Required minimum distributions (RMD) can raise your taxable income and push you into higher tax brackets than you expected. A good strategy starts with planning distributions early, coordinating which accounts you withdraw from, and managing your total income on a year-by-year basis. The goal is smoother, more predictable income throughout retirement, not bigger tax surprises.
Key Takeaways
- RMDs are treated as ordinary taxable income for most retirees
- The goal is smoother income year over year, not bigger surprises at tax time
- RMDs can increase how much of your Social Security is taxed
- Medicare surcharges (IRMAA) can be triggered by higher income, sometimes two years later
- Planning before RMDs begin gives you the most options
Why RMDs Create Tax Surprises
When RMDs Start and Why They Grow Over Time
RMDs begin at age 73 for most retirees under SECURE Act 2.0. The amount you must withdraw each year is calculated by dividing your prior year-end account balance by an IRS life expectancy factor. Over time, that life expectancy factor decreases, which means your RMD amount and taxable income typically increases as you age.
As an example, if you have a traditional IRA valued at $500,000 at year-end and turn 73 the following year, your life expectancy factor would be 26.5 per IRS tables, resulting in a required withdrawal of roughly $18,867. Every year after that, the factor shrinks and the required withdrawal grows, assuming your account has also grown.
There is also a timing trap to be aware of. In the first year, you can delay your RMD until April 1 of the following year. However, waiting until that April deadline means taking two full RMDs in one calendar year, which often creates a much larger tax bill than anticipated.
"Stacking" on Top of Social Security and Pensions
The real problem for many retirees is not the RMD by itself. It is how the RMD stacks on top of other income sources. Some retirees find they have so much saved in tax-deferred accounts that combining RMDs with other income such as Social Security benefits, interest, dividends, or capital gains from brokerage accounts can push them into an unexpectedly high tax bracket.
When your income goes up, more of your Social Security benefit may become taxable as well. Up to 85% of your Social Security income can be subject to federal tax once your combined income crosses certain thresholds. RMDs count toward that calculation, so a larger distribution can trigger a much higher tax bill across multiple income sources at once.
Strategies That May Reduce the Tax Hit
These strategies are case-dependent and may not be suitable for every situation. A qualified financial advisor and tax professional should review your specific circumstances before you act on any of them.
Smoothing Withdrawals Before Required Years
One approach is to start withdrawing funds from tax-deferred accounts at age 59½, the earliest opportunity without incurring a 10% penalty. To avoid pushing yourself into a much higher tax bracket, it is generally best to target a specific tax rate for your distributions and withdraw gradually rather than waiting for RMDs to begin.
This approach works because it reduces the balance in your tax-deferred accounts before the IRS requires you to start taking money out. Smaller account balances mean smaller required distributions later.
Coordinating Taxable vs. Tax-Deferred Withdrawals
A proportional withdrawal strategy, where you take money from both your taxable brokerage accounts and your tax-deferred accounts at the same time, can reduce the overall size of your tax-deferred accounts and lower future RMDs.
This kind of coordination takes planning. The order in which you draw from different accounts, traditional IRA, Roth IRA, and taxable brokerage accounts, has real tax consequences over the long term. There is no universal right answer, but a thoughtful sequence can help you manage which income is taxed, when, and at what rate.
Qualified Charitable Distributions (QCDs)
Individuals aged 70½ or older can use QCDs to satisfy their RMD requirements while reducing taxable income. A QCD allows you to donate up to $108,000 annually directly from your IRA to a qualified charity without including the amount in your taxable income.
For retirees who are charitably inclined and do not need the full RMD for living expenses, this is one of the most effective strategies available. The distribution counts toward your RMD but does not show up as income on your return, which can also reduce how much of your Social Security is taxed and lower potential Medicare surcharges.
Roth Conversions in Lower-Income Years
A Roth conversion can be especially advantageous during the early years of retirement, when RMDs have not yet started and you are most likely to be in a lower tax bracket. However, if you are already receiving retirement benefits, be aware that the converted funds could increase your taxable income, causing taxes on your Social Security benefits and Medicare costs to rise.
Your gap years, the period between retirement and age 73 or 75 when RMDs begin, are often the best window for Roth conversions because income is typically at its lowest during this time. Once RMDs begin, conversions become harder to execute without pushing into a higher bracket.
Reviewing Withholding and Estimated Taxes
Another approach is to use a 100% withholding rate on your RMD to cover taxes owed. This allows you to skip or reduce quarterly estimated tax payments, since the withholding is treated as though it was paid evenly throughout the year.
If you underpay throughout the year and owe a large amount in April, you may also face underpayment penalties. Reviewing your withholding or estimated tax payments each fall, before year-end, can prevent that problem.
Planning Around Tax Brackets
Filling Brackets Intentionally
A commonly overlooked strategy is taking slightly more than the minimum required distribution in years when your tax bracket has room to absorb it. Rather than always taking the minimum, you look at how much space exists in your current bracket and consider whether it makes sense to fill it now at a lower rate rather than take it later at a higher one.
This is especially relevant for retirees who had strong investment growth in prior years and expect their account balances, and therefore future RMDs, to keep rising.
Avoiding Big Jumps From One-Time Events
One-time income events, such as selling a home, taking two RMDs in one year, or completing a large Roth conversion, can send your income into a much higher bracket in a single year. A common mistake is waiting until the April 1 deadline for the first RMD without modeling the tax impact, which can accidentally trigger a higher tax bracket or IRMAA surcharge.
Multi-year income modeling is the best way to spot these traps before they happen. If you can see two or three years of projected income laid out together, you can often find opportunities to shift income from high-tax years to lower-tax ones.
What to Review Each Year
Updated Income Estimate
Each fall, it is worth running a full estimate of your expected taxable income for the year. This includes Social Security, pension income, RMDs, interest, dividends, capital gains, and any other sources. Comparing that total against your tax brackets and IRMAA thresholds can reveal whether you need to adjust before December 31.
Account Balances and Required Amounts
Your RMD is based on your retirement account balance as of December 31 of the prior year and an IRS life expectancy factor. While you cannot avoid taking an RMD, you can control how and when you take it.
If you have multiple IRAs, note that the IRS requires you to calculate RMDs separately for each account. However, you can withdraw the combined total from any one or more of your IRAs, which gives some flexibility in how you execute the distribution.
Tax Payments and Timing
Review whether you are on track with estimated tax payments or withholding. Consider whether to take your RMD early in the year or later based on where your income stands. If December looks like it will push you into a higher bracket or over an IRMAA threshold, taking the distribution earlier in the year and adjusting withholding accordingly can help.
FAQs
You may be able to reduce the tax impact, though you cannot avoid paying tax on RMDs from traditional IRAs and 401(k)s entirely. Strategies like qualified charitable distributions, Roth conversions before RMDs begin, spreading out distributions over time, and coordinating which accounts you withdraw from can all help reduce how much tax you owe. The right approach depends on your income, account balances, and overall financial picture.
You can always take more than the minimum required amount. The extra withdrawal is still taxable income in the year you take it, but there is no penalty for exceeding the minimum. Some retirees choose to take more in lower-income years to reduce future RMDs and potentially avoid a higher bracket later.
Yes. The IRS only requires that you withdraw at least the minimum amount by December 31 each year. How you structure those withdrawals, monthly, quarterly, or in a single lump sum, is up to you. Monthly distributions can make budgeting easier and help with withholding throughout the year.
Yes. RMDs count toward your combined income, which is the figure the IRS uses to determine how much of your Social Security benefit is taxable. Depending on your total income, between 50% and 85% of your Social Security benefit can be subject to federal income tax. A larger RMD can push more of your Social Security into taxable territory.
If you have substantial tax-deferred savings, the start of RMDs at age 73 could trigger a sudden surge in your taxable income, potentially pushing your Medicare costs higher through IRMAA surcharges. IRMAA is based on your modified adjusted gross income from two years prior, so the higher your income in a given year, the higher your Medicare Part B and Part D premiums could be two years later. For 2025, the IRMAA surcharge applies to individuals with income above $106,000 and married couples above $212,000.
Waiting too long. Many retirees do not start thinking about RMDs until they are required to take them, which limits their options significantly. Once you start taking RMDs, you have fewer choices to lower your tax bill, which is why planning ahead matters. The window between retirement and age 73 is often the best time to do Roth conversions, reduce account balances, and model future income so there are no surprises.
Yes, in most cases. Withholding taxes directly from your RMD is a simple way to stay current with the IRS and avoid underpayment penalties. Setting a 100% withholding rate on your RMD can eliminate the need for quarterly estimated tax payments, since that withholding is treated as if it was paid evenly throughout the year. Your advisor or custodian can help you set the right withholding amount based on your projected tax liability.
Both, ideally working together. Your CPA handles the tax return and can calculate your exact liability, while your financial advisor can help with the broader strategy, such as when to take distributions, which accounts to draw from first, and how to coordinate RMDs with Social Security timing, Roth conversions, and Medicare thresholds. When these two professionals are aligned on your income plan, you are far less likely to face surprises.
Take control of your RMD strategy before it controls your taxes
RMD planning is a year-by-year process, built on small, consistent decisions each year to avoid bracket jumps and Medicare surprises.
If you want help mapping out your withdrawals, Roth conversion opportunities, and IRMAA exposure, schedule a complimentary consultation with a CFP® at Bauman Wealth Advisors. We’ll help you build a year-by-year plan that keeps your taxes predictable and your retirement income working efficiently.
