The 3 Big Tax Mistakes EVERY Retiree Makes (Real World Examples)

i’m a smart retired engineer and i spend hours with spreadsheets trying to dial this in every year. 90% of people aren’t smart enough to do that. it shouldn’t be this hard. our tax system is a pain in the ass.

Great info. I just retired in 2023 at age 67 and my wife is 6 years younger, so she's still working. With the standard deduction our AGI is a fair bit below the 22% threshold, so we use our end-of-year estimated tax to find the magic number we can convert from IRA to Roth and stay in the 12% bracket. With my wife working, we'll never avoid social security being taxable. But we believe we can convert about 1/3 of our traditional IRA to Roth over the next 7 years @ 12%. It's important for us to convert as much as possible because odds are that my wife will outlive me, possibly by more than 2 decades, and once I check out she'll be filing her taxes as a single person, so her 22% threshold becomes much lower and those RMDs get expensive!

Here's an idea - since we already paid taxes once on our earnings, how about none of our Social Security income gets taxed again? Perhaps Congress should erase any Federal tax liability from any future Social Security earnings, or even just raise the taxable limit so that Seniors could get most, if not all, of their retirement money tax free? IRAs, pension, etc. would be taxed, but not Social Security.

Great video. Regarding Roth conversions, I think the sweet spot is the years between retirement; say 65 and start of Social Security at 70. You also need to consider the changes in the tax rates after 2025. The other consideration, if you are lucky enough to not worrying about outliving your portfolio, is to pay lower taxes while living rather than leaving large taxable IRAs to you heirs while they are likely in their maximum tax bracket years. Your gross estate may be smaller but your after tax estate will be larger for your heirs.

Great video. One thing to note is that Congress, in their infinite wisdom, did not index the Social Security provisional income thresholds to inflation when they were instituted 40 years ago. This means that a greater proportion of Social Security recipients get hit by the “torpedo” every year. That $25,000 threshold in 1983 is equivalent to almost $80K today. Hence, back then very few retirees had to pay taxes on their Social Security income, while nowadays most probably do… and as the years go by this becomes worse and worse due to the fixed nature of the thresholds.

James you out did yourself today! A triple treat of 3 concise and uber important topics in just one video. You are an outstanding citizen! Best Regards Rich

Good overview. My wife and I are in our mid 70s. I've been converting a chunk of my traditional IRA to Roth each year. We converted my wife's years ago while we were both still working. This reduces the amount you need to withdraw each year to meet the RMD requirement. Something else to consider for married couples is the impact of RMD when one spouse dies. Social Security income is reduced, the RMD stays the same however now Federal income tax is individual not couple, so a double whammy for the surviving spouse.

This video taught me important stuff about taxes when you retire. It showed me how to avoid common mistakes. I liked how they used easy examples to explain complex ideas. Understanding tax gain harvesting, being careful with Social Security taxes, and not converting too much into Roth accounts can save you lots of money in the long run. Thanks for sharing this helpful info!

Best video that walks through the scenarios instead of just rambling without a detailed analysis.

Great video James, I enjoy your presentations. One complication to Roth conversion strategies in the "low income" years is if you don't have employer health care coverage and are purposely keeping your income low in order to qualify for generous ACA healthcare subsidies. As you know, the cost of health insurance can be quite high for those in their late 50's-early 60's before Medicare kicks in at age 65. I'm looking at trying to calculate the trade off of keeping my income low to save a lot of money now on healthcare, vs doing Roth conversions to fill up the tax bracket in order to save on taxes later, at the cost of high healthcare now. Would you consider addressing that particular topic in a video? While I realize that healthcare may be outside your normal scope, I think that this topic might be of interest to lots of people wanting to retire before age 65. Thanks again for all you do, you make what is normally a dry, boring topic interesting!

This is wise advice. My fool of an ex, when we split up just sold everything I had bought for her and got into the 43% tax bracket. Had she sold over several years she could've utilised her allowances wisely. No matter, disappointing. Most frustrating part for me was seeing money going to the government that it doesn't deserve.

2020 and 2022 were tremendous years for Tax Loss Harvesting. I have used $3,000 annually for the last 3 years. I still have $11,853 remaining for future use. I "bit the bullet" in 2020 and 2021, and moved $100K each year from Deferred to Roth accounts. I was able to use cash flow to pay the taxes, so 100% of the funds were converted. I retired in January 2024. This year, on $100K of income, I will be in the 10% bracket. In 2025-2026, I will most likely be in Zero % bracket, depending on what Congress does in 2026. My RMDs are used as QCDs so I have no additional Income because of RMDs. Great Video James.

Always boggled me that you work and earn it, pay tax on it, pay tax on anything you buy, take all the risk on the investment, and they still want a chunk should you actually come out ahead, including even property. Then they tax everything you ever had after you die.... They have no problem deferring the tax, knowing full well they'll get more from you later

Medicare Part B: This can be very pricey if you allow your income to reach one of their high brackets, as you are then paying for your coverage plus others' coverage. This could affect Roth strategy, since it might be the easiest way to keep your apparent income down, if you don't buy securities. This (2023) was a bad year for me because of high CD interest rates generating unforeseen but phoney "income", so Medicare B is top of mind for me. I'm too old to correct some errors but I will advise my children and grandchildren to adopt some strategies earlier in life, and especially when they are making low wages or in a down year.

I don’t think most people understand that the percentage RMD increases each year and that this can push you into having to pay IRMAA for the rest of your life. Another reason for a married couple to do more Roth conversions early is that when one spouse dies the thresholds for income tax brackets and IRMAA drop and financial plans based on both of you living a long life no longer make sense. One way to avoid paying estimated taxes throughout the year is to have taxes withheld when you take a distribution from your IRA. This can be done as late as December without having any underpayment penalty imposed. Withholding can even be taken from your RMD amount. However, your RMD MUST be taken before any Roth conversion is done.

Your videos are always informative. Can you please do a video on how to take advantage of tax gain harvesting, Roth conversion and ACA subsidy? Thanks!

Nice explanation, when I try to talk about this with my coworkers, the just can’t seem to understand what any of it means. It’s frustrating to see how clueless most people are about finances.

OMG, we are getting old and need a master's degree in finance just so the government doesn't take advantage of us. Could you give me a break? James, I love your knowledge and your mission to help us protect our finances. Thank you.

It is sad that our tax code is so blasted difficult, and after paying taxes for 40-50 years, you get to 70 and find out your income (from all that sacrificing and going without to build investments, etc) is added to social security, throwing you into a danger zone, only to have the government come after it again in taxes. So many of our senior citizens are eating peanut butter and jelly sandwiches, or keeping the thermostat at 60, etc because they barely make enough to survive, and here comes Uncle Sam, with his hand out saying "Uncle Sam wants your dough too".

Thanks for all your videos James! Question...I visited your root financial website but couldn't find information I wanted without having to provide information and probably get on your mailing list. Specifically, does your firm charge AUM type fees or fixed fees for specific advice tailored to a client's situation? Thanks again and keep doing what your doing.