How Required Minimum Distributions (RMDs) Impact Your Taxes in Retirement

If you’ve been diligently saving for retirement using tax-deferred accounts like a traditional IRA or 401(k), congratulations — you’ve given your nest egg a chance to grow with minimal tax interference. But once you reach a certain age, the IRS wants its share. That’s where Required Minimum Distributions (RMDs) come in. These mandatory withdrawals can have a significant effect on your retirement tax strategy — and understanding them is key to preserving more of your income.

What Are Required Minimum Distributions (RMDs)?

RMDs are the minimum amounts that the IRS requires you to withdraw annually from certain retirement accounts once you hit a specific age. As of 2025, RMDs typically begin at age 73 (thanks to the SECURE 2.0 Act). This rule applies to traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts — but not to Roth IRAs during the account holder’s lifetime.

Why RMDs Are Taxable

Here’s the catch: the money you withdraw through RMDs is considered ordinary income and taxed at your current income tax rate. Since you likely received a tax break when you contributed to these accounts, the government is now collecting its share.

The amount of your RMD is based on your account balance and life expectancy, using IRS-provided tables. Each year, this number changes — and your tax bill could grow as a result.

The Tax Impact of RMDs

1. Increased Taxable Income

Your RMD adds to your total taxable income for the year. This may push you into a higher tax bracket, which can also affect how much you owe in other areas — such as capital gains or the taxation of Social Security benefits.

2. Social Security Benefit Taxation

If your combined income (including RMDs) exceeds certain thresholds, up to 85% of your Social Security benefits may become taxable. For example, if you file jointly and your combined income tops $44,000, you’re likely in the zone where maximum taxation applies.

3. Medicare Premium Surcharges

RMDs can also increase your Medicare Part B and D premiums through something called IRMAA (Income-Related Monthly Adjustment Amount). The more income you report, the higher your premiums can be.

4. Potential Penalties

If you fail to take your RMD by the deadline (usually December 31st each year), you could face a hefty excise tax penalty — 25% of the amount not withdrawn (which may be reduced to 10% if corrected timely).

Planning Strategies to Minimize the Tax Hit

Fortunately, there are ways to manage the tax impact of RMDs with the help of a trusted financial advisor. Here are a few strategies:

• Roth Conversions: Consider converting some of your traditional IRA funds to a Roth IRA before RMD age. Roth IRAs are not subject to RMDs and future withdrawals are tax-free.

• Qualified Charitable Distributions (QCDs): If you're 70½ or older, you can donate up to $100,000 annually directly to a qualified charity from your IRA. This counts toward your RMD and is excluded from taxable income.

• Delay Retirement Account Withdrawals: If you don’t need the income, delay withdrawals until required — but plan ahead for the tax bump that RMDs might cause later.

• Coordinate with Social Security: Timing your RMDs around when you start taking Social Security benefits can help reduce overlap and taxation.
  

Final Thoughts

RMDs are more than just a retirement rule — they’re a tax event that can have ripple effects across your entire retirement income plan. At Avalon Tax & Financial Services, we specialize in helping retirees navigate these complex tax issues and make smart, forward-thinking decisions. If you’re approaching RMD age — or just want to better prepare — let’s build a strategy that keeps more of your hard-earned savings in your pocket.

Need help planning around RMDs? Contact Avalon today for personalized retirement tax guidance.