I recently met with a couple who thought they had retirement figured out. They’d saved diligently for decades, built a solid nest egg, and even worked in banking over their careers. But when I reviewed their first year of retirement, I realized they’d unknowingly paid thousands more in taxes than necessary.
The reality is that this scenario plays out more often than you’d think. As a financial planner, I’ve learned that even the most prepared retirees can easily stumble into costly tax traps.
The difference between a good retirement and a GREAT one usually comes down to understanding three mistakes—and knowing how to avoid them.
Mistake #1: Ignoring the 0% Capital Gains Tax Bracket
Jim, a 63-year-old recent retiree, needed $75,000 for his annual expenses. He had diversified his savings nicely—traditional IRA, Roth IRA, and a brokerage account worth $1 million with $750,000 in unrealized gains. But like many retirees, he was missing a huge opportunity hiding in plain sight.
Most people don’t realize there’s actually a 0% tax bracket for long-term capital gains. For 2025, if you’re married filing jointly and your taxable income stays under $96,700, you can harvest capital gains without paying ANY federal taxes on them. Single filers get this benefit up to $47,025 in taxable income.
This is the plan we made: First, he could withdraw $15,000 from his traditional IRA, which was completely tax-free thanks to the standard deduction. Then, he sold $60,000 worth of investments from his brokerage account. Of that amount, $45,000 represented gains—and because his taxable income remained under the threshold, he paid absolutely nothing in federal taxes on those gains.
The result? Jim generated his full $75,000 income without paying a dime in federal taxes. This strategy can be particularly powerful in those early retirement years before Social Security and Required Minimum Distributions kick in.
Mistake #2: Getting Hit by the Social Security Tax Torpedo
The “Social Security tax torpedo” is one of the most devastating—and least understood—tax traps in retirement.
Take for example a couple who are receiving $50,000 in combined Social Security benefits. When they withdrew just $6,000 from their IRA, their “provisional income” was $31,000, and none of their Social Security benefits were taxable. But when they decided to take $40,000 from their IRA for a home renovation, their provisional income jumped to $65,000. Suddenly, $23,850 of their Social Security benefits become taxable.
Here’s how the torpedo works: Your provisional income includes your adjusted gross income plus half of your Social Security benefits. When this crosses certain thresholds—$32,000 to $44,000 for married couples filing jointly—up to 50% of your benefits become taxable. Above $44,000, up to 85% can be taxed.
The devastating part? Each additional dollar of income doesn’t just increase your taxes normally—it also pulls more of your Social Security benefits into the taxable column. This creates an effective tax rate that can exceed 22% even when you think you’re safely in the 12% bracket.
This becomes particularly important when planning Roth conversions or larger withdrawals from traditional retirement accounts.
Mistake #3: Converting Too Much (or Too Little) to a Roth IRA
Roth conversions can be a great tool when it comes to retirement planning, but I see retirees make costly mistakes on both ends of the spectrum. The key is finding your “sweet spot”—not too much, not too little, but just right for your situation.
Take for example a couple with $2.5 million in traditional IRAs. In their early retirement years, their income was relatively low. But what would happen once they reached 75 and Required Minimum Distributions kicked in? That’s when they’d be forced into significantly higher tax brackets.
For them, strategic Roth conversions make sense. By converting portions during their lower-income years—essentially “filling up” the 10% and 12% tax brackets—they could avoid paying 24% or more later. Using this strategy could potentially save them over $300,000 in taxes over their lifetime.
The mistake many people make is either converting too much at once—pushing themselves into higher tax brackets unnecessarily—or waiting for the “perfect” low-income year that may never come.
Final Thoughts
The reality is that taxes don’t disappear when you retire.
But by avoiding these three costly mistakes—overlooking the 0% capital gains opportunity, getting caught in the Social Security tax torpedo, and mismanaging Roth conversions—you can create a more secure and confident retirement.
Retirement planning isn’t just about accumulating assets—it’s also about drawing them down in the most tax-efficient way possible.
These strategies might seem complex, but you don’t have to navigate them alone. Working with an investment advisor who acts as your fiduciary and can guide you on financial planning can make a difference. They can help create a personalized strategy that accounts for your unique situation, potentially saving you tens of thousands of dollars over your retirement.
Are you ready to retire with confidence?
Book a no-obligation initial call to see how we’ve helped hundreds of clients like you craft a personalized retirement plan that’s uniquely you.