The Biggest Tax Surprises in Retirement and How to Avoid Them

Retirement Taxes: What You Don’t Know Can Cost You

Most people assume that their tax burden will go down in retirement. After all, you’re no longer getting a paycheck, so you must owe less, right?

Well… not exactly.

The reality is that many retirees face a surprising number of taxes—some of which can be significant. And while taxes don’t stop when you stop working, with smart planning, you may be able to reduce or avoid many of them.

At Lucia Capital Group, we help our clients uncover the hidden tax traps that can catch you off guard in retirement—and put strategies in place to potentially soften the blow. Here’s what you need to know.

The End of the Paycheck Doesn’t Mean the End of Taxes

In your working years, the formula is fairly straightforward: you earn a paycheck, and then taxes come out—federal income tax, state tax, FICA, Medicare, and so on. The more you earn, the more you pay.

So, it stands to reason that when those regular paychecks stop, your tax bill should shrink. And in some cases, it does.

But retirement introduces new sources of income—like withdrawals from retirement accounts and Social Security benefits—which are taxed in different and often unexpected ways.

Surprise #1: Retirement Account Distributions

You’ve likely spent years contributing to tax-deferred accounts like 401(k)s and traditional IRAs. You got a deduction on that income upfront, which means you haven’t yet paid taxes on that money—or its growth.

But that bill eventually comes due.

When you take distributions from these accounts in retirement, every dollar is taxed at your ordinary income rate, just like wages. That means your withdrawals could be taxed as high as 37% at the federal level, depending on your other income.

Even if you don’t need the money, the government will eventually force your hand with Required Minimum Distributions (RMDs) starting at age 73 (or 75 for some). If you inherit an IRA, the timeline for distribution—and therefore taxation—can be even shorter.

This can lead to sharp jumps in taxable income, especially when combined with other income sources.

Surprise #2: Taxable Social Security Benefits

Many retirees are shocked to learn that their Social Security benefits can be taxed—especially those who assumed these payments were always tax-free.

How much of your benefit is taxable depends on your Modified Adjusted Gross Income (MAGI). This includes:

1. IRA and 401(k) withdrawals
2. Rental income
3. Dividends and interest
4. Capital gains
5. Even tax-free municipal bond income

If your combined income exceeds certain thresholds, up to 85% of your Social Security benefits could be taxed at your ordinary income rate.

Here’s the catch: even modest withdrawals from retirement accounts can push you past these thresholds, especially if you’re married and filing jointly.

Surprise #3: Medicare Premium Surcharges (IRMAA)

Think Medicare is free or low-cost for everyone? Think again.

In 2025, the base monthly premium for Medicare Part B is $185. But if your Adjusted Gross Income (AGI) from two years prior exceeds $106,000 (for individuals) or $212,000 (for couples), you’ll pay more.

A lot more.

For high-income retirees, these surcharges—called IRMAA (Income-Related Monthly Adjustment Amounts)—can raise your Part B premium to over $600 per month per person. Part D (prescription drug coverage) can have its own IRMAA penalties, too.

These added costs function much like a stealth tax—and they’re often unexpected.

What Can You Do About It?

Here’s the good news: many of these tax hits can be mitigated or even avoided with strategic planning.

At Lucia Capital Group, we help retirees and pre-retirees build tax-aware income strategies using tools like:

Income Blending

Instead of pulling from just one source, consider blending your income from:

1. Traditional IRAs/401(k)s (taxable)
2. Roth IRAs (tax-free)
3. Personal brokerage accounts (capital gains treatment)

By strategically coordinating withdrawals, you may be able to:

1. Stay in a lower tax bracket
2. Minimize the amount of Social Security that’s taxed
3. Keep your income below IRMAA thresholds
4. Avoid large spikes in taxable income when RMDs begin

Use of Standard Deduction and Tax Brackets

It’s also important to consider how much room you have in your current tax bracket. Many retirees unintentionally waste lower tax brackets in early retirement by withdrawing too little.

By proactively filling those brackets—say, with partial Roth conversions—you may reduce future RMDs and taxes on Social Security.

Temporary vs. Permanent Taxes

One key concept we explain to clients is the difference between temporary tax hits and permanent tax traps.

For example, an IRMAA surcharge triggered by a one-time capital gain may only last one year. But an unaddressed RMD strategy could lead to compounding tax issues year after year.

Strategic planning helps you differentiate between the two—and take action accordingly.

Knowledge is Power

Retirement tax planning isn’t about eliminating taxes completely (which is rarely possible). It’s about awareness and optimization.

Knowing:

1. How different income sources are taxed
2. When to take withdrawals
3. How to coordinate benefits
4. What your future tax landscape looks like

…can make a dramatic difference in your net income over time.

We’re Here to Help

At Lucia Capital Group, tax planning isn’t a seasonal thing. It’s something we do every single day for clients just like you.

Our financial advisors understand the complexities of retirement income, and we specialize in helping you create a tax-smart strategy that supports your long-term goals.

Whether you’re years from retirement or already in it, now’s the time to review your plan.

Want to learn more? Just give us a call. Let’s see how we can help you keep more of what you’ve earned.