Tax Planning for Pre-Retirees: 6 Costly Tax Mistakes You Must Avoid
POINTS
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Early tax planning can save retirees thousands over time.
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Roth conversions may lower future taxes and Medicare costs.
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Tax diversification creates more flexibility in retirement income.
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Poor withdrawal timing can trigger unnecessary taxes.
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Catch up contributions can strengthen retirement savings after 50.
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Smart income planning may reduce Social Security taxes.
Tax planning for pre-retirees focuses on how income is structured in the years leading up to retirement, when control over taxable earnings is typically at its highest.
Decisions around retirement accounts, withdrawals, and benefit timing can have a lasting impact on future tax liability.
As retirement approaches, the shift from accumulation to income requires coordinating multiple sources of funds under changing tax rules. Without a forward-looking approach, retirees may face higher taxes, reduced flexibility, or avoidable costs in later years.
Do You Pay Income Tax After Age 80?
Simple rules on retirement income, Social Security, and filing after 80.
Read MoreWho Exactly Are Pre-Retirees
Pre-retiree, generally speaking, refers to people within about 5-10 years of retirement age.
So, I would say if you are in your late 50s or late 60s who is shifting focus from saving to strategically managing savings, taxes, and income streams, you can be considered a pre-retiree.
Retirement Assets
Retirement assets fall into three tax buckets:
- Pre-tax (tax-deferred) – Pay tax later
- Roth (tax-free) – Pay tax first, then nothing later
- Taxable accounts – Pay tax every year as you earn
| Asset | Accounts | How It’s Taxed |
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| Pre-Tax (Tax-Deferred) |
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| Roth (Tax-Free) |
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| Taxable (After-Tax) |
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How Retirement Income Is Taxed
Most retirement income is taxed as ordinary income.
- Withdrawals from traditional 401(k)s, IRAs, and pensions are taxed at your regular income tax rate.
- Wages, interest income, and annuity payments are also taxed as ordinary income.
Traditional 401(k) / 403(b)
This is a pre-tax retirement account.
Withdrawals are taxed as ordinary income.
The federal rate can fall anywhere from 10% to 37%.
Traditional IRA
This is also a pre-tax retirement account.
Every withdrawal is fully taxable as ordinary income.
Required distributions are taxed the same way.
Roth IRA / Roth 401(k)
This is an after-tax retirement account.
Qualified withdrawals are tax-free at the federal level.
The tax was already paid before the contribution was made.
Social Security benefits
Social Security is not taxed with a flat rate.
Depending on income, 0% may be taxed, or up to 50%, or up to 85% may be included in taxable income.
The thresholds differ for single and married filers.
Pension income
Pension income is usually taxed at ordinary income rates.
That can range from 10% to 37%.
It is often fully taxable unless part of the pension was funded with after-tax contributions.
Annuities (non-Roth)
Non-Roth annuities are taxed on the gains portion.
The gains are taxed at ordinary income rates.
The principal portion may be a tax-free return of capital, depending on how the annuity was funded.
Traditional 401(k) / 403(b)
This is a pre-tax retirement account. Withdrawals are taxed as ordinary income. The federal rate can fall anywhere from 10% to 37%.
Traditional IRA
This is also a pre-tax retirement account. Every withdrawal is fully taxable as ordinary income. Required distributions are taxed the same way.
Roth IRA / Roth 401(k)
This is an after-tax retirement account. Qualified withdrawals are tax-free at the federal level. The tax was already paid before the contribution was made.
Social Security benefits
Social Security is not taxed with a flat rate. Depending on income, 0% may be taxed, or up to 50%, or up to 85% may be included in taxable income. The thresholds differ for single and married filers.
Pension income
Pension income is usually taxed at ordinary income rates. That can range from 10% to 37%. It is often fully taxable unless part of the pension was funded with after-tax contributions.
Annuities (non-Roth)
Non-Roth annuities are taxed on the gains portion. The gains are taxed at ordinary income rates. The principal portion may be a tax-free return of capital, depending on how the annuity was funded.
Tax Bracket Planning Before Retirement
Because tax brackets will largely stay at current levels, pre-retirees should focus on keeping income within the optimal bracket each year.
For example, if you have one year of unusually high income (a bonus, sale of property, or large IRA distribution), it can push you into a higher tax rate and trigger extra taxes.
To avoid this:
Spread out income
If possible, defer bonuses or postpone the sale of assets until a lower-income year.
Fill low brackets
Use Roth conversions or IRA withdrawals to “fill up” lower tax brackets.
You can try converting around $100,000/year when below the 22% bracket to maximize tax-free space.
Avoid single-year spikes
Do conversions or recognition of gains gradually rather than all at once.
Each year, use just enough IRA conversion to reach the top of your target bracket.
Coordinate With Spouses
When married, splitting income (e.g., one spouse taking Social Security and the other taking IRA distributions) can help use each spouse’s lower brackets effectively.
As an advisor, I would personally suggest you should aim to convert or withdraw just enough each year to “max out” a favorable bracket, then stop, rather than overshoot into a higher bracket.
Biggest Tax Mistakes Pre-Retirees Make
One thing I’ve realized, speaking with retirees, is that many tax mistakes are incredibly avoidable in hindsight.
1. Not prioritizing Tax-Advantaged Accounts
It’s easy to underuse tools like IRAs, 401(k)s, and HSAs, but doing so may mean missing out on current-year tax savings.
These accounts can reduce your taxable income today while helping you build long-term savings more efficiently.
2. Missing the Roth conversion window
Many people skip Roth conversions during lower-income years, then lose the opportunity once income rises or required distributions begin.
I would recommend converting strategically when your tax bracket is lower, which can help you lock in long-term tax advantages.
3. Bad RMD Timing
People spend decades contributing to traditional 401(k)s and IRAs because that’s what everyone tells them to do.
Of course, getting the upfront deduction feels great while working, but eventually that money has to come back out again as taxable income.
Waiting until the last minute for your first RMD (currently age 73) can create a problem you didn’t plan for.
Two large withdrawals in the same tax year and it can push you into a higher tax bracket and increase your overall tax bill.
4. Overlooking Income-Based “Cliff” Effects
Certain benefits phase out once your income crosses specific thresholds.
These include Medicare surcharges (IRMAA) and Affordable Care Act premium subsidies.
A small increase in taxable income can sometimes lead to a disproportionately high cost.
5. State-Tax Surprise
Then there are the state tax surprises.
Where you live matters. Many people dream about retiring somewhere warm without realizing certain states heavily tax retirement income, while others barely touch it at all.
Retiring in a higher-tax state can quietly add thousands of dollars in extra taxes each year.
6. Overlooking Charitable Strategies
Many retirees miss opportunities to use Qualified Charitable Distributions (QCDs).
These allow you to donate directly from an IRA, which can satisfy RMD requirements while also lowering your adjusted gross income.
Year-End Tax Planning Checklist for Pre-Retirees
| Checklist Item | Timing | Priority | Status | Actions |
|---|---|---|---|---|
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Max out prior-year retirement contributions
Traditional or Roth IRA, and HSA contributions for the prior tax year can usually still be made until the filing deadline. Finish any missed contribution before you file.
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Now | High | Pending |
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Take Required RMDs carefully
Check whether you have reached age 73 or will next year. For a first RMD year, decide whether to take it by December 31 or delay to April 1.
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Year-end | High | Pending |
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Review withholding or estimated taxes
Update your W-4 or estimated tax payments after retirement, stock sales, or a major life change so you do not get hit with avoidable penalties.
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ASAP | High | Pending |
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Harvest tax losses
Review taxable investments for losses that can offset gains. Unused losses can often carry forward, so make sure they are captured correctly.
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Before Dec. 31 | Medium | Pending |
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Charitable giving and itemizing
Gather donation receipts and consider bunching gifts if you are close to itemizing. Timing matters at year-end, especially around changing deduction rules.
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Before year-end | Medium | Pending |
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Use FSA or HSA funds
Spend leftover Flexible Spending Account money before it expires. If eligible, top off your HSA before year-end to maximize the deduction.
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Before reset | Medium | Pending |
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Organize tax documents
Assemble W-2s, 1099s, mortgage interest, property taxes, receipts, and other paperwork in one folder so filing season is smoother.
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Now | High | Pending |
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Update beneficiaries and documents
Confirm beneficiaries on IRAs, 401(k)s, and life insurance. Review your will, trust, and powers of attorney after any major life change.
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Year-end | High | Pending |
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FAQs
Retirement tax rules, from Social Security and RMDs to Roth planning, QCDs, estate taxes, Medicare costs, and state tax differences.
How Is Social Security Taxed?
Up to 85% of Social Security benefits may be taxable depending on your income.
Above $25,000 (single) or $32,000 (married): up to 50% may be taxable.
Above about $34,000 or $44,000: up to 85% may be taxable.
When Do RMDs Start?
Most retirees must begin taking RMDs from traditional IRAs and 401(k)s at age 73.
You can delay your first RMD until April 1 of the following year, but that could mean taking two RMDs in one year.
How Can You Reduce Taxes On IRA Withdrawals?
Roth conversions, spreading withdrawals across multiple years and Qualified Charitable Distributions (QCDs) may help lower taxes on retirement withdrawals. State tax rules can also affect how much you owe.
What Is The QCD Limit?
The annual QCD limit is about $111,000 per person for 2025 and 2026. QCDs count toward your RMD and are excluded from taxable income.
What Is The Federal Estate Tax Exemption?
The 2026 federal estate tax exemption is about $15 million per person, or $30 million for married couples. Amounts above the exemption may be taxed at 40%.
How Do State Taxes Affect Retirement?
Some states have no income tax, while others tax IRA withdrawals, pensions and investment income. Property and estate taxes can also vary widely by state.
How Do Healthcare Costs Affect Retirement Taxes?
Before age 65, ACA subsidies may depend on your income. After 65, higher income can increase Medicare premiums through IRMAA surcharges.
How Do Roth 401(k) Changes Affect Retirement Planning?
Under SECURE Act 2.0, some higher earners must make catch-up contributions to Roth 401(k)s instead of pretax accounts. Roth 401(k)s also no longer require RMDs.
State Tax Map
Click a state to see the tax snapshot for that state.