Here are five retirement tax traps to watch in 2026 — and how to plan ahead.
Many retirees assume their tax bill will automatically shrink once they stop working. In reality, required withdrawals, Social Security income, pensions, and investment gains can quietly push you into higher tax brackets.
Here are five retirement tax traps to watch in 2026 — and how to plan ahead.
1. Required Minimum Distributions (RMDs)
Beginning at age 73, most retirees must take annual RMDs from traditional IRAs and 401(k)s. Failing to withdraw the correct amount can trigger penalties of up to 25% — reduced to 10% if corrected promptly using IRS Form 5329.RMD amounts are calculated using your prior year-end balance and IRS life expectancy tables. Each account requires its own calculation.
Example: If your RMD is $15,000 and you miss it, the penalty could be $3,750. Correcting it quickly could reduce that penalty significantly.
Planning Tip: Coordinate withdrawals carefully. Taking distributions in lower-income years or correcting errors quickly can minimize both penalties and bracket creep.
2. Social Security Taxation
Up to 85% of your Social Security benefits can become taxable depending on your “combined income,” which includes: Adjusted gross income (AGI) Nontaxable interest Half of your Social Security benefits. Additional IRA withdrawals, pension income, or dividends can increase the taxable portion of your benefits.
Example: A modest increase in IRA withdrawals can move you from having 50% of benefits taxable to 85%.
Planning Tip: Monitor your combined income carefully. Timing withdrawals strategically may help limit how much of your benefits become taxable. New Senior Bonus Deduction (Beginning 2025)A new deduction allows taxpayers age 65+ to claim up to:$6,000 (single)$12,000 (married filing jointly)This deduction applies whether you itemize or take the standard deduction and may help reduce taxable income. However, it phases out at higher income levels.
3. Investment Gains and Dividends
Selling investments in retirement can generate capital gains taxes. Long-term gains are taxed at 0%, 15%, or 20%, depending on income. Higher earners may also owe the 3.8% Net Investment Income Tax (NIIT).Capital gain thresholds adjust annually for inflation.
Example: A $50,000 gain could be tax-free in a low-income year but taxed at 15% or more in a higher-income year.
Planning Tip: Consider harvesting gains in lower-income years or using losses to offset gains.
4. Pension and Annuity Income
Most pension payments are fully taxable as ordinary income. With annuities, the earnings portion is taxable. When combined with IRA withdrawals and other income, these payments can unexpectedly increase your tax bracket and affect Social Security taxation. Some states also tax pension income.
Planning Tip:
Avoid “stacking” multiple taxable income streams in the same year without reviewing the broader tax impact.
5. State Taxes on Retirement Income
Not all states treat retirement income the same. Some tax IRA withdrawals and pensions but exempt Social Security. Others offer partial exclusions. A relocation can significantly change your tax picture.
Example: Moving from a no-income-tax state like Florida to a state that taxes retirement income could add thousands of dollars annually in state taxes.
Planning Tip: Before relocating, evaluate both federal and state tax implications.
Retirement Taxes: The Bottom Line Even routine retirement income can trigger unexpected tax consequences.RMDs, Social Security, investment gains, pensions, and state residency all play a role. Proactive planning — reviewing income streams, coordinating withdrawals, and working with a qualified tax professional — can help you preserve more of your retirement dollars.
At Pelleton Capital Management, we believe retirement income planning is not just about what you earn — it’s about what you keep. Taxes are one of the largest expenses retirees face, and without a coordinated strategy, they can quietly erode your nest egg. Our role as fiduciaries is to help you see the entire financial ‘box top’ — how your RMDs, Social Security, pensions, and investments all fit together.
If you would like a retirement tax review or a second opinion on your income strategy, we would be honored to sit down with you. A few smart adjustments today can make a meaningful difference over the next 10, 20, or 30 years. To schedule a conversation, contact our office, 480-513-1830.
Warm regards, Charles C. Scott, AIF®, CDP®
ACCREDITED INVESTMENT FIDUCIARY®CERTIFIED DEMENTIA PRACTITIONER®
Source: Kelley R. Taylor, Senior Tax Editor, Kiplinger.com
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