What Are the Biggest First-Year-of-Retirement Tax Mistakes?
Last reviewed: July 2026
The biggest first-year-of-retirement tax mistakes are withdrawing too much too fast, mistiming required minimum distributions, skipping tax withholding once a paycheck disappears, and ignoring how those moves ripple into Social Security taxation, Medicare premiums, and Maryland state tax. One uncoordinated year can quietly cost a retiree several thousand dollars. The fix is to project your full-year income before you touch an account, not after.
That first year off the payroll feels like freedom. It is also the year the tax code stops being on autopilot for you. Your employer no longer withholds anything, new rules from the SECURE 2.0 Act change your required minimum distribution timing, and the decisions you make in January echo through your tax return the following April.
On This Page
- Key Takeaways
- Why Does the First Year of Retirement Trip Up Smart People?
- How Much Should You Withdraw in Your First Year?
- When Do RMDs Start, and Why Does the Timing Matter?
- Who Handles Your Tax Withholding Once the Paycheck Stops?
- How Do Withdrawals Affect Social Security and Medicare?
- What Does Maryland Tax in Your First Year of Retirement?
- Frequently Asked Questions
- Ready to Plan Your First Year the Right Way?
- Disclosures
Key Takeaways
- The 2026 standard deduction is $32,200 for married couples filing jointly, with an extra $1,600 per spouse age 65 or older.
- Required minimum distributions now begin at age 73, rising to 75 for anyone born in 1960 or later.
- Up to 85% of Social Security benefits become taxable once combined income passes $44,000 for joint filers.
- Maryland fully exempts Social Security and offers a pension exclusion worth up to $40,600 per person age 65 or older in 2026.
- Large withdrawals can trigger Medicare IRMAA surcharges above $218,000 of MAGI for couples.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate retirement tax planning since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff sees the same thing every January: the clients who get burned aren't careless, they just treated retirement like a continuation of their working years, and the tax code does not work that way.
Why Does the First Year of Retirement Trip Up Smart People?
The first year of retirement trips up smart people because they manage it like a normal income year, when it is anything but. Your paycheck stops, so withholding stops. Your accounts become your income, so every dollar you pull becomes a tax decision. And the rules governing that money keep moving, from RMD ages to the One Big Beautiful Bill provisions reshaping deductions in 2026.
Here is the pattern I watch play out. A couple retires with a healthy six-figure portfolio, feels prepared, and starts spending the way they always planned to. Nobody runs the projection first. By the time the tax return arrives, they have crossed a bracket line, made more of their Social Security taxable, or set up an underpayment penalty they never saw coming.
What changes about taxes the moment you stop working?
Three things change at once. Withholding disappears, because no employer is sending money to the IRS on your behalf anymore. Your income now comes from accounts that are taxed differently from each other: a traditional IRA withdrawal is ordinary income, a Roth withdrawal usually is not, and a brokerage sale generates capital gains. And the federal rules around retirement income, including the 2026 standard deduction of $32,200 for joint filers and a new deduction for seniors, shift in ways that reward planning and punish guessing.
At Chesapeake Financial Planners, we frame this entire transition through our R.U.D.D.E.R. Method™, which is Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. The first year of retirement is where that process earns its keep, because the cost of skipping it is measured in real dollars.
How Much Should You Withdraw in Your First Year?
You should withdraw only what your spending plan requires after accounting for taxes, not a round number that simply feels about right. The mistake I see most often is pulling a large lump sum, say $60,000 from a $600,000 traditional IRA, without checking what that does to your bracket. That single choice can push you into a higher marginal rate, make more of your Social Security taxable, and raise your Medicare premiums two years later.
Picture a Bel Air couple who retires with a $600,000 traditional IRA. They decide to take $60,000 the first year for living expenses, on top of $20,000 in Social Security and $10,000 in dividends. Their income lands near $90,000 before deductions. Run the same plan with a $40,000 withdrawal instead, and they may stay in a lower bracket while drawing the difference from a brokerage account or cash, where the tax treatment is gentler.
What withdrawal order keeps your tax bill lowest?
Start by estimating your full-year spending, then map your income sources against the 2026 IRS tax brackets and the standard deduction before you withdraw a dollar. A married couple both over 65 gets the $32,200 standard deduction plus an additional $1,600 each, and may also qualify for the new $6,000-per-person senior deduction that phases out between $150,000 and $250,000 of income for joint filers. Those deductions create room to withdraw tax-efficiently. The lever here is not your investment return. It is which account you tap and how much, and you control both.
There is a second move worth understanding, often called tax bracket harvesting. If your income sits comfortably below the top of a bracket, you can deliberately fill the rest of that bracket with a Roth conversion or an extra taxable withdrawal, paying tax at today's known rate rather than an unknown future one. Done across several low-income years, this builds three distinct tax buckets: pre-tax accounts, Roth accounts, and taxable brokerage money. When you reach the years where required distributions and full Social Security stack up, those buckets give you the flexibility to draw from whichever one keeps your bracket, your IRMAA tier, and your Maryland bill lowest in any given year.
What is the right retirement withdrawal order for your accounts?
When Do RMDs Start, and Why Does the Timing Matter?
Required minimum distributions now start at age 73 for most people, and the timing matters because mistiming them cuts both ways. Under the SECURE 2.0 Act, anyone born from 1951 through 1959 begins RMDs at 73, and anyone born in 1960 or later waits until age 75. Pull money out thinking an RMD is due before it actually is, and you may have taken too much in a year you could have left it compounding tax-deferred.
The reverse error is worse. Miss a required distribution once you are past your beginning date, and the IRS applies a penalty on the shortfall. SECURE 2.0 reduced that penalty from 50% to 25%, and to 10% if you correct it promptly, but a self-inflicted penalty is still money you never had to lose.
How do you calculate your first RMD?
Find your required beginning date from your birth year, then calculate the distribution using the IRS Uniform Lifetime Table and your prior year-end account balance. Divide the balance by your age factor, and that figure is the minimum you must withdraw and report as ordinary income. The years before your RMDs begin are some of the most useful planning windows you get, because your income is often temporarily low. That gap is exactly when a Roth conversion can move money out of the tax-deferred bucket at a lower rate, shrinking the RMDs that would otherwise stack up later.
What are the rules and strategies for required minimum distributions?
When does a Roth conversion make financial sense and how do you execute it?
Who Handles Your Tax Withholding Once the Paycheck Stops?
You do, and that is the trap. While you were working, your employer withheld federal and state tax from every check automatically. The day you retire, that stops cold, but the tax does not. IRA withdrawals, 401(k) distributions, and taxable investment income are all still taxable, and if nothing is withheld, you can walk straight into an underpayment penalty when you file.
Say you withdraw $50,000 from your IRA, collect $15,000 in dividends and interest, and receive $12,000 in Social Security. With no withholding and no estimated payments, you could owe a meaningful penalty on top of the tax itself. The IRS expects to be paid as income is earned, not in one lump the following spring.
Should you use withholding or quarterly estimated payments?
Either works, and many retirees use both. Project your taxable income, subtract your standard deduction, and map the result to your bracket. Then ask your IRA or 401(k) custodian to withhold federal and, where it applies, Maryland state tax directly from your distributions, or set up quarterly estimated payments to cover income that has no withholding. Withholding from an RMD late in the year is a quiet planning trick worth knowing: the IRS treats withheld tax as paid evenly across the year, which can erase an underpayment that built up earlier. Check the math at midyear and adjust, because guessing in January and never revisiting it is how penalties happen.
The retirees who get tripped up here are rarely the ones who ignored taxes entirely. They are the ones who set withholding once, in their first January, and assumed it would carry them. Then a mid-year capital gain, a larger-than-planned withdrawal, or a Roth conversion changes the picture, and the December tax bill does not match the January estimate. I tell clients to treat the first year as a live experiment: set a reasonable withholding rate, then recheck after you file that first return, when you finally have real numbers instead of projections. By year two, you know your pattern. Year one is the one that bites people, which is exactly why it deserves a second look in June rather than a surprise the following April.
Do I need to pay quarterly estimated taxes?
How Do Withdrawals Affect Social Security and Medicare?
Large withdrawals can make more of your Social Security taxable and raise your Medicare premiums, and most retirees do not see the connection until it costs them. Up to 85% of your Social Security benefits can be taxed once your combined income, defined as adjusted gross income plus nontaxable interest plus half of your benefits, climbs high enough. For married couples, taxation begins at $32,000 of combined income and reaches the 85% tier above $44,000. A big IRA withdrawal is often what tips someone over that line.
Consider a retiree drawing $30,000 of Social Security who also withdraws $40,000 from a traditional IRA and earns $10,000 in investment income. Their combined income runs to roughly $55,000, enough to make a large share of those benefits taxable. The 2026 cost-of-living adjustment raised benefits by 2.8%, which is welcome, but a clumsy withdrawal can hand a chunk of that raise back to the IRS.
What income level triggers Medicare IRMAA and the net investment income tax?
Two thresholds catch retirees by surprise. The Medicare income-related monthly adjustment amount, or IRMAA, adds a surcharge to your Part B and Part D premiums once your modified adjusted gross income exceeds $218,000 for joint filers in 2026, and IRMAA looks back two years, so a single high-income year today raises your premiums later. Separately, the 3.8% net investment income tax applies to investment income above $250,000 of MAGI for couples. The defense against both is the same: spread income across years rather than spiking it. Sell appreciated positions gradually, time Roth conversions deliberately, and keep one eye on your MAGI all year long.
This is also where the Tax Cuts and Jobs Act and its scheduled changes matter. Planning as though today's rates are permanent is a gamble. Building diversified tax buckets, some pre-tax, some Roth, some taxable, gives you the flexibility to adapt no matter which way rates move.
Is Social Security Taxable? 2026 Tax Rules Explained
What is IRMAA, and how does income raise my Medicare premium?
What Does Maryland Tax in Your First Year of Retirement?
Maryland gives retirees a genuine break on some income and quietly taxes the rest, so your first year here demands a state plan, not just a federal one. The good news first: Maryland fully exempts Social Security benefits from state income tax, so the federal taxation of your benefits does not follow you onto your Maryland return. The state also offers a pension exclusion of up to $40,600 per eligible person age 65 or older in 2026, which shelters a slice of pension and certain retirement income.
The catch is that the pension exclusion is reduced dollar-for-dollar by your Social Security and Railroad Retirement income, and IRA and 401(k) withdrawals are taxed by Maryland as ordinary income on top of your local county tax. For a Forest Hill or Bel Air retiree, that combined state-and-local bite is real, and it is why we project both federal and Maryland tax together rather than treating the state return as an afterthought.
The local-tax layer is the part people forget. Every Maryland county levies its own income tax on top of the state rate, and Harford County's local rate applies to the same retirement-account withdrawals the state taxes. So the same $50,000 IRA distribution that pushed up your federal bill also carries a state and a county charge here. Retirees weighing a move out of state often discover that Maryland's full Social Security exemption and pension exclusion offset more of that than they expected, which is why the relocate-or-stay decision deserves an actual projection rather than a hunch. We run those numbers side by side so a Harford County retiree can see the real after-tax difference before packing a single box.
Does the Maryland pension exclusion help federal retirees at Aberdeen Proving Ground?
Yes, and it is one of the most overlooked benefits for the federal and military retirees we work with across Harford County. A FERS or CSRS annuity counts as pension income that can qualify for Maryland's exclusion, and there is a separate, more generous subtraction available to retired military for their service pension. Aberdeen Proving Ground retirees often carry a Thrift Savings Plan balance too, and TSP withdrawals follow the same RMD and ordinary-income rules as a private 401(k). Coordinating the FERS annuity, Social Security, and TSP draws in the right order is where a federal retiree keeps the most after-tax income. Jeff Judge has sat with enough APG families to know the difference between a coordinated first year and a reactive one often runs into the thousands.
How Can Maryland Retirees Reduce Their State Tax Burden?
How do I coordinate my FERS pension, TSP, and Social Security for the best retirement outcome?
What is the best strategy for withdrawing from my TSP when I retire?
Frequently Asked Questions
What is the single most common tax mistake in the first year of retirement?
The most common first-year mistake is withdrawing a large round number from a traditional IRA without projecting the tax impact first. That single move can push you into a higher bracket, make up to 85% of your Social Security taxable, and raise your Medicare premiums two years later. Run a full-year income projection before you take the first distribution.
When do I have to start taking required minimum distributions?
Required minimum distributions start at age 73 for anyone born between 1951 and 1959, and at age 75 for anyone born in 1960 or later, under the SECURE 2.0 Act. Your first RMD can be delayed until April 1 of the year after you turn 73, though doubling up two distributions in one year can spike your taxable income.
How much of my Social Security will be taxed in retirement?
Up to 85% of your Social Security benefits can be federally taxable, depending on your combined income, which is your AGI plus nontaxable interest plus half your benefits. For married couples, taxation begins at $32,000 of combined income and reaches the 85% tier above $44,000. Maryland, by contrast, fully exempts Social Security from state tax.
Do I need to pay estimated taxes once I retire?
Yes, in most cases, because no employer is withholding tax from a paycheck anymore. You can either ask your IRA or 401(k) custodian to withhold federal and Maryland tax from distributions or make quarterly estimated payments. Withholding from a year-end RMD is treated as paid evenly across the year, which can prevent an underpayment penalty.
How does a large withdrawal affect my Medicare premiums?
A large withdrawal can raise your modified adjusted gross income above the 2026 IRMAA threshold of $218,000 for joint filers, which adds a surcharge to your Medicare Part B and Part D premiums. IRMAA uses your income from two years prior, so a single high-income year today increases your premiums later. Spreading income across years is the main defense.
Is Maryland a tax-friendly state for retirees?
Maryland is partly tax-friendly for retirees. It fully exempts Social Security benefits and offers a pension exclusion of up to $40,600 per person age 65 or older in 2026, with an enhanced subtraction for military retirees. However, Maryland taxes IRA and 401(k) withdrawals as ordinary income and adds a county-level local tax, so withdrawals still need careful planning.
Should I do a Roth conversion in my first year of retirement?
A Roth conversion often makes sense in the low-income years between retiring and starting RMDs, when your tax bracket may be temporarily lower. Converting then moves money out of your tax-deferred accounts at a reduced rate and shrinks future required distributions. The right amount depends on your bracket, your Medicare IRMAA thresholds, and your other income, so model it before converting.
Ready to Plan Your First Year the Right Way?
Your first year without a paycheck does not run itself, and the difference between a coordinated plan and a reactive one shows up directly in what you keep. Avoiding these first-year-of-retirement tax mistakes starts with one full-year projection of your income, withdrawals, and withholding, then revisiting those numbers every year. Jeff Judge and the Chesapeake team serve families, federal retirees, and business owners across Harford County and the Baltimore metro. Schedule a free fit call.
A version of this article originally appeared in Kiplinger.
Want to go deeper? Our Tax Strategies in Retirement Checklist walks through this step by step.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
