5 Tax Mistakes Costing Retirees & Pre-Retirees Thousands

Many pre-retirees approaching retirement focus exclusively on accumulating wealth while overlooking a crucial factor that could cost them: inefficient tax planning. A well-executed tax strategy that avoids common tax mistakes can save thousands of dollars in retirement.

Social Security benefits become taxable when your combined income (adjusted gross income + nontaxable interest + half of Social Security benefits) exceeds $25,000 for individuals or $32,000 for married couples filing jointly.  

Therefore, collecting a Social Security check can bump you into a higher tax bracket where more benefits are taxable. This has the most significant impact on those with moderate taxable income who could trigger taxation. 

Many people have trouble understanding the fundamental differences between account types and their role in tax planning. 

• Traditional IRA/401(k) = Tax deferred (pay taxes on withdrawals) 
• Roth IRA = Tax-free growth and withdrawals in retirement 
• Non-qualified account = Taxed on gains only 

As your life circumstances change alongside your life stage, these account types can serve different purposes. For example, if you’re retiring early (before age 65), you may want to accelerate income. Because you’re likely not receiving Social Security and aren’t yet at the age at which RMDs kick in, you may be in a lower tax bracket, potentially making it a great time to withdraw capital gains from non-qualified accounts at favorable rates. 

There are several ways to reduce taxable income that pre-retirees often forget about. 

• Qualified Charitable Distributions: Allow a retiree (age 70½ and older) to satisfy RMD requirements (or just enjoy tax-free giving) with charitable contributions up to $108,000 (in 2025) directly from their IRA without it counting as taxable income.¹ 

• Tax-loss harvesting: Sell investments at a loss to offset capital gains and reduce overall tax liability. Up to $3,000 in excess losses can be deducted against ordinary income annually. 

• Bunching itemized deductions: Concentrating charitable donations, medical expenses, and other deductible items into alternating years can provide more tax benefits. 

If you’re fortunate enough to retire early, you’ll want to consider the tax challenges and opportunities that come with your timeline. For example, you’ll have to consider health insurance premiums from COBRA or private insurance until Medicare kicks in. Still, you can potentially use the tax benefits of an HSA if you’re on a high-deductible plan. Additionally, this may be a great time to consider a Roth conversion in a lower tax bracket, allowing you to convert tax-deferred dollars at a reduced tax rate. 

We’re often surprised at the number of pre-retirees unaware of certain tax advantages from various investments or benefits. Here are a few examples:  

1. Health Savings Accounts (HSAs): Offer tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Can be a kind of stealth retirement account if you invest the funds and pay current health costs out of pocket until you’re ready to use the money you’ve saved and invested.  
2. 529 Plans: Education can feel far off, and some families assume they’ll just pay out of pocket. Yet 529s allow tax-free compounding, gifting leverage for estate planning, and in many states, immediate deductions or credits.
3. Life Insurance: Offers tax-free death benefits to beneficiaries and tax-free cash value growth.  

A client recently approached us with a plan to leave most of her assets to charity. Because of her sizable required minimum distributions (RMDs) and capital gains, her income pushed her above the threshold for partial taxes on Social Security payments. 

The Problem: Our client was taking $26,000 in annual RMDs and reinvesting most of it after taxes while giving about $3,000 in donations to charity via Qualified Charitable Distributions.  

The Solution: Because most of her assets are to be allocated toward charity anyway after she passes, we advised our client to start giving now and save on taxes. We plan to redirect her entire RMD amount to qualified charities through Qualified Charitable Distributions (QCDs), helping reduce her overall taxes by almost $10,000 annually.   

Through decades of working with pre-retirees, we’ve found that a well-thought-out tax plan specific to each person can be the key to avoiding tax mistakes and keeping more of what you’ve earned through retirement. 

Tax planning should always start with reviewing your previous tax return and building a financial plan. While you can undertake this yourself, having professional support can help you consider the most recent tax laws and their impact on your finances, give you access to tax planning tools, and create coordinated support between a variety of experts, like your financial advisor and CPA, so you feel confident in your plan. 

With your analysis in hand, you can begin to look at your choices for moving forward, including: 

• Investment location decisions: Which accounts should be used for each investment type? 
• Withdrawal sequencing: Which accounts to liquidate first. 
• Income acceleration: Determining when to increase income from a tax standpoint. 
• Roth conversion: Taking advantage of Roth tax benefits. 
• Tax-free benefits: Utilizing benefits that have the most significant impact. 

Tax strategies aren’t one-size-fits-all, especially since retirement timelines can differ. Your tax plan should address your current-year opportunities, medium-term strategies (next 5-10 years), and long-term tax optimization through retirement. 

As your life circumstances change, so should your action plan. Annual reviews ensure your strategy continues to fit your evolving needs while accounting for tax law changes that could impact your bottom line. Set calendar reminders to review your plan before the end of the year and assess any needed adjustments. 

Tax-efficient retirement planning isn’t about complex strategies — it’s about making informed decisions with your existing assets. Our previously mentioned client, who saved nearly $10,000 annually, didn’t use a complicated strategy; she redirected money already going to charity through a more tax-efficient method.  

Whether it’s optimizing withdrawal sequences, timing Roth conversions, or maximizing charitable tax benefits, small changes compound into significant savings over time. Start your tax planning conversation today, and your future self will thank you. 

To avoid making costly tax mistakes, reach out to a member of our team today.