Retirement changes your tax picture in three ways at once: the income sources you've relied on for decades disappear and get replaced by a mix of Social Security, retirement account withdrawals, and investment income. Payroll withholding vanishes, leaving you responsible for making sure the IRS gets paid on time. And a new set of rules kicks in, including Required Minimum Distributions, Social Security taxation thresholds, and Medicare surcharges that penalize you for income you earned two years ago.
Three Things Change at Once
The first year of retirement is where most of the expensive mistakes happen -- not because the rules are impossibly complex, but because they all arrive simultaneously and nobody hands you a checklist.
When you were working, your taxes were mostly automatic. Your employer withheld federal and state taxes from every paycheck, you received a W-2 in January, and you filed a return by April.
Retirement breaks that system. You go from a single W-2 to a patchwork of income sources -- Social Security benefits, IRA or 401(k) withdrawals, pension payments, investment dividends, maybe rental income. Each one has different tax treatment. None of them automatically withholds the right amount unless you set it up. And the IRS introduces rules you've never dealt with before, including mandatory withdrawals from your retirement accounts that come with a stiff penalty if you miss them.
Required Minimum Distributions (RMDs)
Miss a Required Minimum Distribution and you'll owe a 25% penalty on the amount you should have withdrawn. On a $500,000 account, that's $4,717 -- even at the reduced rate.
Technical detail
Starting at a specific age, the IRS requires you to withdraw a minimum amount from your tax-deferred retirement accounts each year. These mandatory withdrawals apply to traditional IRAs, 401(k)s, 403(b)s, and most other employer-sponsored retirement plans. The logic is straightforward: you got a tax deduction when you put money in, and the IRS wants its share before you die.
When RMDs Begin
Your RMD starting age depends on when you were born:
- Born 1951-1959: RMDs begin at age 73
- Born 1960 or later: RMDs begin at age 75
SECURE 2.0 Act, Section 107.
How the Amount Is Calculated
Your annual RMD equals your account balance on December 31 of the prior year divided by a life expectancy factor from the IRS Uniform Lifetime Table. IRS Publication 590-B, Table III. The factors for the first few RMD years:
- Age 73: factor of 26.5 (so a $500,000 balance means an RMD of about $18,868)
- Age 74: factor of 25.5 ($500,000 = $19,608)
- Age 75: factor of 24.6 ($500,000 = $20,325)
- Age 76: factor of 23.7 ($500,000 = $21,097)
The factors decrease as you age, which means the percentage you must withdraw increases each year. At 73, you're withdrawing roughly 3.8% of your balance. By 85, it's closer to 6.3%.
The First-Year Deadline Trap
In most cases, take your first RMD in the year you turn the applicable age -- not the following April. Here's why.
For your very first RMD, the IRS gives you an extension: you have until April 1 of the year after you reach RMD age, rather than the usual December 31 deadline. That sounds generous, but it creates a trap.
If you delay your first RMD to the following April 1, you'll owe two RMDs in the same calendar year: the delayed first one (due April 1) and the regular second one (due December 31). Two RMDs in a single year can:
- Push you into a higher tax bracket
- Increase the taxable portion of your Social Security benefits
- Trigger Medicare surcharges (IRMAA)
Which Accounts Require RMDs
Accounts that require RMDs:
- Traditional IRAs, SEP IRAs, SIMPLE IRAs
- 401(k)s, 403(b)s, and 457(b) plans
Accounts that do not require RMDs during your lifetime:
- Roth IRAs -- have never required lifetime RMDs
- Roth 401(k)s -- starting in 2024, no longer subject to lifetime RMDs
Technical detail
SECURE 2.0 Act, Section 325. Previously, Roth 401(k) holders either had to take RMDs or roll the balance into a Roth IRA to avoid them.
Aggregation rule: If you have multiple traditional IRAs, you can calculate the RMD for each but take the total from any one or combination of your IRAs. Employer plan RMDs cannot be aggregated -- each plan's RMD must come from that specific plan. IRS Publication 590-B.
Social Security Taxation
If you have any meaningful retirement income beyond Social Security, you will almost certainly owe tax on a portion of your benefits. About half of all Social Security recipients now pay tax on their benefits, up from roughly 10% when the thresholds were first set, because those thresholds have never been adjusted for inflation. The 50% tier was set in 1984 and the 85% tier in 1993 (CRS Report RL32552).
Whether your benefits are taxable -- and how much -- depends on your "combined income."
Technical detail
The Thresholds
For single filers:
- Combined income below $25,000: benefits are not taxed
- Between $25,000 and $34,000: up to 50% of benefits are taxable
- Above $34,000: up to 85% of benefits are taxable
For married filing jointly:
- Below $32,000: not taxed
- Between $32,000 and $44,000: up to 50% taxable
- Above $44,000: up to 85% taxable
The New Senior Deduction (2025-2028)
The One Big Beautiful Bill Act of 2025 (OBBBA) introduced a new deduction for taxpayers age 65 and older that can reduce your tax bill by up to $1,320 per person (at the 22% bracket) or $2,640 for a qualifying couple.
- Amount: $6,000 per qualifying individual ($12,000 for a married couple filing jointly where both spouses are 65+)
- Available to: both itemizers and standard deduction filers
- Tax years: 2025 through 2028
Technical detail
The Roth Conversion Window
The years between stopping work and starting Social Security and RMDs are the single best tax planning opportunity most retirees will ever have. Convert $300,000 at 12% during these "gap years" instead of withdrawing it later at 22%, and you save $30,000 in federal taxes alone.
Consider a married couple who both retire at 62. They won't claim Social Security until 67, and their RMDs won't start until 73 (or 75). During those gap years, their taxable income might drop from $200,000 in their final working year to $30,000-$40,000 from investment income alone.
With the 2026 tax brackets as a reference point, a married couple filing jointly can fill these brackets after a standard deduction of $32,200 (Tax Foundation, 2026 projections):
- 10% bracket: up to $24,800
- 12% bracket: up to $100,800
- 22% bracket: up to $211,400
If their only income during the gap years is $35,000 from investments, they could convert $65,000 or more from a traditional IRA to a Roth and still stay entirely within the 12% bracket. That same $65,000, withdrawn as an RMD five years later when Social Security is also flowing, might be taxed at 22% or higher.
The math is simple: pay 12% now or 22% later. Over a five-year gap period, a couple could convert $300,000 or more at rates well below what they'd face once RMDs and Social Security stack on top of each other.
How a Roth Conversion Works
A Roth conversion moves money from a traditional IRA (pre-tax) to a Roth IRA (post-tax). You pay income tax on the converted amount in the year of conversion. After that, the money grows tax-free and comes out tax-free. There is no income limit and no cap on how much you can convert in a single year.
A $1 mistake in planning your conversion amount can cost you $1,700 per year in Medicare surcharges. IRMAA brackets are cliffs, not gradual phase-ins -- exceed the threshold by a single dollar and you pay the full surcharge for that tier.
Medicare Part B and Part D premiums include an Income-Related Monthly Adjustment Amount (IRMAA) that increases your premiums if your income exceeds certain thresholds. IRMAA uses a two-year lookback: the premium you pay in 2026 is based on your 2024 tax return. That means a large Roth conversion in 2024 could increase your Medicare premiums in 2026.
Technical detail
The Life-Changing Event Exemption
If your income was high in your last working year but dropped significantly when you retired, you may be paying inflated Medicare premiums based on that older, higher income. Retirement qualifies as a "life-changing event" under SSA rules. Technical detail
Withdrawal Sequencing
The conventional "taxable first, tax-deferred second, Roth last" withdrawal order assumes your tax rate stays constant throughout retirement -- which is almost never true. A smarter approach adjusts the sequence year by year based on your actual tax bracket.
The conventional wisdom is simple:
- Withdraw from taxable accounts first (brokerage accounts with capital gains treatment)
- Then tax-deferred accounts (traditional IRAs and 401(k)s)
- Then tax-free accounts (Roth IRAs) last
Why Bracket-Filling Works Better
In reality, your early retirement years often have lower taxable income (before RMDs and Social Security), while later years stack multiple income sources. A more effective approach is "bracket-filling":
- Low-income years: Deliberately take withdrawals from your traditional IRA (or do Roth conversions) up to the top of your current tax bracket. You're accelerating tax-deferred income into years when it's taxed at lower rates.
- High-income years: When RMDs and Social Security push you into higher brackets, draw from Roth and taxable accounts to avoid adding more ordinary income.
Some planners advocate proportional withdrawals -- taking from all three account types in a ratio designed to smooth your tax rate across retirement. The right approach depends on your specific income sources, account balances, and how long you expect to be in each bracket. This is one of the areas where a CPA who specializes in retirement tax planning typically pays for their fee many times over.
Tax Withholding in Retirement
Without an employer handling withholding, you're responsible for making sure the IRS gets paid on time through a combination of voluntary withholding and quarterly estimated payments. Get this wrong in your first year and you'll owe an underpayment penalty.
Voluntary Withholding
You can request federal tax withholding from several retirement income streams:
- Social Security: Choose withholding at 7%, 10%, 12%, or 22% of your benefit -- no other options File Form W-4V with the Social Security Administration.
- IRA distributions: The custodian typically withholds 10% for federal taxes unless you elect otherwise. You can choose any rate from 0% to 100%. Use Form W-4R to set your withholding rate.
- Pensions: Works like employment withholding. Fill out Form W-4P to set your withholding rate.
Quarterly Estimated Taxes
If withholding doesn't cover your full tax liability -- and it often won't in the first year when you're still figuring out your income mix -- you'll need to make quarterly estimated tax payments. Use Form 1040-ES (IRS Publication 505).
Safe Harbor Rules
You can avoid the underpayment penalty entirely if you meet one of these thresholds:
- You owe less than $1,000 when you file your return, or
- Your total payments (withholding plus estimated payments) equal at least 90% of your current year's tax liability, or
- Your total payments equal at least 100% of your prior year's tax liability (110% if your AGI exceeded $150,000 in the prior year)
For most new retirees, the prior-year safe harbor is the easiest to apply: just make sure your total payments this year at least equal what you paid last year. If your final working year had high income, this might mean overpaying, but you'll get a refund. The alternative is trying to estimate your retirement-year income accurately in your first year, which is genuinely difficult when you don't yet know exactly how Social Security, RMDs, and investment income will interact.
When to Get Professional Help
The gap years between retirement and the start of RMDs and Social Security represent the highest-value planning window most retirees will ever have -- and once those years pass, they're gone. Once RMDs begin, your withdrawal amounts are dictated by the IRS. Once you claim Social Security, your benefit is set. The flexibility you have before those obligations kick in is finite and nonrenewable.
- All withdrawals taxed as ordinary income at 22%+ bracket
- RMDs force higher income when Social Security starts
- IRMAA surcharges triggered at $212,000 threshold
- Convert $300,000 at 12% bracket over 5 gap years
- Smaller RMDs when mandatory withdrawals begin
- Tax-free Roth withdrawals in high-income years
- Calculating the optimal Roth conversion amount for each gap year
- Coordinating conversion amounts to stay below IRMAA thresholds
- Setting up a withdrawal sequence that minimizes your lifetime tax bill
- Ensuring your estimated payments meet safe harbor requirements so you don't owe penalties
If you have more than $500,000 in tax-deferred accounts and you're within five years of retirement, the planning conversation is worth having now -- not after you've already burned through two gap years without a strategy.