Retirement is often imagined as a time of relaxation and reward — a well-earned break after decades of work. But what many retirees don’t realize is that the way they handle their taxes can make or break their financial stability. One of the biggest — and most overlooked — mistakes people make in retirement is failing to plan for taxes.
This mistake is surprisingly easy to avoid, yet countless people still fall into the same trap year after year. In this article, we will talk about #1 retirement planning mistake and we’ll explore why proper tax planning is critical before and during retirement, how it differs from the approach you took during your working years, and specific strategies that can help reduce your long-term tax burden.
Tax Planning Doesn’t End in April
Most people think tax season ends on April 15. Once the paperwork is filed, they mentally check out until the next year. But for retirees — or those approaching retirement — tax planning is a year-round activity.
Taxes never sleep. And that’s true — the IRS isn’t going anywhere, and tax laws are constantly changing. Many people mistakenly believe that taxes are just about filing forms and getting refunds, but that mindset doesn’t serve you in retirement. Instead, your focus should be on minimizing your tax liability over the rest of your life, not just on getting a refund next spring.
Why Getting a Refund in Retirement Is a Red Flag
For decades, most working Americans have been conditioned to expect — and even look forward to — their annual tax refund. In some cases, these refunds can be substantial: $10,000, $20,000, or even more. But in retirement, this is a dangerous habit.
If you’re getting a large tax refund in retirement, it usually means you’ve overpaid your taxes throughout the year, essentially giving the government an interest-free loan with your money. That’s money that could have been earning interest, dividends, or even growing in your investments.
In Ryan’s words, “Your dollars are soldiers. They go out into the world to work for you and bring back income, interest, and dividends. But if you’re loaning them to the IRS, they’re not working for you — they’re working for the government.”
Your goal should be to owe a small amount at tax time — or get a very modest refund (less than $500). That means your tax withholding and estimated payments are dialed in just right, allowing your money to work for you all year long.
The Shift: From Tax Filing to Tax Planning
Tax filing is backward-looking — you’re reporting what already happened. Tax planning, on the other hand, is forward-thinking and strategic.
In retirement, the name of the game is proactive planning. Waiting until January or February to gather tax documents and run to your CPA won’t help you reduce your taxes. The decisions that impact your taxes — like Roth conversions, IRA withdrawals, and capital gains harvesting — need to happen before December 31.
Think of your retirement plan as a 30- or 40-year tax project. Your goal is to pay as little in taxes as legally possible over the rest of your life. That’s not something you can leave to chance — or put off until the end of the year.
The Roth Conversion Advantage
One of the most powerful — and misunderstood — tools in retirement tax planning is the Roth IRA conversion.
A Roth conversion involves moving money from a traditional IRA (where it grows tax-deferred) into a Roth IRA (where it grows tax-free). You pay taxes on the conversion amount now, but that money will never be taxed again — not on growth, not on withdrawals, and not for your heirs.
The key is to convert in low-tax years, especially while current tax brackets are historically low. Ryan explains that a married couple over 65, with $100,000 of income, may be able to convert up to $30,000 more at just a 12% tax rate. That’s an incredibly low rate to pay for a lifetime of tax-free growth.
But don’t go overboard. Converting too much can bump you into a higher tax bracket or trigger other costs, like higher Medicare premiums. That’s why a customized, year-by-year Roth conversion strategy is so valuable.
Don’t Fear the Tax Bill — Plan for It
Understandably, many people hesitate to do Roth conversions because they don’t want to write a big check to the IRS. But Ryan offers an important perspective: “If you know taxes are going up, wouldn’t you rather pay a smaller amount today than a bigger one tomorrow?”
He even shares a case where a client used a financial product with a guaranteed 24% return in the first year to cover the taxes on a large conversion. This kind of creative strategy highlights how working with a knowledgeable advisor can uncover options most people don’t know exist.
Capital Gain Harvesting: Another Smart Strategy
Roth conversions aren’t the only tax tool in your arsenal. If you’ve invested in stocks over the years — especially if you’ve held them for a long time — you may be sitting on large unrealized capital gains. And while it’s tempting to let those stocks ride, this can create major tax headaches down the road.
Ryan recommends a strategy called capital gain harvesting. It involves selling appreciated assets to “lock in” gains at today’s lower rates. Then you can buy back the stock (if you still like it) at a new, higher cost basis.
For example, if you bought Nvidia stock at $1 and it’s now $100, you can sell it, pay capital gains tax on the profit, then repurchase it at $100. Now, any future gains are taxed only on growth above $100, not $1. This is especially smart to do before retirement, when your income — and tax rate — might be lower.
Coordinating Distribution Strategies
A sophisticated retirement plan also includes a distribution strategy — a coordinated approach for how and when to draw money from different accounts (IRAs, Roths, taxable brokerage accounts, etc.).
Here’s a little-known fact: Depending on your income mix, you may be able to take money out of taxable accounts and IRAs and pay zero in taxes. Ryan gives the example of taking $90,000 in capital gains and $30,000 from an IRA in the same year and paying nothing in federal taxes — all based on careful coordination.
The order and timing of withdrawals matter. Without a plan, you could unintentionally trigger higher tax brackets, Social Security taxes, or increased Medicare premiums. With a plan, you can minimize your taxes while maximizing your income.
Legislative Risk and the Uncertain Future
Even if taxes are low today, they won’t stay that way forever. Retirees can expect to live through 15 to 20 election cycles, and with each one comes the potential for tax law changes.
This is called legislative risk, and it’s one of the biggest reasons to act now. Laws can and do change — sometimes with very little notice. Taking advantage of today’s favorable tax environment could save you tens or even hundreds of thousands over the course of your retirement.
What You Can Do Right Now
If you’re within five years of retirement — or already there — now is the time to:
- Stop thinking in terms of refunds. Your goal is tax efficiency, not a big check from the IRS.
- Run a tax liability analysis. Tools like OnTheMoneyTaxPL.com can estimate how much you owe on tax-deferred accounts.
- Work with a tax-savvy advisor. Most of the strategies described here require professional insight.
- Plan proactively. Don’t wait until December (or January!). Now is the time to take action that affects this year’s taxes.
- Consider small Roth conversions each year. “Filling the bracket” at lower tax rates is a smart long-term move.
- Harvest capital gains intentionally. Don’t wait for a market dip or legislative change to catch you off guard.
Conclusion: The #1 Retirement Planning Mistake That’s Easy to Avoid
The #1 retirement planning mistake — waiting passively for a tax refund — is a symptom of outdated thinking. Your working years are over, and your financial strategy needs to evolve. The earlier you start planning proactively for taxes, the more you can preserve your wealth, reduce worry, and enjoy the retirement you’ve earned.
Remember: it’s not about what you make — it’s about what you keep. And smart tax planning is the surest way to keep more.
Also read: How to Lower Taxes in Retirement
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