Fix Tax & IRA Mistakes Before Retirement: Avoid SS Taxes

Wait, Social Security can be taxed like that?

Yep. Here’s the curveball: many retirees pay federal income tax on their Social Security because Congress set very low income thresholds in 1983 and 1993 and never indexed them for inflation. Not once. So even average retirees, who were never the original target, get pulled into the tax net in 2025. That’s not a political statement, just math from decades of inflation doing what it does.

The rules, in plain English: up to 50% of your benefits can be taxable once your “provisional income” tops $25,000 (single) or $32,000 (married) under the 1983 law. And up to 85% can be taxable once you cross $34,000 (single) or $44,000 (married) under the 1993 expansion. Those exact dollar amounts, $25k/$32k and $34k/$44k, are still the law in 2025. They haven’t budged since the ‘80s and ‘90s. That’s the part most folks miss.

Up to 85% of Social Security benefits can be taxable at $34,000 (single) and $44,000 (married) provisional income, thresholds set in 1983/1993 and never indexed for inflation.

Quick pause. What is provisional income? It’s your adjusted gross income + tax-exempt interest + 50% of your Social Security. Overly complicated? Kind of. But think of it like this: the IRS adds half your benefit to almost everything else you earn (yes, even muni bond interest) to decide how much of your benefit to tax. The point isn’t elegance, it’s to measure your total resources. I know, that’s probably one step too far, but it matters because high CD yields and money market income this year can tip you over a threshold without you realizing it.

Here’s the surprise I still hear at client tables: “I thought Social Security was tax-free.” It isn’t for a lot of people. In fact, with rates on Treasuries and cash still elevated in 2025 and markets throwing off capital gains earlier this year, plenty of near-retirees are drifting into the 85% bucket just from interest, dividends, and small IRA withdrawals. And once you’re there, every extra dollar can make the tax on your benefits jump, what we call a stealth marginal rate spike. Annoying? Yes. Avoidable? Sometimes.

Why bring this up now? Because IRA decisions before retirement can make the tax hit bigger, or smaller. A few examples where small tweaks help:

• Roth conversions in low-income years before claiming benefits can cut future provisional income.
• Asset location: hold interest-heavy assets in tax-advantaged accounts to avoid nudging past the thresholds.
• Withdrawal sequencing: take from taxable accounts first, then pre-tax, then Roth, or mix strategically, so you don’t trigger the 85% zone needlessly.

My take, just one analyst’s view after two decades on the Street: the combo of unindexed thresholds, higher-for-longer yields, and RMDs starting at age 73 is creating accidental tax bills. It also spills into healthcare. Cross certain income levels and you can face Medicare premium surcharges (IRMAA) two years later. Not fun, and yes, preventable in many cases.

So what will you get out of this section of the guide? Three things: you’ll see how the Social Security tax formula really bites, you’ll see how your IRA choices can either amplify or soften that bite, and you’ll leave with a short, realistic checklist. Small fixes now can trim lifetime taxes, avoid Medicare surcharges, and keep you out of penalty traps later this year and beyond. It’s not sexy, but it’s real money.

Clean up the retirement paperwork mess now (beneficiaries, rollovers, and RMD age)

This is the unglamorous part that quietly trips people into paying tax twice, missing relief, or handing money to the wrong person. Quick triage now saves you from ugly letters later. And yes, the market’s still paying more on cash than the 2010s, which makes the timing of distributions and conversions matter a bit more than people think.

Start with beneficiaries, because forms beat wills

• Confirm primary and contingent beneficiaries on every IRA, 401(k), 403(b), 457, and HSA. Old forms override your will. If your ex is still listed from 2009, the plan pays the ex. I’ve seen it happen; it’s a mess to unwind and usually can’t be fixed.
• Request and save confirmation pages or screenshots. Date-stamp them. Plans merge, recordkeepers change, and files get “lost.”
• If you want different payout rules for heirs, use per stirpes language if available and check each plan’s rules, some employer plans restrict stretch options or force cash-outs.

Rollovers: don’t commingle after-tax dollars

• When you leave a job, separate pre-tax and after-tax money from your old 401(k). Under IRS Notice 2014-54, you can do a split rollover: send pre-tax to a traditional IRA and the after-tax basis to a Roth IRA in the same distribution. That preserves the basis and avoids taxable growth landing in the wrong bucket.
• Keep a copy of the plan’s distribution breakdown showing pre-tax, Roth, and after-tax subtotals. If the paper trail goes missing, you lose use in an audit.
• Watch for forced cash-outs. SECURE 2.0 raised the involuntary cash-out threshold to $7,000 starting in 2024 plan years. Small orphan accounts can get liquidated and mailed as checks, taxable if you wait too long or don’t redeposit. Consolidate prudently to avoid this.

Track your basis, Form 8606 or pay twice

• If you’ve ever made a nondeductible IRA contribution or done a backdoor Roth, file IRS Form 8606 every year it’s required. That form tracks your after-tax basis so future distributions aren’t taxed again.
• Missing 8606s are common, and it’s fixable, file retroactively with your next return, but it’s easier to keep a running PDF stack with contribution receipts and year-end IRA statements.

RMDs: age rules changed

• RMD age is 73 starting in 2023 (SECURE 2.0). It rises to 75 for individuals who hit age 74 after 2032. Translation: many born 1960 or later will have a 75 start age.
• Plan Roth conversions before RMDs begin. Once RMDs start, you can’t convert the RMD amount, and the RMD itself boosts AGI, which can push up Medicare IRMAA two years later. The earlier you right-size tax-deferred balances, the more control you keep.
• Penalty note: SECURE 2.0 cut the missed-RMD excise tax to 25% (10% if corrected in a timely manner). Still painful, but better than the old 50% hit.

Inherited IRAs: the 10-year rule confusion isn’t over

• Under the post-2019 rules, most non-eligible designated beneficiaries must empty inherited IRAs by the end of year 10. For deaths after 2019, some heirs are also expected to take annual RMDs in years 1-9 if the decedent died after their required beginning date, this is the part that’s tripped people up.
• IRS Notice 2024-35 continued penalty relief through 2024 for certain beneficiaries who didn’t take those annual RMDs, but it didn’t stop the 10-year clock. The account still has to be drained by the end of year 10.
• Eligible designated beneficiaries (spouses, minor children of the decedent, disabled/chronically ill individuals, and beneficiaries less than 10 years younger) often still get life-expectancy payouts, check your status carefully.

Bottom line: relief waived penalties for some 2024 missed annual RMDs, not the obligation to finish by year 10. Different issue entirely.

Keep a plan list and consolidate, carefully

• Maintain an inventory of every plan: provider, account number, pre-tax/Roth/after-tax balances, and beneficiaries. Add old 401(k)s, 403(b)s, 457s, SEP/SIMPLE IRAs. You’d be surprised what shows up.
• Consolidate to cut fees and simplify RMDs, but don’t lose features (like good stable value funds or in-plan Roth). With rates still elevated versus the 2010s, cash drag matters, so does fund cost.

One last thing, name a trusted contact on brokerage and IRA accounts. Not a power of attorney, just someone your custodian can call if something looks off. I started doing this after a client’s email got spoofed; we caught it because the rep had a second number to sanity-check. Boring? Sure. But boring keeps money where it belongs.

Stop the contribution mistakes that trigger 6% penalties

This is the quiet stuff that dings you year after year if you don’t catch it. The IRS charges a 6% excise tax on excess IRA contributions under IRC §4973, every year the excess sits there. One client thought a $1,000 overage was “no biggie.” Two years later it was a $120 problem, plus cleanup paperwork. The fix is simple, but fussy: ask your custodian for a return of excess contribution with net income attributable (NIA). The earnings come out with the excess; the earnings are taxable in the year of the contribution and may face a 10% penalty if you’re under 59½. If you miss the tax-filing deadline (including extensions), that 6% applies for the year, and keeps applying until the excess is removed or absorbed by a future year’s limit.

Backdoor Roth: worth it, but only if you manage pro‑rata

The backdoor Roth still works in 2025. But the pro‑rata rule counts all your traditional, SEP, and SIMPLE IRA balances on 12/31. High pre‑tax IRA balances dilute the benefit because your Roth conversion gets taxed in proportion to pre‑tax vs. after‑tax dollars. If you’ve got a large pre‑tax IRA, consider rolling it into an active 401(k) with low costs to “clear the decks” before you do the nondeductible contribution and conversion. I’ve done that shuffle myself. It’s annoying, but it’s cleaner than explaining a messy 8606.

401(k) catch-up Roth mandate, delayed to 2026

Per IRS Notice 2023‑62, the rule that high earners (wages over $145,000 from the prior year) must make catch-up contributions as Roth is delayed until 2026. Translation for this year: you have 2025 to get payroll systems and elections straight. HR teams should test file formats, payroll codes, and plan documents now so January doesn’t turn into a fire drill. I’ve seen providers still patching mid-year, don’t rely on a Friday memo.

Spousal IRA is still a thing

If you’re married filing jointly and one spouse has earned income, both spouses can fund IRAs for 2025 (subject to income limits and workplace plan coverage rules). People miss this constantly, especially when one spouse steps out of the workforce. Just watch Roth MAGI phaseouts and traditional IRA deductibility rules for the covered spouse vs. the noncovered spouse.

SEP/SIMPLE vs. personal IRAs, coordinate or you’ll overfund

Self-employed? Verify your plan document before you move money. SEP IRA contributions are employer contributions and can be made up to your tax filing deadline, including extensions. SIMPLE IRAs have employee deferral timing rules and employer match deadlines. Both live on the same pro‑rata island for backdoor Roth math. And yes, I’ve seen someone make a nondeductible IRA contribution and a late SEP top-off, then realize the backdoor got taxed to bits.

Use 2025 limits, not last year’s blog post

Contribution limits change periodically. Make deposits using the current IRS 2025 limits, not the 2024 numbers you remember from a chart you screenshotted. Also sanity‑check plan‑specific caps (some plans set lower limits). With money markets still paying more than the 2010s and equities whipping around this year, cash timing and where you stage contributions can matter for a few extra basis points, just don’t let “improve” turn into inaction.

Quick checklist: confirm your account type before funding, schedule an annual 12/31 IRA balance review for pro‑rata, use the return‑of‑excess procedure if you overshoot, and coordinate payroll changes in 2025 for the 2026 catch‑up Roth mandate.

Frequently Asked Questions

Q: Should I worry about my Social Security being taxed if I’m just “average” income?

A: Short answer: yes, at least pay attention. The thresholds are tiny and never indexed, $25k/$32k for the 50% tier and $34k/$44k for the 85% tier (single/married). Provisional income = AGI + tax‑exempt interest + 50% of your benefit. High CD and money market yields in 2025 are nudging folks over. Manage IRA withdrawals, capital gains, and consider Roth conversions before filing.

Q: How do I estimate my provisional income and avoid crossing the 85% bucket this year?

A: Add up: your AGI (wages, IRA distributions, dividends, interest, capital gains), plus tax‑exempt interest (munis count here, sneaky), plus 50% of your Social Security. If that total tops $34k single/$44k married, up to 85% of your benefit becomes taxable. Tactics: harvest losses to offset gains, space IRA withdrawals across the year, use Qualified Charitable Distributions for giving, and avoid piling CDs, bond funds, and capital gains in the same tax year. If you haven’t claimed yet, keep benefits off the table while you convert some IRA dollars to Roth in lower brackets. And watch those year-end mutual fund distributions, every December I still see surprise 1099s wreck good plans.

Q: What’s the difference between Roth conversions and QCDs for keeping Social Security taxes down?

A: Roth conversions move pre-tax IRA money into a Roth now, creating taxable income today but shrinking future Required Minimum Distributions (RMDs) and future provisional income. Good in the gap years before claiming Social Security or before RMDs start at age 73. QCDs (from IRAs directly to charity) kick in at age 70½, count toward RMDs, and keep the donation out of AGI and provisional income, cleanest way to give without raising your Social Security tax. Conversions are a preemptive fix; QCDs are a surgical tool once withdrawals are required. Use the annual IRS‑indexed QCD limit (check the current figure for 2025). I tell clients: convert when brackets are friendly, QCD when generosity and tax control intersect.

Q: Is it better to delay Social Security or claim now to manage taxes around IRAs and RMDs?

A: It depends on your cash flow, health, and tax bracket path, but purely on tax mechanics, delaying often helps. Here’s why. Claiming early brings 50% of your benefit into the provisional income math immediately, which can push you into the 85% taxable bucket once your AGI + tax‑exempt interest + 50% of Social Security crosses $34k single/$44k married. If you delay benefits, those years (say 62-69) become prime time to do measured Roth conversions in the 12% or 22% brackets, shrinking future RMDs that begin at age 73. Smaller RMDs later mean lower AGI later, which means less chance your benefits are heavily taxed in your 70s, especially relevant while cash and Treasury yields are still elevated in 2025 and could stick around into next year. A few guardrails: don’t convert so much that you trigger IRMAA Medicare surcharges later this year or next; keep an eye on state taxes; and if you retire before 65, remember ACA premium credits hinge on MAGI, so big conversions can nuke subsidies. I had a couple earlier this year, claimed at 67, did modest conversions at 68-69, and cut projected RMDs by a third, keeping them under the 22% bracket. The math won’t be identical for you, but the playbook’s similar: delay if you can fund living expenses from taxable assets, use the window to right‑size your IRA via conversions, and revisit annually. If you must claim now, consider QCDs at 70½ and tighter control of capital gains to keep your provisional income in check.

@article{fix-tax-ira-mistakes-before-retirement-avoid-ss-taxes,
    title   = {Fix Tax & IRA Mistakes Before Retirement: Avoid SS Taxes},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/fix-tax-ira-mistakes/}
}