5 Retirement Tax Traps to Watch in 2026

Even in retirement, some income sources can unexpectedly raise your federal and state tax bills. Here's how to avoid costly surprises. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.You are now subscribedYour newsletter sign-up was successfulWant to add more newsletters?Delivered dailyKiplinger TodayProfit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. 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That's because income sources, like required withdrawals, Social Security benefits, and investment gains, can quietly push you into higher federal tax brackets.Understanding these and other retirement tax traps can help you avoid surprises in 2026 and make your retirement dollars go further. Let's dive in. Starting at age 73, retirees must take required minimum distributions (RMDs) from traditional IRAs and 401(k)s. Missing an RMD or withdrawing the wrong amount can trigger a penalty of up to 25%. Under the SECURE 2.0 Act, that penalty can drop to 10% if the mistake is corrected in a timely manner using IRS Form 5329. Large withdrawals can also push other income into higher tax brackets.Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.RMD key points:Example:Imagine a retiree with a $400,000 IRA whose RMD for the year is $15,000. If they fail to withdraw it on time, the penalty could be $3,750 (25% of the RMD). By correcting it quickly, that penalty drops to $1,500, saving $2,250 — all without changing their overall retirement plan.Tax Tip: Plan withdrawals strategically. Splitting RMDs across multiple accounts or timing them in lower-income years can help manage your tax burden. Also, always correct any missed RMDs promptly to minimize IRS penalties.Up to 85% of Social Security benefits may be taxable depending on your "combined income." Other retirement income, like IRA withdrawals, pensions, or investment dividends, increases that amount, which can make more of your Social Security subject to federal income tax.Key points about taxes on SS benefits:Example:Suppose a single retiree receives $20,000 in Social Security and $15,000 from IRA withdrawals. Their provisional income would be $20,000 ÷ 2 + $15,000 = $25,000, putting 50% of their Social Security benefits into taxable income. If they withdraw $10,000 more from their IRA, their provisional income rises to $30,000, and up to 85% of benefits could become taxable.Tax Tip: Monitor your combined income. Consider timing withdrawals from taxable accounts to reduce the taxable portion of your benefits.Note: You may have heard that the Trump/GOP 2025 tax and spending bill eliminates taxes on Social Security benefits. It does not. (The new law doesn't change the Social Security benefit tax formula or the IRS "combined income" thresholds.)But the 2025 Trump tax bill does contain a new tax deduction for older adults.Senior Bonus Deduction key points:Yes, the new deduction can lower taxable income and thereby potentially reduce the portion of Social Security benefits subject to federal income tax. However, the benefit phases out for higher earners.For more information, see our report: How the $6,000 Senior Bonus Deduction Works.Even in retirement, sales of stocks, bonds, and mutual funds can trigger capital gains taxes. Long-term gains are taxed at 0%, 15%, or 20%, depending on income. Additionally, the net investment income tax (NIIT) of 3.8% can apply to higher earners. Dividends are also taxed differently depending on whether they are qualified.Key points on capital gains taxes in retirement:Example:A retiree sells $50,000 worth of stock gains in a year with little other income and pays 0% long-term capital gains tax. In a year with higher withdrawals or pensions, that same $50,000 could be taxed at 15% or higher.Tax Tip: Harvest gains in lower-income years or use tax-loss harvesting to offset taxable gains.Most pension payments are taxable as ordinary income. With annuities, the portion representing earnings (not principal) is taxed. Large pension payouts or annuity distributions can unexpectedly push you into a higher tax bracket, affecting other income sources like your Social Security benefits.Key points on annuity and pension income tax in retirement:Example:A retiree receiving a $40,000 annual pension and $20,000 in IRA withdrawals could find themselves in a higher federal bracket than expected, causing a larger portion of Social Security benefits to become taxable.Tax Tip: If you have multiple income streams, consider staggering distributions to avoid stacking taxable income.Relatively few states are truly tax‑friendly on all types of retirement income. Many either tax pensions and IRA withdrawals or offer partial tax breaks on retirement income. So even small changes in residency can affect your taxes.Key points on state retirement taxes:Example:Some retirees move from low- or no-income-tax states like Texas or Florida to higher-tax states to be closer to family or for lifestyle reasons. For instance, a retiree relocating from Florida to North Carolina might find that their IRA and pension withdrawals are now fully taxable, while Social Security remains fully exempt. That could add anywhere from $5,000–$10,000 or more in state taxes annually, even though their federal tax situation hasn’t changed.Tax Tip: Before relocating, research both federal and state tax implications of your retirement income. A tax-friendly move can protect more of your nest egg, while an overlooked state rule can create unexpected costs.To learn more, see our guide: Retirement Taxes: How All 50 States Tax Retirees.Even routine distributions and benefits can carry tax consequences. For retirees, monitoring RMDs, Social Security, investment income, pensions, and new state tax rules now can help you avoid surprises at tax time.To stay ahead of the curve, review your expected income streams, plan withdrawals strategically, and consult a tax professional to optimize your retirement tax strategy.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.Kelley R. Taylor is the senior tax editor at Kiplinger.com, where she breaks down federal and state tax rules and news to help readers navigate their finances with confidence. A corporate attorney and business journalist with more than 20 years of experience, Kelley has helped taxpayers make sense of shifting U.S. tax law and policy from the Affordable Care Act (ACA) and the Tax Cuts and Jobs Act (TCJA), to SECURE 2.0, the Inflation Reduction Act, and most recently, the 2025 “Big, Beautiful Bill.” She has covered issues ranging from partnerships, carried interest, compensation and benefits, and tax‑exempt organizations to RMDs, capital gains taxes, and energy tax credits. Her award‑winning work has been featured in numerous national and specialty publications.

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