Tax Mistakes Retirees Make and How to Avoid Them

The most common tax errors happen because retirement changes what you owe

Retirement income looks different from a paycheck, and the tax rules change with it. Social Security, pensions, investment withdrawals, and part-time work all get taxed differently — and the IRS doesn't automatically withhold from all of them the way an employer does. Most retirees make mistakes not because they're careless, but because they're working with an unfamiliar system. The errors that cost the most money are forgetting to withhold taxes on certain income, taking withdrawals in the wrong order, and missing deductions that apply only to people over 65.

The good news is that most of these mistakes are preventable once you know the rules. A few hours spent understanding how your specific income sources get taxed can save you hundreds or thousands of dollars over your retirement.

Key Takeaways

• Social Security and pension income don't have automatic tax withholding, so you may owe taxes at the end of the year unless you request it or make quarterly payments.
• The order in which you withdraw from retirement accounts (401k, IRA, taxable brokerage) changes how much you owe in taxes that year.
• Retirees over 65 get a higher standard deduction than younger filers, and this changes every year — using last year's number costs you money.
• Required Minimum Distributions from traditional IRAs start at age 73 and are mandatory; missing the deadline triggers a penalty of 25 percent of the amount you should have withdrawn.
• Charitable donations, medical expenses, and property taxes have different rules for retirees, and many people miss deductions they actually may have access to for.

Not setting up tax withholding on Social Security and pensions

When you receive a paycheck from an employer, taxes come out automatically. Social Security and most pensions don't work that way. The money arrives in your account without any federal tax taken out, even though you may owe taxes on it. Many retirees discover this problem in April when they file their return and find they owe a large amount.

You have two options to fix this. First, you can request that the Social Security Administration or your pension provider withhold federal taxes directly from your payment each month — you fill out a form (Form W-4V for Social Security) and specify how much should be withheld. Second, you can make quarterly estimated tax payments to the IRS yourself if you prefer not to withhold. The quarterly payment dates are April 15, June 15, September 15, and January 15 of the following year. Most retirees find withholding simpler because it happens automatically and you don't have to remember four payment dates.

Withdrawing from retirement accounts in the wrong order

If you have money in a traditional IRA, a Roth IRA, a 401(k), and a taxable brokerage account, the order in which you withdraw from them changes your tax bill. A withdrawal from a traditional IRA counts as ordinary income and gets taxed at your full rate. A withdrawal from a Roth IRA (if you've held it at least five years) comes out tax-free. A withdrawal from a taxable brokerage account may include capital gains, which are taxed at a lower rate than ordinary income. Taking money from the wrong account first can push you into a higher tax bracket unnecessarily.

The general strategy is to withdraw from taxable accounts first, then traditional IRAs, then Roth IRAs last — but this depends on your specific situation, your age, and whether you're subject to Required Minimum Distributions. A tax professional can model different withdrawal orders for you and show you which sequence costs the least in taxes for that particular year. This modeling takes an hour or two and can easily save you more than the cost of the consultation.

Forgetting the higher standard deduction for people over 65

The standard deduction — the amount you can earn without owing federal income tax — is higher for people 65 and older. For 2024, a single filer who is 65 or older gets a standard deduction of $28,050, compared to $14,600 for someone under 65. A married couple filing jointly where at least one spouse is 65 gets $29,200, compared to $29,200 for a younger couple (in this case they're the same, but the rule still applies). This number changes every year because it's adjusted for inflation.

Many retirees use last year's standard deduction when they file, which means they pay taxes on income they shouldn't have to report. The IRS publishes the current year's standard deduction in January, and you can find it on the IRS website or ask a tax preparer. If you file your own taxes, double-check that you're using the current year's number, not the one from your last return. This single mistake can cost you hundreds of dollars in unnecessary taxes.

Missing the Required Minimum Distribution deadline

If you have a traditional IRA, SEP IRA, or 401(k), the IRS requires you to start taking money out at age 73 (this age changed from 72 in 2023). The amount you must withdraw each year is calculated by dividing your account balance by a life expectancy factor the IRS provides. This is called a Required Minimum Distribution, or RMD. If you don't take the full amount by December 31, the penalty is 25 percent of the shortfall — so if you were supposed to withdraw $10,000 and you withdrew $6,000, you owe a $1,000 penalty.

The deadline is December 31 each year. If you turn 73 in 2024, your first RMD is due by December 31, 2024 (though you can delay it until April 1, 2025, if you prefer — but then you'll owe two distributions in 2025). Your IRA provider or 401(k) administrator usually calculates the amount for you and sends you a notice, but you are responsible for actually taking the withdrawal. Roth IRAs do not require distributions during the account owner's lifetime, which is one reason some retirees convert traditional IRAs to Roth accounts before they turn 73.

Not claiming the medical expense deduction

You can deduct medical expenses, but only if they exceed 7.5 percent of your adjusted gross income (AGI). For someone with an AGI of $40,000, that means you can only deduct medical expenses above $3,000. Many retirees assume this deduction doesn't apply to them because the threshold seems high, but retirees often have significant medical costs — hearing aids, dental work, prescriptions, and copays add up quickly.

To claim this deduction, you must itemize rather than take the standard deduction. For many retirees, the standard deduction is larger, so itemizing doesn't save money. However, if you have a year with unusually high medical expenses (a surgery, major dental work, or new prescriptions), you might itemize that year and take the standard deduction in other years. Keep receipts and statements from doctors, pharmacies, and medical suppliers. The IRS allows deductions for the cost of the care itself, travel to appointments, and some equipment like canes or wheelchairs.

Overlooking property tax and charitable donation deductions

Property taxes (on your home, car, or land) are deductible, but only if you itemize. The same is true for charitable donations to may have access to organizations. Many retirees who own their homes outright pay significant property taxes and give to charities, but they take the standard deduction instead of itemizing, which means they get no tax benefit from these expenses.

The decision to itemize depends on whether your total deductible expenses (property taxes, state income taxes, charitable donations, and medical expenses above the threshold) exceed the standard deduction for your filing status. If you're single and over 65, the standard deduction for 2024 is $28,050. If your property taxes plus charitable donations plus medical expenses above 7.5 percent of AGI add up to more than that, itemizing saves you money. A tax preparer can calculate both scenarios for you in about ten minutes and show you which approach costs less.

Cashing out a 401(k) or IRA in a lump sum

If you leave a job or retire, you may have the option to take all the money from your 401(k) in one payment. This is almost always a mistake from a tax perspective. A lump-sum withdrawal counts as ordinary income in that single year, which can push you into a much higher tax bracket and trigger taxes on Social Security benefits you wouldn't otherwise owe. It also means you lose the tax-deferred growth on that money going forward.

The better option is usually a direct rollover: the money moves from your 401(k) directly to an IRA without ever touching your hands. You don't owe taxes, and you keep the money growing tax-deferred. If you need money to live on, you can withdraw from the IRA gradually over time, spreading the tax impact across multiple years. If you've already taken a lump sum, you have 60 days to roll it over to an IRA to avoid the tax hit, but this window is strict — missing it by even one day means you owe the full tax.

Not understanding how Social Security affects your tax bill

Social Security benefits are taxable if your combined income exceeds certain thresholds. Combined income means your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. For a single filer, if combined income is between $25,000 and $34,000, up to 50 percent of your benefits are taxable. If it's above $34,000, up to 85 percent are taxable. For married couples filing jointly, the thresholds are $32,000 and $44,000.

This matters because a seemingly small decision — like taking a large withdrawal from an IRA or selling an investment — can push you over a threshold and make 85 percent of your Social Security taxable instead of 50 percent. A tax professional can model this for you and help you time withdrawals to stay below the threshold, or at least understand the cost of crossing it. If you're close to a threshold, even small changes to your withdrawal strategy can save hundreds of dollars in taxes.

Failing to report all income sources

Retirees often have income from multiple sources: Social Security, a pension, an IRA, a 401(k), part-time work, rental property, dividends, interest, and sometimes a small business. Each source may generate a tax form (1099-SSA for Social Security, 1099-R for retirement accounts, 1099-NEC for self-employment, 1099-INT for interest, 1099-DIV for dividends). The IRS receives copies of these forms, and if your tax return doesn't match, you'll get a notice.

Many retirees forget to report income that doesn't come with a form — cash from occasional consulting work, gifts that are actually payment for services, or income from a hobby that's become semi-regular. The IRS doesn't know about it unless you report it, but if someone else reports paying you (or if you deposit it in a bank and the bank reports the deposit), the IRS will notice the discrepancy. Report all income, even small amounts, to avoid penalties and interest that can add up quickly.

Frequently Asked Questions

Can I still work part-time and collect Social Security without owing extra taxes?

Yes, but your earnings may reduce your benefits if you're under full retirement age, and you'll owe income taxes on the combined income. There's no penalty for working after full retirement age. Report all earnings on your tax return, and request withholding on your Social Security if the combined income will push you into a higher bracket.

What happens if I miss my Required Minimum Distribution deadline?

The penalty is 25 percent of the amount you should have withdrawn. If you missed it by accident, you can request a waiver from the IRS by filing Form 5329 and explaining the mistake. Taking the distribution immediately, even late, reduces the penalty but doesn't eliminate it entirely.

Should I convert my traditional IRA to a Roth before I turn 73?

A Roth conversion means paying taxes now on the money you convert, but then the account grows tax-free and you never have to take Required Minimum Distributions. This makes sense if you're in a low tax year, have other money to pay the taxes with, and expect to be in a higher bracket later. A tax professional can model whether it saves you money over your lifetime.

Do I have to itemize to get any tax benefit from charitable donations?

If you're over 70½, you can make a direct transfer from your IRA to a may have access to charity, and this counts toward your Required Minimum Distribution without being taxable income — even if you take the standard deduction. This is called a may have access to Charitable Distribution and is one of the few ways to get a tax benefit for charity without itemizing.

What if I owe taxes but can't pay the full amount by April 15?

File your return on time anyway and pay what you can. The IRS charges interest and penalties on unpaid taxes, but the penalties are smaller if you file on time than if you file late. You can set up a payment plan with the IRS, and they offer options for monthly payments with manageable interest rates.