With about 40% of veterans over 65 depending on Social Security for half their income, how you handle your retirement withdrawals is everything. The way you tap those funds can either protect your financial future or hand a big chunk of it over to the IRS, and most people don’t have a plan to make sure their savings last as long as they do.
Key Takeaways
- A lot of vets overpay on taxes because they don’t think about the order they pull from taxable, tax-deferred, and tax-free accounts.
- Doing a strategic Roth conversion can slash future tax bills, especially if you think you’ll be in a higher tax bracket later on.
- You have to know the Modified Adjusted Gross Income (MAGI) thresholds for Medicare Part B premiums or you’ll get hit with surprise surcharges from poorly timed distributions.
- Putting off Social Security, if you can afford it, boosts your monthly checks and gives you a great inflation-proof income source.
- To make savings last longer, vets should pull from taxable accounts first, then tax-deferred, and save tax-free accounts for last.
The 70% Overpayment Trap: Why Many Veterans Pay Too Much Tax
An independent survey found that almost 70% of retirees, vets included, are probably paying too much in taxes because of bad withdrawal strategies. This is about efficiency, not evasion. Most people just don’t get the proper sequence for tapping their accounts and default to their 401(k) or IRA because it’s the biggest pot of money, triggering higher income taxes way too early. The problem starts with a failure to plan and model different withdrawal scenarios before you actually need the money. For example, if you have a big traditional IRA and a brokerage account, pulling only from that IRA can easily shove you into a higher tax bracket for the year, which makes your entire taxable income more expensive. It’s a basic misunderstanding of how marginal tax rates work. After a career spent saving in tax-deferred accounts, many vets get a shock when those deferred taxes finally come due at rates they never saw coming, because that’s the bill for blindly following the “always defer” advice.
The Roth Conversion Conundrum: Only 15% Maximize This Strategy
According to the Investment Company Institute (ICI), a shockingly low 15% of people who could benefit from strategic Roth conversions actually do them. This is a huge missed opportunity for veterans, who often have a few low-income years at the start of retirement before their pension or Social Security kicks in. The strategy is simple: you pay taxes on your traditional IRA or 401(k) money now to make it a Roth, so all qualified withdrawals later are tax-free. If you think tax rates will go up or that you’ll be in a higher bracket later, paying the tax at today’s lower rate is an obvious win. I see this all the time, vets in their late 50s or early 60s have this golden window of low income. You can convert just enough of your traditional IRA each year to fill up the lower tax brackets (like the 10% or 12% federal brackets in 2026) without bumping yourself into a higher one. It takes a multi-year plan and some math, but the tax-free income you get down the road is worth it. A lot of advisors don’t even bring it up because it takes work to forecast, but it’s a core part of smart tax planning in retirement.
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Medicare Surcharges: 20% of Retirees Hit by IRMAA Unexpectedly
About 20% of retirees get slammed with higher Medicare Part B and Part D premiums, called the Income-Related Monthly Adjustment Amount (IRMAA), completely by surprise. It’s almost always caused by clumsy retirement withdrawals. The problem is that IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years ago, so a big, one-time withdrawal from a traditional IRA today can spike your Medicare premiums for an entire year, two years from now. For example, your 2024 income determines your 2026 premiums. The sequence of your withdrawals is everything here. Say you need a chunk of cash for a home renovation. If you pull it all from a tax-deferred account in one shot, you could be paying for it again in higher Medicare costs for years. You need a “Medicare-aware” withdrawal plan. This means you model out your income, spread large withdrawals over several years if possible, or tap accounts that don’t count toward MAGI, like a Roth IRA (qualified distributions aren’t in the MAGI calculation). This is about your whole financial picture in retirement, and Medicare premiums are a huge piece of it.
“Newsom, whose tenure as governor is coming to an end, had expressed concerns that the measure could cause the wealthy to leave the state and drive out their important income tax revenue.”
The Social Security Optimization Gap: Billions Left on the Table
Americans leave billions on the table every year by taking Social Security too early, and vets are no exception. The math is simple: for every year you wait past your full retirement age (up to age 70), your benefit grows by about 8%. That’s a guaranteed, inflation-adjusted return you can’t find anywhere else. Vets who retire early from the military often feel pressure to claim at 62, the first chance they get. But if you have other income streams like a military pension, VA disability benefits, or enough in savings, waiting to claim Social Security is one of the smartest things you can do. A good withdrawal strategy makes this possible. You can live off your taxable brokerage account in your 60s, or even do some Roth conversions, letting that Social Security benefit get bigger and bigger. That higher payout later on is your best defense against inflation and the risk of outliving your money. A lot of people grab their benefits early “just in case,” but the real risk for most is outliving their savings, and a bigger Social Security check is the best hedge against that.
Challenging Conventional Wisdom: Why “Always Maximize Tax Deferral” Isn’t Always Right
The old advice to “always maximize tax deferral” is way too simplistic and ignores the reality of retirement. Deferring taxes is good, but sticking to it rigidly can set up a massive tax bomb later on, especially for vets who’ve built up big balances in traditional IRAs and 401(k)s. Standard thinking assumes paying taxes later is always the smart move, but it doesn’t factor in Required Minimum Distributions (RMDs) starting at age 73 (as of 2026) or the real possibility of higher tax rates in the future. If you’ve deferred taxes for 30 years and have a huge tax-deferred account, your RMDs can be massive, forcing you into higher tax brackets right when you’re trying to keep your income down for Medicare. For most vets, a balanced approach is better. This means you strategically pay some tax now with Roth contributions or conversions, especially in low-income years. The goal is to minimize your lifetime tax bill. Paying a 12% tax on a Roth conversion today is far better than being forced by an RMD to pay 24% or more on that same money years from now. It’s a strategy that requires thinking ahead, and it works a lot better than just repeating an old mantra.
Handling retirement withdrawals the right way means looking at everything together, taxes, income needs, and your long-term plans. When you see how your different accounts affect your taxes and Medicare premiums, you can build a plan that actually protects your money. For veterans, the next step is to find a financial advisor who gets these tax-smart withdrawal strategies and can run the numbers on different scenarios to cut your tax bill. To learn more about getting your finances in order, check out our guide on working through finances post-service in 2026, or see if a VA cash-out refinance could help you with your goals.
The “Taxable First” Withdrawal Strategy
This common-sense strategy is about order. You spend money from your taxable brokerage accounts first. This lets your tax-deferred accounts (like a traditional IRA or 401(k)) and your tax-free accounts (like a Roth IRA) keep growing without being touched, giving you more runway before you have to start paying taxes on those distributions.
How RMDs Mess Up Your Withdrawal Strategy
Required Minimum Distributions (RMDs) start at age 73 for most people and force you to take money out of your tax-deferred accounts whether you need it or not. The IRS makes you withdraw a certain percentage each year, and that distribution counts as ordinary income. This can easily spike your income for the year, pushing you into a higher tax bracket and possibly triggering those painful Medicare IRMAA surcharges. A good plan anticipates RMDs by doing things like Roth conversions in earlier years to shrink the account balance that RMDs are calculated from.
Can You Really Avoid Taxes on Withdrawals?
No, you can’t avoid taxes completely unless every penny you saved is in a Roth account (and you follow the rules for withdrawals). But you can absolutely minimize them. Smart planning involves using Roth accounts for tax-free income, carefully managing withdrawals to stay in lower tax brackets, and being smart about when you realize capital gains. It’s about paying as little tax as legally possible over your entire retirement.
What Is the Social Security “Tax Torpedo”?
The “tax torpedo” is what happens when your other income forces your Social Security benefits to become taxable. The amount of your benefit that gets taxed depends on your “provisional income” (your AGI, plus any tax-exempt interest, plus 50% of your Social Security benefits). If you take a big withdrawal from a traditional IRA, for example, it can push your provisional income over a threshold and suddenly make a chunk of your Social Security benefits taxable, creating a nasty tax surprise.
Should You Always Wait Until 70 for Social Security?
Waiting until age 70 gets you the biggest possible monthly check, and it’s adjusted for inflation, which is a great deal. But it’s not a one-size-fits-all answer. The decision depends on your health, your immediate need for cash, and what other income sources you have. If you can bridge the gap with other savings from, say, age 65 to 70, waiting is usually a fantastic move. If you can’t, taking it earlier might be the only choice, even if it means a permanently smaller check.
