For decades, you've been told that saving in a 401(k) or traditional IRA is one of the smartest financial moves you can make. The tax deduction now, the tax-deferred growth, the discipline of saving automatically — all of it is genuinely valuable.
But there's a chapter of the story that doesn't get told as clearly: at age 73, the IRS requires you to start withdrawing money from those accounts whether you need it or not. And every dollar you withdraw is taxed as ordinary income.
For many pre-retirees with significant balances in tax-deferred accounts, this is one of the largest and most preventable tax surprises in retirement.
A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw from your tax-deferred retirement accounts each year, starting at age 73.
These accounts include traditional 401(k)s, traditional IRAs, SEP IRAs, SIMPLE IRAs, and most other employer-sponsored retirement plans. Roth IRAs are the primary exception — they are not subject to RMDs during the original owner's lifetime.
The amount you're required to withdraw each year is calculated by dividing your account balance by an IRS life expectancy factor. As you age, the factor decreases, which means the percentage you're required to withdraw increases over time.
For someone with $1 million in a traditional IRA at age 73, the first RMD is approximately $36,500. By age 80, the required withdrawal on the same balance approaches $50,000. These amounts are added to your taxable income for the year, on top of Social Security and any other income you receive.
The problem isn't just the tax on the RMD itself. It's the cascading effects that a forced income increase can trigger.
Higher tax bracket: If your RMD pushes your income above a certain threshold, a larger portion of your income is taxed at a higher rate — not just the RMD, but your other income too.
Medicare premium surcharges (IRMAA): Medicare Part B and Part D premiums are income-tested. If your income exceeds certain thresholds — which RMDs can easily push you past — your premiums increase significantly. For some people, this adds hundreds of dollars per month.
Increased taxation of Social Security: Up to 85% of your Social Security benefit can become taxable income. A large RMD can push your combined income above the threshold where more of your Social Security is included, increasing your overall tax bill.
Estate planning implications: Large RMDs can reduce the assets available to pass to your heirs and, depending on your estate structure, affect how inherited accounts are taxed.
Here's what makes this genuinely frustrating: much of the RMD tax exposure is preventable with planning that starts well before age 73.
The years between retirement and the start of RMDs — often a window of five to ten years — represent one of the most valuable tax planning opportunities in a person's financial life. During this period, income typically drops, tax brackets are often lower than they'll be once RMDs begin, and there is time to act strategically.
Roth conversions during this window allow you to move money from a traditional IRA into a Roth IRA, paying tax now at a lower rate, and reducing the balance that will be subject to RMDs later. Done systematically over several years, this strategy can substantially reduce lifetime tax liability.
Coordinated withdrawal planning — drawing on taxable accounts and traditional accounts in a specific sequence — can also help manage the balance of tax-deferred assets before RMDs begin.
The window for this planning closes gradually. By the time RMDs start, many of the best options have passed.
If you're already 73 or older and taking RMDs, there are still strategies worth knowing.
Qualified Charitable Distributions (QCDs): If you're charitably inclined, you can direct up to $105,000 per year (indexed for inflation) from your IRA directly to a qualifying charity. This counts toward your RMD but is excluded from your taxable income — effectively allowing you to satisfy your RMD without paying tax on it.
Reinvestment strategy: If you don't need the RMD income to live on, reinvesting it in a taxable brokerage account allows continued growth — though in a different tax structure.
Ongoing Roth conversions: Even after RMDs begin, partial Roth conversions may be worth exploring depending on your tax situation and estate planning goals.
If you have significant assets in traditional 401(k)s or IRAs and you're within ten years of age 73, the most useful thing you can do right now is understand what your future RMD picture looks like.
A simple projection — showing your estimated RMD amounts by year, their likely tax impact, and the effect of different Roth conversion strategies — takes less than an hour to produce and frequently changes the direction of a retirement plan entirely.
It's one of the core analyses we run in every retirement planning consultation.
If you haven't modelled your future RMD exposure, that's the conversation to have now — before the planning window narrows further.
📅 Book your complimentary consultation →https://calendly.com/d/cxhw-ysw-34z/initial-complimentary-consultation
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