The RMD Problem: Why Your IRA Might Cost More in Taxes Than It's Worth

Required Minimum Distributions force you to withdraw from your IRA whether you need the money or not. Here's how to shrink the tax bill before it starts.

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You spent decades putting money into your 401(k). Tax-deferred contributions, compound growth, the whole deal. But the IRS has been keeping a tab, and at some point, they want their cut.

That point is called Required Minimum Distributions. Starting at age 73 (75 if you were born in 1960 or later), you have to withdraw a minimum amount from traditional IRAs and 401(k)s every year — whether you need the money or not. Every dollar comes out as ordinary income.

If your balance is large, those forced withdrawals can push you into higher tax brackets, trigger Medicare surcharges, and turn your retirement account into what some advisors call a "tax bomb."

How RMDs Work

The IRS publishes life expectancy tables. Each year, you divide your account balance by the factor for your age. That's your required withdrawal.

The older you get, the larger the percentage. A $1 million IRA at 75 generates $40k in forced income. By 90, it's over $80k — if the account hasn't grown in the meantime. In reality, if markets cooperate, the balance keeps climbing even as you withdraw, and RMDs grow with it.

The Cascade Effect

Large RMDs don't just mean higher taxes. They set off a chain reaction:

Higher federal brackets. A $60,000 RMD on top of Social Security can easily push you from the 12% bracket into the 22% or higher.

Social Security taxation. Most people don't realize that Social Security can be taxed. If your "combined income" (half of SS plus other income) exceeds certain thresholds, up to 85% of your benefits become taxable. Guess what counts as other income? RMDs.

IRMAA surcharges. Medicare Part B and D premiums increase at certain income levels. The base premium might be $174/month, but exceed the first threshold and it jumps to $244. Go higher, and you could be paying $560/month — for the same coverage. And the income used is from two years prior, so a large RMD in 2025 hits your premiums in 2027.

State taxes. Some states tax retirement income heavily. Others don't. But if you're stuck in a high-tax state, RMDs add to the pain.

Each of these feeds the others. The result is that a nominally $60,000 RMD might cost you $15,000-20,000 or more in combined taxes and surcharges.

The Zero-Tax Retirement Concept

There's a target that some retirees aim for: keeping taxable income within the standard deduction.

For 2025, the standard deduction for a married couple (both 65+) is roughly $32,300. If your only taxable income is RMDs, and those RMDs total $30,000 or less, you pay zero federal income tax.

To make that work, you need a relatively small traditional IRA balance at RMD age. For a couple aiming for $30,000 annual RMDs at 75, that means roughly $740,000 in traditional accounts. Anything above that triggers federal tax.

The strategy: convert enough money from traditional to Roth before RMDs start so your remaining traditional balance stays below that target.

Working Backward

Here's how to think about it:

1. Pick your target RMD. How much annual forced income can you tolerate? The standard deduction, the top of the 12% bracket, or some other number?

2. Calculate the balance that produces that RMD. Divide your target by the life expectancy factor at RMD age. For $30,000 RMDs at 75: $30,000 × 24.6 = ~$740,000.

3. Figure out the gap. If you have $1.2 million today and you want $740,000 at 75, you need to convert about $460,000 (adjusted for expected growth).

4. Spread it out. You have from now until RMD age to do those conversions. Spreading them out lets you stay in lower brackets each year rather than spiking into high ones.

The math gets complicated because you have to account for growth, other income sources, state taxes, and constraints like IRMAA thresholds. This is exactly what retireclarity's Roth Conversion Planner does — it works backward from your target, figures out the total conversion needed, and tests different timing strategies to find the best approach.

The IRMAA Wrinkle

Medicare premium surcharges (IRMAA) add a constraint. The thresholds for 2025 married couples:

That's per person, per month. Exceed $258,000 and you're paying $4,200/year extra for the same Medicare coverage.

The kicker: IRMAA uses income from two years prior. A large conversion in 2025 hits your 2027 premiums. You have to plan around this, not discover it later.

The Conversion Window

For most people, the optimal conversion window is between retirement and RMD age — roughly 65 to 73. During this period:

• You're not earning a salary (lower income)
• RMDs haven't started yet
• You can control exactly how much to convert each year

This window gets squeezed if you retire later. Someone who works until 70 has only 3-5 years to optimize. Someone who retires at 60 has over a decade.

The earlier you start planning, the more room you have to spread conversions across low-income years.

When This Matters Most

The RMD problem is worst when:

• Traditional balances are large ($500k+)
• You're in a low bracket now but expect higher later
• You have other income sources (Social Security, pensions) that will stack with RMDs
• You're in a high-tax state
• IRMAA thresholds are a concern

It matters less when:

• Traditional balances are small
• You plan to give to charity via QCDs (Qualified Charitable Distributions)
• You're already in a high bracket and expect to stay there
• You're moving to a no-income-tax state

Running the Numbers

retireclarity's Roth Conversion Planner handles this automatically. It calculates your target traditional balance, determines how much to convert, and tests multiple timing strategies — front-loading conversions, spreading them evenly, concentrating them before RMDs, and variations in between.

The output shows lifetime tax paid under each approach, so you can see the difference between optimizing and doing nothing. For people with large IRAs and long planning horizons, the savings can be six figures.

The Bottom Line

RMDs aren't optional. Once they start, you're stuck with whatever forced income your traditional accounts generate.

The only way to control the damage is to act before RMDs begin. Convert strategically during your lower-income years, shrink the traditional balance, and keep future RMDs within manageable limits.

Done right, you can turn a potential tax disaster into a tax-efficient retirement. Done wrong — or not done at all — you might pay hundreds of thousands more than necessary over the course of retirement.

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Related Articles

• Roth Conversions: When They Make Sense (And When They Don't) — The complete guide to evaluating whether conversions fit your situation.
• Why "Average Returns" Will Mislead Your Retirement Plan — Test your RMD reduction strategy against thousands of market scenarios.
• When to Claim Social Security: The Math Behind the Decision — Another key retirement timing decision that interacts with your tax strategy.

From the Guide: How RMDs Work · IRMAA Surcharges