• Withdrawals are taxed as ordinary income, just like wages.
• No payroll taxes (like Social Security or Medicare) are applied, but income tax still applies.
• Roth IRAs and Roth 401(k)s, on the other hand, offer tax-free withdrawals if certain conditions are met (e.g., age 59½ and the account is at least 5 years old).
• Brokerage accounts (non-retirement) may be taxed at capital gains rates, which are often lower than ordinary income tax rates.

Strategy Tip: Diversify your retirement savings across tax-deferred, tax-free, and taxable accounts to give yourself flexibility in managing taxes during retirement.

The Martins’ Retirement Tax Surprise

After decades of hard work and careful saving, Paul and Denise Martin were ready to enjoy their retirement. At 66, they had just sold their family home in Illinois and moved to a cozy lakeside community in Michigan. With their children grown and their mortgage paid off, they felt financially secure. Their retirement plan was simple: draw $60,000 annually from their traditional IRAs to cover living expenses and travel.

But after their first full year of withdrawals, they were stunned when their tax preparer delivered the news—those IRA withdrawals had pushed them into a higher tax bracket. Not only were they paying more in federal income taxes than expected, but the increased income also nudged them closer to higher Medicare premiums and reduced eligibility for certain tax credits. What they thought was a straightforward plan turned out to be more costly than they had imagined.

Their neighbors, Luis and Carmen Rodriguez, had taken a different approach. Also in their 60s, the Rodriguezes had retired early and spent years strategically funding Roth IRAs. Now, they were withdrawing $30,000 annually—completely tax-free. Their lower taxable income kept them in a favorable tax bracket, preserved their Medicare premiums, and gave them more flexibility in managing their finances.

After a few long conversations over backyard barbecues, the Martins realized they needed to rethink their strategy. They began working with a financial advisor to diversify their income sources and explore partial Roth conversions to better balance their tax exposure. It was a lesson learned the hard way—but one that would help them preserve more of their savings in the years to come.

Social Security benefits can be partially taxable depending on your combined income:

• Up to 50% of benefits are taxable if your income is:
  • $25,000–$34,000 (single)
  • $32,000–$44,000 (married filing jointly)
• Up to 85% of benefits are taxable if your income exceeds:
  • $34,000 (single)
  • $44,000 (married filing jointly)

Strategy Tip: Coordinate withdrawals from different account types to manage your taxable income and potentially reduce the portion of Social Security that is taxed.

The Johnsons’ Tax Season Surprise

After decades of hard work, Robert and Elaine Johnson were finally enjoying their retirement in a quiet suburb of Ohio. At 68, they had settled into a comfortable routine—morning walks, volunteering at the local library, and spending weekends with their grandkids. Their income came from Social Security, which provided about $40,000 a year, and withdrawals from Robert’s traditional IRA to cover additional expenses.

That year, they withdrew $35,000 from the IRA to fund a home renovation and a long-awaited trip to Italy. But when tax season rolled around, they were blindsided by a much larger tax bill than expected. Their accountant explained that the IRA withdrawal had pushed their combined income high enough to trigger taxation on 85% of their Social Security benefits. What they thought was a smart use of their savings had unexpectedly inflated their taxable income.

Determined not to repeat the mistake, the Johnsons reevaluated their strategy. They began working with a financial planner who helped them restructure their withdrawals. Instead of relying solely on the IRA, they started drawing from a Roth IRA they had funded years earlier and a small taxable brokerage account. By mixing their income sources, they kept their combined income below the threshold that would trigger higher Social Security taxation.

The following year, their tax bill was far more manageable—and their peace of mind restored. The Johnsons learned that in retirement, it’s not just how much you withdraw, but where you withdraw it from that can make all the difference.

When Mark and Lisa decided to convert a large chunk of their traditional IRA into a Roth account in 2023, they didn’t realize it would come back to bite them two years later. In 2025, their Medicare Part B and D premiums jumped significantly due to something called IRMAA—an income-based surcharge triggered when their Modified Adjusted Gross Income exceeded $170,000. Because Medicare uses a two-year look-back to determine premiums, their well-intentioned tax move ended up costing them hundreds more per month. It was a tough lesson in how even smart financial strategies can have unintended ripple effects on healthcare costs.

Medicare Part B and D premiums are income-based. If your Modified Adjusted Gross Income (MAGI) exceeds certain thresholds, you’ll pay Income-Related Monthly Adjustment Amounts (IRMAA):

• For example, if MAGI > $170,000 (married) or $85,000 (single), premiums increase.
• There’s a two-year look-back: 2025 premiums are based on 2023 income.

Strategy Tip: Be cautious with large Roth conversions or capital gains that could push you into a higher IRMAA bracket.

The Roth Conversion Dilemma: A Tale of the Clarks

David and Marlene Clark had always been proactive about their finances. David, a retired aerospace engineer, and Marlene, a former high school counselor, had built a comfortable nest egg over the years. At ages 64 and 66, they were looking ahead to their 70s and wanted to minimize the impact of Required Minimum Distributions (RMDs) on their taxes.

After reading about Roth conversions, they decided to convert a large portion of their traditional IRA into a Roth account in one go. Their financial advisor had warned them about the potential tax hit, but they were focused on the long-term benefits—tax-free growth and no RMDs from the Roth. What they didn’t fully grasp, however, was how this move would affect their Medicare premiums.

Two years later, when Marlene turned 68 and David was 70, they were shocked to see their Medicare Part B and D premiums had nearly doubled. The reason? Their 2023 income, inflated by the Roth conversion, had pushed them into a higher IRMAA (Income-Related Monthly Adjustment Amount) bracket. Medicare uses a two-year look-back to determine premiums, and their strategic tax move had triggered an unexpected and costly consequence.

Frustrated but wiser, the Clarks decided to take a different approach moving forward. They began spreading out smaller Roth conversions over several years, carefully managing their income to stay below the IRMAA thresholds. This strategy, while slower, allowed them to continue reducing future RMDs without the surprise of inflated healthcare costs.

Their experience became a cautionary tale among their friends—proof that even smart financial moves need to be timed and sized with care, especially when Medicare is part of the equation.

When Harold turned 73, he was so focused on enjoying retirement that he overlooked a critical IRS rule: Required Minimum Distributions (RMDs). He had several traditional retirement accounts—an old 401(k), a SEP IRA, and a traditional IRA—but forgot to withdraw the minimum amount required by law. Months later, he received a notice from the IRS informing him of a steep 50% penalty on the amount he failed to withdraw. Unlike Roth IRAs, which are exempt from RMDs during the account holder’s lifetime, traditional accounts come with strict rules—and costly consequences if ignored.

• RMDs begin at age 73 (as of recent law changes).
• Applies to traditional IRAs, 401(k)s, 403(b)s, etc.
• Roth IRAs are exempt during the account holder’s lifetime.
• Failing to take RMDs results in a 50% penalty on the amount not withdrawn.

Strategy Tip: Consider Roth conversions before RMD age to reduce future RMDs and taxes.

The Thompsons’ Retirement Wake-Up Call

James and Evelyn Thompson had always prided themselves on being financially responsible. James, a retired high school principal, and Evelyn, a former librarian, had spent decades saving diligently in their workplace retirement plans. By the time they reached their early 70s, they had accumulated several accounts—James had a 401(k) from his school district and an IRA he rolled over years ago, while Evelyn had a 403(b) from her time at the public library.

At 74, they were enjoying retirement in their modest home in Oregon, spending time gardening, volunteering, and visiting their grandchildren. But one spring morning, a letter from the IRS arrived that shook their sense of security. It turned out James had forgotten to take the Required Minimum Distribution (RMD) from his old 401(k)—an account he hadn’t touched in years and had nearly forgotten about. The penalty? A whopping 50% of the amount he was supposed to withdraw.

Frustrated and embarrassed, the Thompsons turned to their financial advisor, who gently explained that while their savings strategy had been solid, their account management needed streamlining. Together, they consolidated their remaining IRAs into a single account and set up automatic RMD withdrawals going forward. The process not only simplified their finances but gave them peace of mind knowing they wouldn’t face another costly oversight.

Their story is a reminder that even the most careful savers can stumble in retirement if they don’t stay organized—and that sometimes, the best financial move is simply making things easier to manage.

When Carla retired at 62, she was eager to enjoy her newfound freedom and began withdrawing large sums from her retirement savings to travel and renovate her home. By 68, she realized her portfolio had shrunk far more than expected, putting her long-term financial security at risk. Had she followed the 4% rule—starting with a modest 4% withdrawal in the first year and adjusting for inflation—her savings might have lasted much longer. Now, she’s exploring annuities to create a steady income stream and ensure her essential expenses are covered without draining her nest egg too quickly.

• Withdrawing too much too soon can jeopardize long-term financial security.
• The 4% rule is a common guideline: withdraw 4% of your portfolio in the first year of retirement, adjusting for inflation thereafter.
• Consider guaranteed income sources like annuities to cover essential expenses.

Strategy Tip: Use a dynamic withdrawal strategy that adjusts based on market performance and spending needs.

The Parkers and the Alvarezes: A Tale of Two Retirements

When lifelong friends Tom and Linda Parker and Miguel and Rosa Alvarez retired within a year of each other, they were all 60, healthy, and excited to embrace the next chapter of life. Both couples had worked hard—Tom was a civil engineer, Linda a school administrator, while Miguel had run a small landscaping business, and Rosa worked part-time as a nurse. They had similar nest eggs, around $900,000 each, and modest homes in the same quiet neighborhood.

But their retirement paths quickly diverged.

The Parkers dove headfirst into their bucket list. They took cruises, upgraded their kitchen, bought a new SUV, and visited their grandchildren across the country several times a year. They withdrew about 6% of their portfolio annually—more than the commonly recommended 4%—believing they had plenty of time to adjust later. By the time they turned 70, they were shocked to see their savings had dwindled to less than half. Market dips and inflation had taken a toll, and they now faced the uncomfortable reality of scaling back their lifestyle just when healthcare costs were beginning to rise.

Meanwhile, the Alvarezes took a more measured approach. They used Miguel’s Social Security and a small annuity they purchased to cover their basic monthly expenses—housing, food, and utilities. They tapped their investment portfolio only for discretionary spending, withdrawing around 3% annually. They still traveled, but chose road trips and off-season deals. By age 70, their portfolio had grown modestly, giving them peace of mind and the flexibility to handle future medical needs or help their grandchildren with college.

Though both couples started with similar resources, their choices led to very different outcomes. The Parkers learned the hard way that overspending early can jeopardize long-term financial security, while the Alvarezes showed how building an income floor and spending intentionally can preserve both wealth and peace of mind.