Many look forward to retirement as a time of financial simplicity, but unexpected taxes can quickly complicate even the best-laid plans. From Social Security benefit taxes to Required Minimum Distributions (RMDs), hidden taxes in retirement often surprise those who thought they were finished with complex tax planning. At Berger Financial Group, we help Minnesotans identify these hidden costs early and create retirement strategies that preserve more of their hard-earned savings.
Why Hidden Retirement Taxes Are a Bigger Problem Than Most Expect
Retirement may free you from work, but it doesn’t free you from taxes. In fact, some taxes are triggered because you’re retired. Without proper retirement planning, you may pay more in retirement taxes than during your working years. Recognizing how your income, distributions, and assets interact with the tax code is the first step toward managing these costs effectively.
Social Security Benefit Taxation
Many retirees are surprised to learn that Social Security benefits can be taxed based on their total income.
How It Works
If your combined income (which includes wages, retirement distributions, and half of your Social Security benefits) exceeds certain thresholds, up to 85% of your benefits can be taxable.
- Individual filers: Taxation starts at $25,000 of combined income
- Joint filers: Taxation begins at $32,000 of combined income
We help clients plan distributions and other income sources to minimize Social Security tax burden and preserve more of their monthly benefits. Strategic withdrawals from tax-deferred accounts can help reduce how much of your Social Security is taxable.
Retirement Account Distributions & RMDs
Once you reach age 73 (or 75 for some under SECURE Act 2.0), the IRS requires you to start withdrawing from traditional retirement accounts like IRAs and 401(k)s.
Required Minimum Distributions (RMDs)
These mandatory withdrawals are taxable income and can push you into a higher tax bracket, especially if you don’t need the money for living expenses. We work with clients to:
- Time withdrawals efficiently
- Convert portions of IRAs to Roth accounts earlier
- Manage the tax impact of large distributions
Planning before RMDs begin can reduce tax liability and increase long-term wealth retention.
Capital Gains on Home Sales
Selling your primary home may seem tax-free, but you must understand some limits. Understanding the nuances of capital gains can significantly impact your financial outcome, especially during retirement.
What You Can Exclude
The IRS provides specific exclusions for capital gains tax when selling your primary residence. Here’s a closer look at what you can exclude:
- Up to $250,000 in capital gains tax exclusion for individuals
- Up to $500,000 for married couples filing jointly
If your home has appreciated significantly or does not meet IRS criteria for exclusion, part of your profit may be taxable. It’s important to understand that not all home sale profits are tax-free. Therefore, it’s wise to consult a financial advisor or tax professional before listing your property.
IRMAA Medicare Premiums
Income in retirement doesn’t just affect your taxes; it can also increase your Medicare costs.
What Is IRMAA?
The Income-Related Monthly Adjustment Amount (IRMAA) is a surcharge added to Medicare Part B and Part D premiums for higher-income retirees. These surcharges are based on your income from two years prior and can significantly increase your out-of-pocket healthcare costs. Even modest increases in income can raise your Medicare premiums. Monitoring this annually is critical.
State Taxes on Retirement Income
When planning for retirement, it’s crucial to consider not only federal taxes but also state taxes, as they can significantly impact your overall financial situation.
Know Your State’s Policy
Different states have different policies regarding the taxation of retirement income. Here are three common categories:
- Pensions and annuities
- IRA and 401(k) withdrawals
- Social Security benefits
Minnesota, for example, does tax Social Security income above certain thresholds and includes other retirement income in taxable income calculations. State tax policies vary widely. Planning for your state’s rules can lead to meaningful savings.
How to Prepare for Hidden Taxes in Retirement
Being aware of hidden taxes in retirement helps you stay in control of your income and protect your retirement lifestyle. By reviewing all income sources, strategically timing withdrawals, and planning for long-term care and healthcare premiums, you can reduce tax surprises and keep more of what you’ve earned.
At Berger Financial Group, we believe that proactive tax planning is essential for a successful retirement. From identifying potential tax pitfalls to coordinating investment and withdrawal strategies, we offer personalized guidance to help you navigate retirement with clarity and confidence.
Build a Retirement Plan That Minimizes Tax Surprises
Retirement should be a time of freedom, not financial confusion. Now that you know the most common hidden taxes in retirement, you can start taking action to protect your income and avoid costly surprises. With the right approach, you can lower your tax burden and enjoy a more stable, predictable retirement.
For guidance tailored to your goals, contact Berger Financial Group today. Start planning now and keep more of what you’ve worked so hard to build. Explore our tax & retirement planning services, and let us help you prepare for retirement with confidence.
