Deciding to retire, or at least make work optional, is one of the biggest decisions, as well as accomplishments, of your personal and professional life.
Ideally you've saved enough between 401ks, IRAs and investment accounts and you know how much your income will be and where it's going to come from. You've probably got some retirement goals for you and your spouse and you can't wait to be living them out.
A critical part of doing any retirement planning is to account for and anticipate your retirement expenses. But one of your biggest retirement expenses often gets overlooked by so many people planning for retirement.
What is it?
Taxes are one of your biggest, if not THE biggest, expense you'll have in retirement. It's not unlikely that taxes will be a 6 or 7 figure retirement expense throughout the course of your retirement. And a lot of retirees I meet severely underestimate the amount of taxes that they'll have to pay or simply think they won't have to pay taxes. Unfortunately, taxes are still a very real, and very big, expense you'll have in retirement.
So what taxes do you have to pay in retirement?
These aren't going away in retirement. You'll still have to pay income taxes on your retirement income, both federally and at the state level.
Income tax rates are some of the worst tax rates around. They range from 10% up to 37% as of 2025. As your income goes up, your tax rates go up.
In retirement you'll have various sources of income that will be subject to income taxes.
→ Social Security (Yes, your social security benefit is unfortunately taxable but this could change)
→ Pensions (military retirement, traditional work pensions)
→ Pre-tax IRA distributions and RMDs
→ Bank account interest
→ Bond Interest
→ Rental Property Income
Since income tax rates are some of the highest tax rates around and most of your income is subject to income taxes, doing some tax planning to try and reduce your lifetime tax bill throughout retirement is important and can be very impactful.
Also, don't forget that you have state income taxes in addition to federal income taxes. The rates mentioned above with the top rate being 37% are federal tax rates. Your state rate will vary depending on where you live and can either be a flat rate or progressive like the federal brackets. And again, the state income tax rates are on top of your federal income tax rates.
This is a tax that often surprises a lot of retirees. This Net Investment Income Tax, or NIIT, is a tax of 3.8% on your net investment income if you are over certain income thresholds.
The income thresholds are:
Investment income includes interest, dividends, capital gains, rental income, non-qualified annuities, and more.
The calculation for the 3.8% NIIT can be a little involved but the bottom line is that it's an additional tax that you may have to pay depending on your income. Obviously, the higher your income, and the more investment income you have, the more impactful this tax can be on your overall tax liability.
The reality of this tax just reiterates the importance of doing proper tax planning, as well as investment management, to help manage this tax and reduce this if possible during your retirement.
Also, the NIIT is subject to estimated tax provisions, which means that you may have to pay estimated tax payments throughout the year if your income/investment income is high enough. If you're required to make estimated tax payments and you don't make them then you can be charged penalties and interest further increasing your tax bill. Again, this is yet another reason to be doing proactive tax planning, along with retirement planning and investment management.
If you own your home then you'll have property taxes to pay, even if your home is paid off.
When you have a mortgage the property taxes, along with insurance, are part of your monthly mortgage payment. This makes things pretty easy. The taxes go into your escrow account and your mortgage company pays the property taxes on your behalf. But when you pay off your home, there's no longer an escrow account or a mortgage company to pay the taxes on your behalf. So you'll have to pay these taxes on your own.
Property taxes can actually be a larger expense than you may have realized in retirement, and the amount of property taxes you pay depends on where you live because some states are more expensive than others.
For example, in parts of California property taxes can be north of $60k per year, that's $5k per month!
But in Colorado you can easily pay $3k-$4k per year.
That is a huge difference in potential tax expense during retirement.
So choosing where to live in retirement can be a big consideration for your overall retirement plan, and regardless of where you live, it's important to account for taxes in your retirement plan.
If you underestimate or forget your property taxes in retirement then you may find yourself with an unpleasant surprise tax bill.
What is IRMAA?
If you've looked into Medicare at all as part of your retirement planning then you may have already heard about it, but if not, IRMAA stands for the Income-Related Monthly Adjustment Amount (IRMAA).
Essentially, it's a law that allows your Medicare Part B monthly premium to increase based on your income. The higher your income the higher your monthly premium.
Even though the IRMAA is technically a premium, I consider it a tax since the premium amount is income-related and can increase as your income goes up.
For the IRMAA, there is a 2 year lookback to see what your income was to determine if you're subject to any IRMAA.
For example, your 2025 Medicare part B monthly premium is based off your 2023 income.
Here are the IRMAA brackets for 2025.
As you can see, as your income goes up your monthly Medicare Part B premium can increase significantly resulting in a larger expense.
If you're married filing jointly and your Modified Adjusted Gross Income (MAGI) was between $344,000 and $400,000 then you, and your spouse, would be paying $480.90 per month for an annual Medicare Part B premium expense of $11,541.60.
These are not numbers to be ignored, since doing some proactive tax planning, as well as retirement planning, can help manage this cost over the course of your retirement.
It should also be noted that your Modified Adjusted Gross Income (MAGI) is used to determine your income level, and, therefore, any IRMAA. For IRMAA MAGI, you take your adjusted gross income and add back any tax-exempt interest such as municipal bond interest.
These 4 taxes are not all inclusive and you may actually have other taxes that you need to pay depending on your specific situation (income, assets, where you live, etc.). But these are the 4 main taxes I see time and time again that retirees pay and that retirees often overlook.
It is critical that you do retirement planning, but as you do retirement planning, it is equally important that you do proactive tax planning and investment management to help manage, and potentially lower your tax liability each year throughout the course of your retirement.
If you're not doing any retirement planning, tax planning and investment management you're likely leaving money on the table through overpaying in taxes.
At Didion Wealth Management, I help high-earning, busy professionals and retirees with retirement planning, tax planning and investment management so they don't overpay the IRS and plan for a beautiful retirement.
If you'd like to have a quick 15 minute call with me to see if we're a good fit to work with each other feel free to use the link below to schedule a time to talk.
Happy Retirement Planning!