Everyone talks about the tax benefits of contributing to an IRA or 401(k). Almost nobody talks about what happens on the other side: once you turn 73, you're required to start withdrawing from these accounts, whether you need the money or not. In this post, we walk through how RMDs work, why they can be especially painful if you're forced to withdraw during a market downturn, and what a plan to get ahead of them could look like. If you'd like a side-by-side look at what this could mean for your own taxes, our team offers a free B.O.S.S. Retirement Tax Savings Analysis.
Throughout your career, contributing to an IRA or 401(k) came with a real tax benefit. What often goes unmentioned is what happens on the back end. Starting at age 73, the IRS requires you to begin withdrawing from these accounts through what's called a Required Minimum Distribution, or RMD. The amount is based on a percentage that grows every year, and it continues whether or not you actually need the money.
One of the biggest risks with RMDs is timing. If the market is down significantly when your RMD comes due, you could be forced to sell investments at a loss just to meet the requirement. We haven't seen a downturn on the scale of 2008 in a long time, and after more than a decade of a generally strong market, it's easy to forget what that kind of environment feels like.
This connects to what's known as sequence of returns risk. If you retire during a strong market, your withdrawals tend to be replenished by ongoing growth. If you retire into a weak market, you could be withdrawing money that isn't being replaced, and pulling out even more than required just to cover the gap. That combination can cause savings to run out much faster than expected.
RMDs don't exist in isolation. That income gets added to whatever else you have coming in, Social Security, a pension, other investment income, and the total can push you into a higher tax bracket than you expected. Once your combined income crosses certain thresholds, up to 85% of your Social Security benefits could become taxable, and Medicare premiums could increase substantially through the IRMAA surcharge. This all begins the year you turn 73 and continues every year after.
One consequence that catches a lot of people off guard: when a spouse passes away, the surviving spouse has to file taxes as a single person instead of married filing jointly, often while still taking the same size RMDs. Filing as single typically means higher tax brackets on the same income, which can meaningfully increase what's owed in taxes at an already difficult time. We call this the widow's penalty, and it's one of the more overlooked pieces of retirement tax planning.
Gary and Sharon (names changed) came to us in their late 60s with a substantial portion of their savings sitting in traditional IRAs. They hadn't given much thought to what their RMDs would look like once they turned 73, or how those withdrawals might interact with their Social Security and Medicare costs down the road.
We walked through a customized analysis of their income sources and built a multi-year plan that included converting a portion of their IRA into a Roth ahead of RMD age, timed around their tax brackets. We also discussed how a widow's penalty scenario could affect Sharon's taxes if Gary passed away first, and built that consideration into the plan. Every family's situation is different, and results depend on individual circumstances, but having this mapped out ahead of time gave them a much clearer sense of what to expect.
The good news is that you have more control over your future tax bill right now than you will once RMDs begin. A few strategies worth considering as part of a plan:
Currently, RMDs are required starting at age 73. This age has changed in recent years due to legislation, so it's worth confirming the current rule for your birth year.
You're still required to withdraw it and pay taxes on it, even if you don't need it for living expenses. Some people reinvest the money in a taxable account or use it for gifting or other planning strategies.
Yes. Roth IRAs are not subject to RMDs during the original owner's lifetime, so converting some of your traditional IRA balance ahead of time could reduce the amount subject to future required withdrawals.
The right amount and timing depends on your individual tax situation.
When a spouse passes away, the surviving spouse typically shifts from filing married filing jointly to filing as single, which can result in higher tax brackets on the same amount of income, including RMDs.
RMDs are one of those retirement realities that are much easier to plan for in advance than to react to once they begin. If you'd like to see exactly how RMDs could affect your own taxes, and what strategies might help reduce that impact, our team offers a free, customized B.O.S.S. Retirement Tax Savings Analysis. Click here to unlock your savings or call us directly at: (800) 637-1031
Tyson Thacker is the Co-Founder of B.O.S.S. Retirement Solutions and B.O.S.S. Retirement Advisors, a fiduciary RIA based in Lehi, Utah. Alongside his brother Ryan, Tyson has helped more than 55,000 area families across Utah, Idaho, Washington, and Arizona build retirement income strategies focused on maximizing income, minimizing taxes, and protecting what they've worked a lifetime to build. B.O.S.S. currently manages more than $1 billion in retirement assets across 11 office locations.
Advisory services offered through B.O.S.S. Retirement Advisors, an SEC-Registered Investment Advisor. Insurance products and services offered through B.O.S.S. Retirement Solutions. Information contained in this material is for informational purposes only and is not intended as personalized investment, tax, or legal advice. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Examples and hypothetical scenarios are illustrative only and do not guarantee future results. Actual results may vary. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of any individual. BOSS is not affiliated with the Social Security Administration, the U.S. government, or any government agency.
Related Resources from B.O.S.S. Retirement Solutions:
The Framework for a More Confident Retirement
Designed to deliver simplified, personalized financial strategies, the B.O.S.S. Retirement Blueprint™ planning process helps maximize income, growth and legacy while minimizing taxes. Ready to view your retirement from a new angle?
