Hidden tax traps that could cost you thousands in retirement

Retirement should be a time of financial security and relaxation, but unexpected tax traps can put a serious dent in your savings. Many retirees make costly tax mistakes that could have been avoided with proper planning. Understanding these potential pitfalls and taking proactive steps can help you keep more of your hard-earned money.

In this week’s installment of Weekly Financial Tips, we’ll walk through the biggest tax traps in retirement and show you how to avoid them. If you want a personalized tax strategy, our team at Guerra Wealth Advisors is here to help.

1. Not Planning for Required Minimum Distributions (RMDs)

Once you turn 73, the IRS requires you to take minimum withdrawals from your tax-deferred retirement accounts (like traditional IRAs and 401(k)s). If you don’t take the required amount, you could face a steep penalty—up to 25% of the missed withdrawal!

How to Avoid This Trap:

• Start planning for RMDs well before you turn 73.
• Consider converting some of your traditional IRA or 401(k) into a Roth IRA, which doesn’t require RMDs.
• Work with a financial advisor to create a withdrawal strategy that minimizes your tax liability.

2. Paying Too Much in Social Security Taxes

Did you know that up to 85% of your Social Security benefits could be taxable? If your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) exceeds certain limits, you’ll owe taxes on a portion of your benefits.

How to Avoid This Trap:

• Withdraw strategically from your retirement accounts to keep your taxable income lower.
• Consider delaying Social Security benefits until later if it helps reduce overall taxable income.
• Use tax-efficient investments to manage income thresholds.

Want help structuring your income to reduce Social Security taxes? Our advisors can craft a personalized strategy for you.

3. Overlooking Tax on Investment Gains

Many retirees assume that selling investments won’t trigger taxes, but that’s not always the case. Selling stocks, bonds, or mutual funds can lead to capital gains taxes, and withdrawing from certain accounts may come with unexpected tax bills.

How to Avoid This Trap:

• Be mindful of when you sell assets—long-term gains are taxed at lower rates than short-term gains.
• Utilize tax-loss harvesting strategies to offset gains with losses.
• Diversify with tax-efficient accounts like Roth IRAs and health savings accounts (HSAs).

Managing investment taxes can get complicated, but you don’t have to figure it out alone. Our team can guide you through tax-efficient investment strategies.

4. Not Factoring in Medicare Surcharges

Higher-income retirees may have to pay extra for Medicare Part B and Part D due to the Income-Related Monthly Adjustment Amount (IRMAA). If your modified adjusted gross income (MAGI) exceeds certain limits, your Medicare premiums could increase significantly.

How to Avoid This Trap:

• Keep an eye on your MAGI and adjust withdrawals accordingly.
• Use tax-free income sources like Roth distributions or HSAs to stay under IRMAA thresholds.
• Plan ahead—your income from two years prior determines your current Medicare premiums.

Working with an advisor can help you keep your Medicare costs under control while maximizing your retirement income.

5. Forgetting About State Taxes

Even if you’ve accounted for federal taxes, state taxes can still take a chunk out of your retirement income. Some states tax Social Security benefits, pensions, and IRA distributions, while others have no income tax at all.

How to Avoid This Trap:

• Research your state’s tax laws before retiring.
• If you’re relocating, consider tax-friendly states like Florida.
• Work with a financial planner to optimize your withdrawals in a tax-efficient way.

Want a tax-efficient retirement plan tailored to your state? We’re here to help you navigate the details.

6. Ignoring Estate and Inheritance Taxes

Leaving an inheritance to your loved ones is a wonderful legacy, but without proper planning, they could face significant taxes. Some states impose estate or inheritance taxes in addition to federal estate tax laws.

How to Avoid This Trap:

• Consider gifting assets during your lifetime to reduce taxable estate size.
• Use trusts and other estate planning tools to minimize tax burdens.
• Review your estate plan with an advisor to ensure your assets are distributed tax-efficiently.

Estate planning and taxes can be complicated, but you don’t have to navigate them alone. Our advisors can help you create a tax-smart legacy plan.

Take Control of Your Retirement Taxes Now

Avoiding these tax traps takes careful planning, but the good news is that you don’t have to do it alone. At Guerra Wealth Advisors, we specialize in retirement tax strategies that help you maximize your income and minimize your tax burden.

Let’s build a tax-smart retirement plan together. Schedule a consultation today and make sure your money stays where it belongs—in your pocket.