshold, you could pay significantly more, in some cases more than double the standard rate. Part D premiums vary by plan, and IRMAA adds a separate surcharge on top of your plan premium.
Here’s what catches people off guard: Medicare looks at your income from two years ago. So if you had a high-income year right before retirement — a big bonus, a stock sale, or a Roth conversion — you could face IRMAA surcharges in your first year of Medicare even if your current income is much lower. You can appeal IRMAA if your income has since dropped significantly due to a life-changing event like retirement by filing Form SSA-44, and it really could be worth doing.
4. Selling Investments Can Trigger Capital Gains
Many retirees rebalance or liquidate investments in their first year of retirement. What they don’t always anticipate is how capital gains interact with everything else.
Capital gains income counts toward the thresholds that determine Social Security taxability, IRMAA eligibility, and your overall tax bracket. A large capital gain, even a long-term one, can create a cascade of other tax consequences that add up fast.
The lesson here isn’t to avoid selling investments. It’s to time them thoughtfully and model the full downstream impact before pulling the trigger.
5. You Could Under Withhold
When you were working, your employer handled tax withholding automatically. In retirement, that safety net is gone.
Pension payments and IRA withdrawals can have withholding set up, but it’s optional and often defaults to too little. Social Security withholding is also voluntary. If you’re not careful, you can end up underpaying taxes throughout the year and owing a penalty come April — on top of the actual tax bill.
The solution is simple but easy to overlook: set up withholding on your income sources or make quarterly estimated tax payments to the IRS. A financial planner or CPA can help you figure out the right amount based on your projected income.
What You Can Do Right Now
The thread running through all of these traps is the same: in retirement, you have more control over your taxable income than you ever did while working, but only if you plan proactively.
Strategies like Roth conversions, thoughtful sequencing of account withdrawals, and careful timing of investment sales can make a dramatic difference in your lifetime tax bill. But they require planning before the taxable events happen, not after.
If you’re within five years of retirement or just crossed into it, this is exactly the kind of planning we do at Etch Financial. We look at your full financial picture — retirement accounts, Social Security, Medicare, investments, and taxes — and build a strategy that keeps more of your money working for you.
This post is for educational purposes only and does not constitute tax or financial advice. Tax rules are subject to change, and individual situations vary. Please consult a qualified tax professional or financial advisor for guidance specific to your circumstances.