You and your neighbor may be living on the exact same amount of income in retirement—but one of you could be paying way more in taxes than the other. Why? Because they know how the U.S. tax system works and they’re using that knowledge to keep more of their income.
Believe it or not, how much you pay in taxes is one of the biggest things you can control in retirement. And yet, we see many retirees make the same costly mistakes over and over again.
In this post, we’ll walk through the three biggest retirement tax mistakes we see—and show you how to avoid them, so you can create more after-tax income and enjoy the retirement you’ve worked hard for.
Mistake #1: Ignoring the 0% Capital Gains Tax Bracket
Most people know that capital gains are taxed differently than ordinary income, but what many don’t realize is that there’s actually a 0% long-term capital gains bracket. Yes—zero percent.
If you’re single and your taxable income (that’s your adjusted gross income minus deductions) is under $48,350, or if you’re married filing jointly and it’s under $96,700, you can realize long-term capital gains and pay nothing in federal taxes on those gains.
This is a strategy known as tax gain harvesting, and it can be incredibly powerful in retirement.
Let’s look at an example. Suppose Joe is 62, single, and wants to live on $75,000 per year in retirement. He has a traditional IRA, a Roth IRA, and a brokerage account with $1 million in it—$250,000 of that is his original investment, and $750,000 are unrealized gains.
Joe starts by withdrawing $15,000 from his IRA. Thanks to the standard deduction, that $15,000 is entirely offset, so he owes no tax.
Next, he pulls $60,000 from his brokerage account. But remember—only $45,000 of that is a gain, and because his taxable income is still under the $48,350 threshold, he pays zero tax on those gains.
In total, Joe just created $75,000 of income—and paid $0 in federal taxes.
Now, this doesn’t mean the goal is to be in the 0% tax bracket every year. The real goal is to minimize your lifetime tax bill, and the 0% capital gains bracket is one powerful way to do that, especially in the early retirement years before Social Security or required minimum distributions (RMDs) kick in.
Mistake #2: Getting Hit by the Social Security Tax Torpedo
If you’re collecting Social Security, there’s another stealth tax trap you need to watch out for: the Social Security tax torpedo.
This occurs when your provisional income—which includes half your Social Security benefits plus all other income like IRA withdrawals or capital gains—crosses certain thresholds. Once it does, up to 85% of your Social Security benefit can become taxable.
Here’s an example. Joe and his spouse are married filing jointly and receive $50,000 in combined Social Security benefits. If they only take $6,000 from their IRA, their provisional income is $31,000, and none of their Social Security is taxable.
But if they instead take $40,000 from their IRA, their provisional income jumps to $65,000. Suddenly, $23,850 of their Social Security becomes taxable, and their tax bill increases sharply—even though they only took out $34,000 more.
This is the “torpedo” effect: each additional dollar of income doesn’t just increase your taxes—it also pulls more of your Social Security into the taxable column, leading to a much higher effective tax rate than expected.
This is especially important when planning Roth conversions or larger IRA withdrawals. Even if you’re technically in the 12% marginal tax bracket, your real tax rate might be over 22% once the torpedo kicks in.
Mistake #3: Converting Too Much (or Too Little) to a Roth IRA
Roth conversions can be a great strategy in retirement. Converting money from a traditional IRA to a Roth IRA allows future growth to be tax-free—and can help you avoid high RMDs later in life.
But here’s the problem: many people either don’t convert enough—or they convert way too much.
Let’s take a couple, John and Sally. They have $2.5 million in a traditional IRA and $750,000 in a joint brokerage account. In their early retirement years, their income is low. But once they hit age 75 and RMDs kick in, they’re forced to take large IRA withdrawals—and their tax bracket jumps significantly.
This is the perfect scenario to consider Roth conversions. By converting in their lower-income years—filling up the 10% or 12% tax brackets—they can avoid paying 24% or more later.
But flip the scenario. What if John and Sally only had $250,000 in their IRA? Then doing large Roth conversions today might not make sense. If they convert too much now and pay 12% or 22% in taxes, they may end up worse off than if they had done nothing—because their required distributions would’ve been small and easily offset by deductions.
The key takeaway: Roth conversions can be incredibly valuable, but they need to be tailored to your specific situation. A one-size-fits-all approach could end up costing you thousands.
Final Thoughts
Taxes don’t stop in retirement—but with the right strategy, you can keep more of your income and gain more control over your financial future.
Avoiding these three mistakes:
- Overlooking the 0% capital gains bracket
- Falling into the Social Security tax torpedo
- Converting too much or too little to Roth
…can help you reduce your lifetime tax bill and create more financial freedom in retirement.
If you’d like to see how these strategies might apply to your personal situation, working with a fiduciary financial planner can make all the difference.