A Tax-Trap for Savers:

RMDs Arrive When You Least Need the Money

For most retirees today, Required Minimum Distributions begin at age 73, though the starting age for people born in 1960 or later is now 75.

At 73, the required withdrawal is only about 3.8% of the account. But the percentage rises with age. At 80, it is closer to 5%.

For someone with a $2 million traditional IRA, assuming for simplicity that the balance somehow stayed at exactly $2 million, the required distributions would look roughly like this:

Age	Distribution Requirement	Approximate RMD on $2 Million
73	3.8%	$75,000
77	4.4%	$87,000
80	5.0%	$100,000
85	6.3%	$125,000
90	8.2%	$164,000

This presumes that the portfolio is flat, net of distributions taken out by the retirees. In reality, the portfolio usually keeps growing when lifelong savers struggle to spend as much of their money as they are allowed to. 

The Income/Life Mismatch

You may have heard the terms "go-go," "slow-go," and "no-go," in reference to a retirement lifestyle. The idea is basically that you'll spend more while you are young and most active. Then, as you start to slow down physically, your spending slows down as well. 

Early on, you might travel, or remodel the house, or buy an RV. You could take the kids and grandkids somewhere. You might spend six weeks in Europe. You finally have both the money and the time to enjoy some great experiences. This phase is a lot of fun. 

But it doesn't last forever. Usually, discretionary spending tends to decline as energy and desire wanes, and it levels off for a lot of people in their mid-70s. 

Unfortunately this is right when RMDs start. So even if you don't need the money, you are still required to take the funds out of your IRA and pay the taxes. (Note: this is only for pre-tax retirement accounts, not Roth IRAs). 

The Problem Isn't the RMD Itself

Traditional retirement accounts give you a tax deduction on the way in and tax-deferred growth along the way. Eventually, however, the government wants to collect the income tax that has been deferred.

An RMD doesn't require you to spend the money, though. 

You can take $100,000 out of an IRA, pay the tax, and reinvest whatever you don't need in a taxable brokerage account. Doing so will satisfy the RMD. 

This creates a tax-planning problem though. If you enter your 70s with a large traditional IRA, those distributions can stack on top of Social Security, pensions, interest, dividends, and other income, and push you into higher tax brackets. 

And that's just the beginning. 

More of Your Social Security May Become Taxable

As your income rises, more of your Social Security benefits can become taxable, up to 85% of the benefit. This can create a strange effect where an additional dollar withdrawn from an IRA causes more than a dollar of income to become taxable, temporarily increasing your effective marginal tax rate.

Medicare Can Get More Expensive

Medicare Part B and Part D premiums are income-tested. As a result, higher income can push retirees into higher IRMAA brackets, increasing Medicare premiums.

You Lose Control Over When That Income Is Recognized

Before RMDs, you have considerable flexibility.

You can decide whether to take $40,000 from an IRA this year or $80,000. You can do a Roth conversion. You can spend taxable assets. You can coordinate withdrawals with Social Security. 

Once RMDs begin, though, some of that flexibility disappears. You can no longer defer that IRA income into a future year. And because the RMD itself cannot be converted to Roth, any Roth conversion comes on top of the taxable income created by the RMD.

You still have planning opportunities, but you're starting from a higher floor.

The planning opportunity is really about preserving as much flexibility as is feasible. 

So Why Not Take More Money Earlier?

This is where I think traditional retirement advice can become too focused on minimizing taxes in the current year.

Suppose you retire at 62.

Your mortgage is paid off. Your living expenses are $60,000 per year. You have plenty of savings.

You look at your tax return and think:

Why would I take an extra $40,000 out of my IRA? I'll just have to pay taxes on it.

That's perfectly reasonable if we look at one year in isolation. But retirement is a 30-40 year game. 

Imagine that leaving the money untouched means you eventually reach age 75 with a $2.5 million IRA, Social Security benefits, and more taxable income than you actually need.

So the relevant question isn't:

"Can I avoid paying tax on this $40,000?"

It's:

"At what point in my lifetime am I likely to pay the lowest reasonable tax rate on this money?"

If you are likely to be in roughly the same tax bracket later, there may not be much reason to accelerate income.

But if today's tax bracket is lower than the bracket you are likely to occupy once Social Security and RMDs arrive, deliberately recognizing additional income earlier can make a great deal of sense.

This is the real value of the early-retirement tax-planning window.

Roth Conversions Can Help

One option is to move money from a traditional IRA into a Roth IRA. You pay ordinary income tax on the conversion today. Afterward, the money can continue growing in the Roth. Roth IRAs are not subject to lifetime RMDs.

The goal isn't to convert the entire IRA, nor convert as much as possible every year. The goal is usually much more measured and opportunistic.

Look ahead to the tax brackets you are likely to occupy once RMDs begin, and consider filling lower brackets today when doing so reduces the chance of paying a higher rate later.

For example, if we expect future RMDs to put a retiree solidly into the 22% bracket anyway, there may be value in using some of the otherwise-empty 12% or 22% bracket before RMDs begin.

That can be especially useful during the years between retirement and the beginning of Social Security or RMDs.

Essentially, you're choosing to pay the tax at a time and rate that you can control, rather than accepting whatever tax situation you happen to find yourself in once RMDs begin.

Spending More Can Be a Tax Strategy Too

There is another option that doesn't get discussed nearly as much:

Spend the money.

If you are 65, financially secure, and have things you genuinely want to do, taking an extra distribution from an IRA is not automatically irresponsible.

Quite the opposite.

If you're going to pay tax on that money eventually anyway, there is an argument for using some of it while it has the greatest potential to improve your life.

Take the family trip. Improve the house you're going to live in for the next 20 years. Help your kids when the money would actually make a difference. Buy the camper. Spend three months in Italy.

I'm not suggesting retirees manufacture expenses simply to reduce an IRA balance, but there is definitely a time and place where I'll encourage people to spend more, not less. I think there is a danger in being too good at saving.

Someone can spend their entire career deferring gratification, reach retirement with more than enough money, and continue deferring gratification because spending still feels vaguely irresponsible.

Then they reach their 80s with a larger portfolio, larger RMDs, and fewer things they particularly want to do.

That isn't a financial planning success.

 QCDs: The RMD Release-Valve

For people who are charitably inclined, Qualified Charitable Distributions can become especially useful later in retirement.

Beginning at age 70½, money can be transferred directly from an IRA to an eligible charity. A QCD can count toward an RMD while generally keeping the distribution out of taxable income.

For someone who already intends to give money away, that can be considerably more useful than taking an RMD, reporting the income, and then writing a personal check to charity.

For 2026, the annual QCD exclusion limit is $111,000 per individual.

Legacy Coordination

RMD planning becomes even more important when a retiree expects to leave a substantial estate.

Under current rules, many non-spouse beneficiaries must empty an inherited retirement account within 10 years. This is a problem because their children usually inherit the account in their 50s, in their peak earning years. 

Imagine inheriting a $2.5 million traditional IRA while you're in your 50s and still working. Even ignoring investment growth, spreading that account evenly over 10 years would mean another $250,000 of annual ordinary income.

Leave more of it until the final years, and the tax problem can become even larger.

Essentially, the parents may have spent years trying to avoid paying tax in the 24% bracket, only for their children to inherit the account during their peak earning years and pay 35% or 37% on some of the distributions.

Had that money been in a Roth, the 10-year rule could actually become an opportunity rather than a tax time-bomb. In many cases, the heir can leave the inherited Roth invested for most or all of the 10-year period, allowing it to continue compounding tax-free before distributing the account by the deadline.

The Goal Isn't to Eliminate RMDs

You just want to make sure you're not creating a situation down the road where the RMD is far more money than you actually need. It's better to get it into a Roth, and preserve some flexibility for yourself and your heirs. Depending on your situation, you can even spend a bit more money you're younger, and reduce your future account balance and RMDs that way. 

With some proactive planning, you can side-step the worst of the problems that RMDs can create. 

But, if you're 73 (or 75), and stuck with a big RMD that's pushing you into higher tax brackets and triggering IRMAA thresholds, you can gain some relief by using QCDs to give money to charitable causes.