Once you retire, understanding your tax implications becomes even more crucial. After all, taxes don’t disappear in retirement. In fact, as you begin withdrawing from your retirement savings, you may be surprised to learn that your tax burden could actually increase.

In this week’s Better Money Boston with WCVB Channel 5, Nicholas J. Colantuono, CFP® explains how you can avoid common “tax traps” and keep more of what you’ve earned in retirement.

Traditional Retirement Accounts

You followed all the right steps to reach this milestone – working, earning, saving, and growing your money in tax-deferred retirement accounts. But now that you’re withdrawing from those accounts, it’s important to remember that every dollar you take out is considered taxable income, both at the federal and state levels. Strategically timing these withdrawals, along with those from other types of accounts, is essential to minimizing your tax liability.

Social Security Taxes

Your relationship with Social Security and taxes begins as soon as you start working, with FICA (Federal Insurance Contributions Act) taxes being withheld from each paycheck. But this relationship doesn’t necessarily end when you retire. Once you start receiving Social Security benefits, many retirees are surprised to learn that they may also owe taxes on that income.

Whether your benefits are taxed depends on your total combined income. Based on this total, you could pay taxes on 0%, 50%, or even up to 85% of your benefits. Understanding where you fall on this spectrum can help you better plan for retirement and avoid unexpected tax bills.

Required Minimum Distributions (RMDs)

If you still have money in your 401(k), IRA, or other tax-deferred accounts when you reach age 73 or 75 (depending on your birth year), you’ll have to take required minimum distributions (RMDs). This is money you haven’t paid taxes on yet, and the IRS is determined to collect its share. RMDs can carry significant tax consequences if you’re not prepared. Since they are treated as ordinary income, RMDs could push you into a higher tax bracket, possibly increasing your tax obligation.

This is why having a solid retirement plan is essential, as it can help you avoid this and other costly tax traps. By working with a financial professional, you can navigate these complex tax situations more effectively. Together, you’ll be able to develop and manage a comprehensive financial strategy, with a focus on minimizing the tax impact on your retirement income.