The 1 Retirement Expense You Risk Forgetting -- but Can't Afford To

Key Points

• You may know to budget for certain living costs, like housing and healthcare, in retirement.

• Many people forget about taxes in the course of their retirement planning.

• There are a number of key retirement income sources that can be taxable, so it's important to be in the loop.

• The $23,760 Social Security bonus most retirees completely overlook ›

If you consider yourself a planner, then there's one milestone you've probably already spent a lot of time thinking about -- retirement. And that's a good thing.

Given that you might spend a few decades of your life in retirement, it's not the sort of thing you want to just wing. Rather, you should make sure to create a retirement budget and figure out how you'll manage your expenses based on your various income streams.

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Now you probably know to account for certain retirement expenses, like housing, healthcare, food, and transportation. But there's one retirement expense far too many people tend to forget -- and it's a big problem.

Make sure to keep taxes in mind

A big reason so many people's retirement budgets tend to get thrown off course is that they forget about taxes. Contrary to what you may have been led to believe, taxes don't magically go away in retirement. There are a number of income sources of yours that may be taxable, including:

• Retirement plan withdrawals. If your money is in a traditional IRA or 401(k) plan, you'll pay taxes on the funds you remove. This extends to funds you're forced to remove in the form of required minimum distributions (RMDs).
• Capital gains and dividends in a regular brokerage account. If you sell stocks at a higher price than you bought them at or maintain a portfolio of dividend stocks, that could trigger a tax bill.
• Bond interest. Bonds can be a great investment for retirees due to the steady income. But unless you hold municipal bonds, you can expect a tax bill on the interest income you receive from them.
• Social Security benefits. In light of recent changes, fewer seniors are expected to owe taxes on their Social Security benefits. But you may still find that your benefits are subject to taxes, especially if you have a large amount of income coming in from other sources.
• Part-time work. Whether it's a job that pays an hourly wage or gig work, the IRS expects a share of every dollar you earn, no matter your age.

Keep in mind that if you live in a state that has an income tax, you may be looking at more than just a federal tax bill in retirement. And also, there are some states that tax Social Security specifically.

How to lower your tax bill in retirement

You may not be able to get out of paying taxes completely in retirement. But there are steps you can take to pay the IRS less money later in life. These include:

• Saving in a Roth IRA or 401(k). Roth accounts don't give you a tax break on retirement plan contributions, but withdrawals from a Roth IRA or 401(k) plan are tax-free. Roth accounts also get you out of RMDs, which means your money can enjoy tax-advantaged growth indefinitely if that's what you want.
• Doing Roth conversions. If you earn too much money to contribute to a Roth IRA directly, you can do a conversion ahead of retirement.
• Holding taxable investments for at least a year and a day. Waiting to sell investments bumps you into the more favorable long-term capital gains tax category, saving you money.
• Moving to a tax-friendly state. Retiring somewhere without an income tax, or in a state that doesn't tax Social Security, could provide some financial relief, especially if you have a lot of taxable income sources.

The last thing you want to do is plan well for retirement only to neglect to factor in taxes. Keep these points in mind as you run your numbers, and be sure to adopt these and other strategies for minimizing your tax burden later in life.

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