Are you paying the IRS thousands more of your hard-earned money each year than necessary?

Many Americans nearing retirement seriously underestimate how much income taxes they’ll owe after leaving the workforce. Retirees already face enough challenges with inflation, market fluctuations, and healthcare expenses without the added stress of unexpected tax bills.

At 1st Choice Financial Services, Inc., we bring decades of expertise as seasoned retirement specialists in Central Pennsylvania. Our independent advisory firm, headquartered in Camp Hill, provides comprehensive financial solutions to clients in Harrisburg, Hershey, Halifax, Lancaster, Lebanon, Enola, Mechanicsburg, and the surrounding communities.

Our retirement advisors for Central Pennsylvania frequently see the same three tax mistakes repeated time and again. Knowing what they are can help you make more informed financial decisions and avoid costly mistakes.

Mistake #1 – Taking Money out of Retirement Accounts Too Early (or in the Wrong Order)

Withdrawing funds from your retirement accounts before reaching age 59½ can turn out to be a surprisingly expensive move. 

In most cases, any early distributions taken from traditional IRAs or employer-sponsored plans like a 401(k) will not only be subject to your regular ordinary income tax rate but will also trigger an additional 10% federal penalty on the amount withdrawn. This double hit of taxes and penalties can significantly reduce the net amount you receive.

You may be able to avoid the penalty if your specific plan allows for certain exceptions, such as:

• Rule of 55 distributions from employer plans
• Substantially Equal Periodic Payments (SEPPs)
• Limited hardship withdrawals, where available

From a Pennsylvania perspective, early withdrawals are not exempt from state tax unless they qualify under retirement distribution rules. This often surprises residents who assume Pennsylvania’s favorable tax treatment applies at any age.

Another common issue is the withdrawal order. Relying solely on tax-deferred accounts early in retirement can substantially increase taxable income. Many retirees use tax diversification by taking withdrawals from taxable, tax-deferred, and tax-free accounts in a coordinated way, rather than treating all accounts the same.

Mistake #2 – Missing the Roth Conversion Window Before RMDs Begin

The years between retirement and the start of Required Minimum Distributions (RMDs) can create valuable planning opportunities. During these lower-income “bridge years,” some individuals explore partial Roth conversions.

In Pennsylvania, qualified Roth withdrawals are generally state tax-free. However, conversions themselves are taxable at the federal level in the year they occur. Converting too much at once may push income into higher tax brackets.

Another often-overlooked factor is Medicare. Large conversions can increase modified adjusted gross income, potentially triggering IRMAA surcharges.

If it suits your situation and tax bracket, you may be able to convert smaller amounts over multiple years to manage the impact. This approach may help reduce future RMDs while keeping current taxes more predictable.

A 1st Choice retirement advisor in Pennsylvania can review with you potential scenarios for if and when to do Roth conversions, balancing future tax exposure with healthcare costs.

Mistake #3 – Not Managing RMDs That Can Push You Into a Higher Tax Bracket

Under the SECURE 2.0 rules, RMDs now begin at age 73, and this starting age will increase to 75 by the year 2033. Failing to take RMDs on time can lead to significant penalties.

The excise tax for missed RMDs is 25% of the amount not withdrawn, a costly consequence for those who overlook this requirement. Fortunately, if the mistake is corrected quickly, the penalty is reduced to 10%, offering some relief for prompt action.

Pennsylvania offers an advantage: qualified RMDs are generally exempt from state income tax for eligible retirees. Federally, however, RMDs increase taxable income and may affect Social Security taxation or Medicare premiums.

A common challenge, as discussed, is holding most retirement savings in pre-tax accounts. Potential planning tools include:

• Gradual Roth conversions
• Qualified Charitable Distributions (QCDs), up to $111,000 in 2026
• Coordinated tax-withholding strategies

These methods may help manage income levels once distributions begin.

1st Choice Retirement Advisors Can Help You Avoid Tax Mistakes

Some taxes can be deferred, while others may be managed through tax-aware investing and planning. With careful preparation, you may be able to reduce the long-term impact taxes have on your retirement resources.

Tax planning is an important part of retirement planning in Pennsylvania and works best when integrated with your overall financial goals. Many retirees are unaware that lowering taxes in retirement can often increase spending options more effectively than pursuing unrealistic investment returns.

As part of our wealth management Central Pennsylvania services, the 1st Choice team evaluates how tax considerations interact with income planning, Social Security timing, and investment strategy. Planning throughout the year, not just at tax time, allows for more flexibility and fewer surprises.

If you live in Harrisburg, Hershey, Lancaster, Mechanicsburg, or elsewhere in the region and want to confirm you’re not making costly tax mistakes, feel free to schedule a no-obligation retirement review with us today.

Frequently Asked Questions

Do Pennsylvania Residents Pay State Tax on Retirement Income?

Pennsylvania generally does not tax qualified retirement income, including Social Security and eligible retirement plan distributions taken after retirement age. However, wages, interest, and some early distributions may still be taxable.

At What Age Do RMDs Start in 2026?

RMDs generally begin at age 73. This starting age was established under the SECURE 2.0 Act of 2022, which raised the RMD age from 72 beginning in 2023. The law also includes a future change that will increase the RMD starting age to 75 in 2033.

Can I Avoid Taxes on RMDs in PA?

RMDs are typically exempt from Pennsylvania tax but remain subject to federal income tax, which may affect Medicare premiums or Social Security taxation.

Should I Do Roth Conversions if I Live in Central Pennsylvania?

That depends on income, tax brackets, and timing. A retirement advisor in Pennsylvania can help evaluate whether partial conversions make sense.

How Do I Find a Retirement Planning Specialist in Central Pennsylvania?

Look for an independent firm with local experience, fiduciary responsibility, and a clear focus on retirement-specific planning rather than generic, product-driven advice.

Investment advisory services offered through Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. The views, statements and opinions expressed herein are those of 1st Choice Financial, and not necessarily of Foundations or their affiliates. The content provided is for educational purposes only and the views reflected are subject to change at any time without notice. No investment, legal or tax advice is provided. Always consult with a professional. Foundations deems reliable any statistical data or information obtained from third party sources that is included in this article,  but in no way guarantees its accuracy or completeness.