Why So Many Retirees Are Blindsided by Taxes, and How to Work to Avoid It

If you’ve saved diligently for retirement, you’ve done a lot right. Yet many retirees still feel blindsided when taxes start taking a bigger bite than expected. It’s frustrating—and it can be confusing—especially when you thought you were “doing the smart thing” for decades.

Here’s the empowering truth: most retirement tax surprises are preventable. With a clear understanding of how different accounts are taxed—and a plan for when to use them—you can keep more of what you’ve earned and feel more confident about your retirement income.

Why retirement taxes catch so many people off guard

For years, the dominant message was simple: defer taxes now by contributing to pre-tax retirement accounts like 401(k)s and 403(b)s. That approach helped many households build impressive balances.

The catch is that tax-deferred doesn’t mean tax-free.

When you retire, withdrawals from pre-tax accounts are generally taxed as ordinary income. If most of your money is in those accounts, you may have less control over your tax bill than you expected—especially when other income sources start stacking on top.

Common reasons retirees feel surprised include:

• Most savings are concentrated in pre-tax accounts
• Withdrawals are taxed as ordinary income
• Required Minimum Distributions (RMDs) can force taxable income higher
• Social Security benefits may become taxable depending on total income
• Pensions and investment income add to the tax “pile”

The three tax “buckets” that shape your retirement tax bill

One practical way to think about retirement planning is by separating your money into three tax buckets. Each bucket plays a different role in controlling taxes.

Pre-tax accounts (taxed later)

These include:

• Traditional IRA
• 401(k)
• 403(b)
• SEP IRA / SIMPLE IRA (for some savers)

You generally received a tax deduction when contributing, but withdrawals are typically taxed as ordinary income.

After-tax brokerage accounts (taxed differently)

These are often called “non-qualified” accounts—like a standard investment or brokerage account funded with dollars you’ve already paid taxes on.

Key points:

• Dividends and interest may be taxable along the way
• Long-term gains may be taxed at capital gains rates, which are often lower than ordinary income rates
• You may have more flexibility with timing and strategy

Roth accounts (potentially tax-free)

Roth accounts (like a Roth IRA or Roth 401(k)) are funded with after-tax dollars, and qualified withdrawals can be tax-free.

Why many retirees value Roth assets:

• Tax-free growth (when rules are met)
• Tax-free qualified withdrawals
• Often more flexibility later in retirement

Why “tax flexibility” matters more than most retirees realize

Tax flexibility means having choices.

If most of your portfolio is pre-tax, you may be forced to take withdrawals that push you into higher tax brackets—especially later in retirement. But when you have a mix of pre-tax, after-tax, and Roth accounts, you can often be more strategic about where income comes from each year.

Tax flexibility can help you:

• Manage your taxable income intentionally
• Stay in a more favorable tax bracket
• Reduce the chance of tax spikes later in life
• Coordinate withdrawals with Social Security and other income sources

For many retirees, controlling taxes becomes just as important as picking investments.

The overlooked planning window before RMDs begin

RMDs are a major reason retirees see taxes rise later—especially if their accounts have grown for years without withdrawals.

What are RMDs?

An RMD (Required Minimum Distribution) is the minimum amount the IRS requires you to withdraw from certain pre-tax retirement accounts starting at a specified age. Those withdrawals are generally taxable.

Why the years before RMD age are so important

Many people retire in their early-to-mid 60s and delay touching retirement accounts because they “don’t need the money yet.” That can be sensible in some cases—but it can also backfire if it leads to very large balances by the time RMDs start.

A simplified example:

• Retire at 63
• Don’t withdraw from pre-tax accounts for 10 years
• Account grows significantly over that period
• RMDs begin and force higher taxable withdrawals each year

Those forced withdrawals can combine with Social Security and pensions to increase taxes and reduce flexibility.

Social Security taxes: the surprise that sneaks up on people

Another common frustration is learning that Social Security benefits can become taxable depending on your total income.

Many retirees assume Social Security is “tax-free.” In reality, a portion of benefits may be taxable based on your income from sources like:

• IRA / 401(k) withdrawals
• Pensions
• Interest and dividends
• Capital gains

Once withdrawals and other income rise, more of your Social Security can become taxable—sometimes up to a significant portion—adding to the feeling of “taxes on top of taxes.”

Roth conversions: a strategic move for the right situation

If you don’t need extra spending money today, one strategy that may help is a Roth conversion.

A Roth conversion generally means:

• Moving money from a pre-tax account (like a traditional IRA) into a Roth account
• Paying taxes on the converted amount now
• Potentially benefiting from tax-free growth and withdrawals later (when rules are met)

Why retirees consider partial conversions:

• You may be able to convert amounts that keep you in a lower tax bracket
• You can reduce future RMD exposure
• You can build a pool of potentially tax-free funds for later years

This isn’t a one-size-fits-all move, but in the right plan, it can be a powerful tool.

The most common retirement tax mistake

The biggest mistake is simple: being unintentional.

Many people follow the defaults:

• “Put everything pre-tax because that’s what everyone does”
• “Max out the retirement plan and I’ll worry about it later”
• “I don’t need withdrawals now, so I’ll leave everything untouched”

But retirement taxes aren’t just about what you save—they’re about how your money is taxed when you use it.

Being intentional means coordinating:

• Which accounts you contribute to
• Which accounts you withdraw from
• When you take income
• How you manage tax brackets year to year

Conclusion: you don’t have to guess your way through retirement taxes

A strong retirement plan isn’t only about investments—it’s also about keeping what you’ve built. By understanding your tax buckets, planning ahead of RMDs, and coordinating Social Security with withdrawal strategies, you can reduce unpleasant surprises and feel more in control.

If you’d like a clearer view of how taxes may impact your retirement income, schedule a no obligation introductory call. We’ll talk through your situation, identify potential pressure points (like RMDs and Social Security taxation), and help you understand what options may be worth exploring.

Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. For current FFG information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with FFG’s CRD# 315329

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.