Where Your Retirement Savings Could Quietly Lose Ground

When planning for retirement, the focus is usually on how much to save, but many people overlook how much of that money could end up going to taxes. And then tax season rolls around, and they owe more than expected.

Retirement often brings several sources of income, which could mean a mixture of tax rules. Understanding those rules before retirement can help you avoid surprises and make your savings last longer.

Pension and Annuity Income May Be Taxable

Most pension income is fully taxable if your employer made contributions with pre-tax dollars.

Annuities can work differently. If you purchased an annuity with money you’d already paid taxes on, you usually won’t pay taxes on that same money again. But any growth your money earned inside the annuity is generally taxable when you receive your payments.

You may also be able to choose to have taxes withheld from these payments throughout the year, making it easier to dodge a large tax bill when you file your return.

Required Minimum Distributions (RMDs) Can Raise Your Taxable Income

Once you turn 73, the government requires you to withdraw a minimum amount from your traditional IRA or 401(k) each year. If you skip it or take out too little, you could end up owing a penalty worth 25% of the shortfall.

The smart move is to plan ahead. Some retirees start taking smaller withdrawals well before RMDs are required. This way, they’re not forced to take out a huge chunk in one year and land in a higher tax bracket.

Social Security Benefits Can Be Taxed

Something that often catches people off guard is the fact that Social Security benefits can be taxed. Depending on your total income, up to 85% of your benefits may be subject to federal income tax. Income from retirement accounts, pensions, investments, and even part-time work can all affect how much of your benefit becomes taxable.

There’s a bit of good news for 2025 through 2028. The Trump tax bill created a federal deduction that gives taxpayers 65 and older an extra $6,000 off their taxable income ($12,000 for couples who both qualify). This is on top of the standard senior deduction already in place. It starts to phase out once your income passes $75,000 ($150,000 for joint filers). It won’t erase your tax bill, but it can reduce how much of your Social Security ends up getting taxed.

Investment Income Has Tax Consequences

Retirees can continue to invest after they stop working, but income from those investments can create its own tax obligations. If you sell stocks, mutual funds, or other investments, you could be subject to capital gains taxes. Dividend payments may also be taxable, even if you leave the money invested instead of spending it.

Before selling investments, consider how the sale could affect your tax bill for the year. In some cases, spreading sales over multiple years may help reduce taxes.

State Taxes Matter, Too

State rules vary widely. Indian, for example, Social Security benefits or military retirement pay. However, withdrawals from traditional IRAs and 401(k)s, along with most private pension income, are generally subject to Indiana’s state income tax. Depending on where you live in the state, county income taxes may apply as well.

The tax rules above aren’t exactly hidden, but they’re easy to overlook until you get the tax bill. A little planning today can leave you with more income to enjoy in your golden years.