The Impact of RMDs on Your Tax Bill: A Senior’s Guide to Required Minimum Distributions

What Are RMDs and Who Has to Take Them?

An RMD is the minimum amount you must withdraw from your tax-deferred retirement accounts each year. The government forced this withdrawal so it can finally collect income tax on the money that has been growing tax-deferred for years.

The RMD Age is 73

Thanks to the SECURE 2.0 Act, you must begin taking RMDs in the year you turn age 73. Your first RMD can be taken as late as April 1st of the year *following* the year you turn 73, but all subsequent RMDs must be taken by December 31st each year.

Which Accounts Require RMDs?

RMD rules apply to tax-deferred accounts, including:

• Traditional IRAs
• SEP IRAs and SIMPLE IRAs
• 401(k), 403(b), and 457(b) plans

Crucial Exception: Original owners of Roth IRAs are NOT required to take RMDs. This makes Roth accounts a powerful tool in retirement tax planning.

The Full Tax Impact: It’s More Than Just One Tax

The biggest mistake retirees make is underestimating the full tax consequence of an RMD. It’s not just a single tax; it’s a chain reaction that can significantly increase your overall tax burden.

1. The Direct Tax Hit

Every dollar you withdraw as an RMD is included in your income for the year and is taxed as ordinary income at your marginal tax rate. It is NOT taxed at the lower capital gains rates.

2. The “Stealth Tax” Ripple Effect

Your RMD increases your Adjusted Gross Income (AGI), which can trigger other taxes:

• Higher Taxes on Social Security: A higher AGI can cause more of your Social Security benefits (up to 85%) to become taxable.
• Higher Medicare Premiums (IRMAA): Your Medicare Part B and D premiums are based on your income from two years prior. A large RMD can push you over an income threshold, triggering the Income-Related Monthly Adjustment Amount (IRMAA) and causing your premiums to spike two years later.
• Higher Tax Bracket: A large RMD could push you into a higher marginal tax bracket, causing more of your other income to be taxed at a higher rate.

Strategies to Manage Your RMD Tax Bill

You can’t avoid RMDs, but you can be strategic about managing their tax impact.

The #1 Strategy: Qualified Charitable Distributions (QCDs)

If you are age 70½ or older, you can donate up to $105,000 (for 2024, indexed for inflation) directly from your IRA to a charity. This distribution is NOT included in your taxable income but still counts toward satisfying your RMD. It’s the most powerful way to reduce the tax bite of an RMD if you are charitably inclined.

Plan Ahead with Roth Conversions

By converting portions of your Traditional IRA to a Roth IRA in the years before your RMDs begin (especially in low-income “gap years”), you reduce the account balance from which future RMDs will be calculated. A smaller IRA balance means smaller future RMDs.

What if I Miss an RMD?

The penalty for failing to take your RMD has been reduced. It is now 25% of the amount you failed to withdraw. If you correct the mistake in a timely manner, the penalty can be further reduced to 10%.