Each year, thousands of retirees end up paying extra taxes and penalties—sometimes without even knowing why. According to the IRS, the most common reason is simple: they missed a rule, a deadline, or failed to update something they thought was fine. These aren’t massive errors. In fact, most are small and avoidable. But once you’ve made them, the financial impact can be serious.
You’ve spent your working years saving, investing, and planning. Retirement is supposed to be the time to enjoy it. Still, the rules around retirement income, taxes, and distributions don’t disappear when you stop working. If anything, they become more important. Knowing the rules—and the traps—is one of the best ways to protect what you’ve built.
Let’s walk through some of the most common retirement mistakes that lead to penalties and how to steer clear of them.
1. Missing Required Minimum Distributions Can Cost You Big
Once you reach a certain age, the IRS expects you to start withdrawing money from your retirement accounts, such as traditional IRAs and 401(k)s. These are called required minimum distributions, or RMDs. If you don’t take them on time, you face a penalty of 25% of the amount you were supposed to withdraw. That’s a hefty fine.
What trips people up is not just the deadline but the math behind the withdrawal. Your RMD amount is based on your account balance and your age. These are known as RMD factors by age, and they’re listed in IRS tables. The older you get, the higher your annual withdrawal requirement becomes. If you’re turning 73 in 2025, for example, you must take your first RMD by April 1, 2026, and another by December 31 of the same year.
This can be confusing, especially if you have multiple accounts or if your financial institution doesn’t send reminders. That’s why it’s smart to mark these dates and double-check your totals with a tax professional.
2. Waiting Too Long to Sign Up for Medicare
Many people assume Medicare kicks in automatically at age 65, but that’s not always true. If you’re not receiving Social Security yet, you need to sign up for Medicare yourself. And if you miss your initial enrollment period—the three months before, the month of, and three months after your 65th birthday—you could pay for it every month going forward.
The penalty for late enrollment in Part B adds 10% to your monthly premium for every 12 months you delay. That increase lasts for life. Part D, which covers prescriptions, also has a penalty if you go without creditable coverage for too long.
The fix is easy: mark your calendar as you approach 65, and research your options early. Even if you’re still working, you may still need to enroll to avoid penalties.
3. Getting Surprised by Taxes on Social Security
It often catches retirees off guard, but Social Security income can be taxed. How much depends on your combined income, which includes wages, interest, dividends, and half of your Social Security benefits. If your combined income crosses certain limits—$25,000 for individuals and $32,000 for married couples—then up to 85% of your Social Security can be taxable.
Planning ahead can make a big difference. If you withdraw from your IRA or 401(k) in the same year you claim Social Security, your income might spike, pushing you into a tax bracket you didn’t expect. One way to manage this is by staggering income sources or talking to a tax advisor before filing.
4. Taking Money Out Too Early
You might think dipping into your IRA before retirement is harmless if you really need the cash, but the IRS doesn’t agree. Unless you qualify for an exception, withdrawals made before age 59½ come with a 10% early withdrawal penalty on top of regular income taxes.
There are exceptions for things like higher education costs or buying your first home, but these rules are strict. Even missing paperwork or misunderstanding the fine print can lead to penalties.
Instead of risking it, build an emergency fund outside your retirement accounts. That way, you won’t be forced to make early withdrawals if something unexpected happens.
5. Messing Up a Rollover
Changing jobs or retiring often means moving money between accounts. If you don’t do it the right way, you could end up with a big tax bill. The safest method is a direct rollover, where your funds go straight from one financial institution to another.
The problem starts when you take a distribution yourself with plans to deposit it into a new account later. If you miss the 60-day window, the IRS treats it as a permanent withdrawal—taxable, and possibly penalized.
Make sure you understand the difference between direct and indirect rollovers before moving any funds. When in doubt, ask your financial institution to handle the transfer directly to avoid mistakes.
6. Timing Roth Conversions Wisely
A Roth conversion can cut future taxes, but the timing matters. When you convert, the amount moved counts as income that year. Push it too high and you land in a steeper tax bracket, triggering a bill that may wipe out the long-term gain. A smart approach is to review your taxable income every autumn. If you have room before the next bracket, move only that slice. Repeat this each year instead of making one large move. This keeps taxes predictable and avoids penalties for underpaid estimates. A brief chat with a tax pro can confirm your safe range.
7. Accounting for State Tax Surprises
Federal rules get most of the attention, yet state taxes often create a bigger shock. A few states fully exempt pension and IRA income, many tax part of it, and some treat every dollar as ordinary income. If you split time between two states, you might even owe returns in both. Before you relocate or claim residency elsewhere, check each state’s rules on retirement income, property taxes, and inheritance taxes. Doing the research now prevents a future notice that demands back taxes plus interest. When in doubt, call the state revenue office and ask for written guidance.
8. Keeping Beneficiary Forms Current
Your will does not control who inherits your IRA or 401(k). The beneficiary form does. Many retirees forget to update that form after a divorce, a remarriage, or the birth of a grandchild. If the listed person has died, the account may pass to the estate, leading to probate delays and higher taxes for heirs. Set a reminder to review every beneficiary designation each year—retirement accounts, life insurance, and even health savings accounts. Confirm full names, birth dates, and contact details. A five-minute check can keep money out of court and put it straight into your family’s hands.
Avoiding retirement penalties is less about complex strategy and more about steady attention. Mark enrollment periods, track distribution dates, keep forms current, and seek timely advice. None of these steps take long, yet together they can save thousands and protect the nest egg you spent decades building. Set a calendar reminder today, schedule a planning session, and give your future self the gift of peace.
(Disclaimer: This content is a partnered post. This material is provided as news and general information. It should not be construed as an endorsement of any investment service. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)
