5 Tax Traps Retirees Can Fall Into — and How To Avoid Them

Core Insights - Retirement introduces new tax challenges that can lead to significant financial losses for retirees if not managed properly [1] Group 1: Required Minimum Distributions (RMDs) - Retirees must begin taking required minimum distributions from certain retirement accounts at age 73, including traditional IRAs and 401(k)s [2] - The RMD amount is calculated based on the previous year's balance divided by a life expectancy factor from IRS guidelines [3] - Failing to withdraw the RMD by year-end incurs a 25% excise tax on the amount not withdrawn, which can be reduced to 10% if corrected within two years [4] Group 2: State Taxes - Relocating during retirement can significantly impact tax situations due to varying state tax rules [5] - States without income tax may still impose property, sales, and estate taxes that affect overall financial health [6] - Some states provide exemptions or deductions for specific retirement income types, while others do not, necessitating careful analysis [7] Group 3: Social Security Benefits - There is a common misconception that Social Security benefits are tax-free, which is not accurate [8]