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The 3 Biggest Tax Surprises in Retirement and How to Avoid Them

There are tax surprises in retirement?  Yes!  Will you have to pay those taxes? Let’s find out. 

With this week’s edition of Lucia Capital Group Weekly, I’m Professor Rick Plum. 

Taxes are a part of life, and most of us know the process: you have a job, you earn your paycheck, and then that paycheck is subject to various forms of taxation: federal, state, FICA, Medicare, and maybe a few others.  And, generally speaking, the more you make, the more taxes you have to pay.  

Common Assumptions About Taxes in Retirement

That being the case, it would stand to reason that once you’re retired and your paychecks stop, your total tax bill will go down. Makes sense, right? Well, maybe not. Here are the three biggest tax surprises in retirement, and advice on how to avoid them. 

Tax Surprise #1: Retirement Account Distributions

The most noticeable taxes you’ll pay will be on your retirement account distributions.  Maybe you’ve been socking money away for many years, and you were able to take that earned income right off the top, deferring those income taxes to a later date.  Well, at some point that “later date” will arrive, either at age 73 (or 75) with required minimum distributions – or maybe even earlier than that, if you inherit an IRA.  With any luck, you’ve had some gains in those retirement accounts over the years. But now every dollar you take out of those accounts is subject to federal income taxes at ordinary income rates (which could be as high as 37%).  

Tax Surprise #2: Social Security Benefits

Second, your Social Security benefits could also wind up in the taxable column of your return.  This catches a lot of people off-guard, especially if they went many years without paying any taxes on their benefits.  Depending on how much other income you have, your Social Security benefits could be subject to ordinary income taxes. What constitutes “other income”? Several things: those IRA and 401(k) withdrawals I talked about earlier, as well as rental income, dividends, capital gains, interest income, tax-free bond income — all of that counts toward what’s called your modified adjusted gross income (MAGI). And if you hit certain thresholds, you might see as much as 85% of your benefits subject to ordinary income taxation.  

Tax Surprise #3: Medicare Premiums

Another tax that you’ll see in retirement is for Medicare. In 2024, most people on Medicare will pay just under $175 per month for their Part B benefit. It’s officially called a “premium,” but it feels like a kind of tax. And if your adjusted gross income (AGI) for 2022 was over $103,000 for single people, or over $206,000 for married couples filing jointly, your premium starts to go up with the first bump a $70 per month increase. And if your AGI is really high, like over $500,000 for a single taxpayer or $750,000 as a married couple, your premium could be as high as $594 per month, per person. That’s a big bump.  

Strategic Planning to Avoid Tax Surprises

Okay, so that’s the bad news. The good news is that you may be able to avoid some or all of these taxes with a little strategic planning by looking at the tax bracket you’re in today, along with your future projected brackets, and try to use them to your advantage.  

Blending Cash Flow

I’ll give you a quick strategy right now: if you can “blend” your cash flow from your IRA, your Roth and your personal accounts, you may be able to keep your overall taxable income down right now by staying in lower income brackets, or by reducing the amount of Social Security that is subject to taxation, without having it blow up on you once your RMD’s begin.  Using the tax code to your advantage – things like the standard deduction, the lower tax brackets and such – should be the priority here.  

Managing Medicare Premiums

When it comes to Medicare Part B, C and D premiums, you can’t always avoid those extra income-related monthly adjustment amount (IRMAA) surcharges, but on the good side, for many retirees, these surcharges are often just temporary (sometimes the result of a large one-time capital gain).   


The important takeaway here is that what seems like an unavoidable tax hit may actually be partially or entirely avoidable through strategic planning with a Lucia Capital Group financial advisor. Our advisors are very well-versed in exactly these kinds of situations, and we know how to deal with them. I’ve said before that knowledge is power, and sometimes just knowing what the potential roadblocks are in advance may give you an advantage and allow you to keep more of your money.  

Contact Us

Tax management – it’s something we do for our clients every single day here at Lucia Capital Group.  How can we help you the most? Just give us a call! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency. Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

It is important to keep in mind that investments in fixed income products are subject to liquidity risk, interest rate risk, financial risk and inflation risk.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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