Most of us look forward to retirement as the time when taxes finally ease up. For many people, though, the opposite turns out to be true. And the reason often comes as a complete surprise: required minimum distributions, or RMDs.
If you have a traditional IRA or 401(k), the IRS eventually requires you to start withdrawing from it. Under rules updated by the SECURE 2.0 Act, that age is now 73, or 75 if you were born in 1960 or later. Miss the deadline and you could face a penalty of up to 25 percent, according to Kiplinger.
Why RMDs Can Cost You More Than You Expect
The money you pull out is taxable income. That might sound manageable, but the ripple effects can go much further than a bigger tax bill.
A large enough RMD can push you into a higher tax bracket. That, in turn, can trigger taxes on your Social Security benefits and drive up your Medicare premiums by thousands of dollars a year.
What Happens to Your Social Security
The Motley Fool points out that even before RMDs enter the picture, a single retiree receiving $3,000 a month in Social Security already clears the $25,000 combined income threshold where benefits become taxable. Add a $10,000 RMD on top of that and you could be pushed toward the 85 percent threshold, meaning up to 85 cents of every Social Security dollar you receive becomes taxable income.
Here is the part that stings. Those income thresholds have not been adjusted for inflation since 1984, according to Instead. That means more and more retirees are crossing them every year, even when their real purchasing power has not changed much at all.
The Medicare Surprise That Hits Two Years Later
Higher income from RMDs can also trigger what are called IRMAA surcharges, extra monthly charges added on top of your standard Medicare Part B premium. These surcharges are based on your income from two years prior.
That timing catches a lot of people off guard. A large RMD you take in 2026 will not show up in your Medicare premiums until 2028. By then, many retirees have long since forgotten about that original withdrawal. Talking with a financial planner, the article notes, can help you prepare before the bill arrives.
What You Can Do Right Now
The good news is that you are not without options. Here are several strategies the article outlines:
- Start drawing early. If you are between 59½ and 73, you can begin withdrawing from your IRA or 401(k) now. Bringing those balances down before RMDs kick in reduces how much you will be forced to take later.
- Consider a Roth conversion. Moving pre-tax money into a Roth IRA during lower-income years means future withdrawals are tax-free. Roth accounts are also exempt from RMD requirements entirely.
- Use a health savings account (HSA). HSA contributions go in pre-tax, grow tax-free, and can be withdrawn tax-free for qualified medical expenses Medicare does not cover. One important note: once you enroll in Medicare, you can no longer make new contributions to an HSA. This strategy applies to pre-Medicare retirees or existing HSA balances.
- Work with a financial planner. You may not be able to avoid every RMD tax hit, but a good planner can help you find ways to reduce what you owe and keep more of your money where it belongs, with you.
No matter where you are in retirement, there is likely a strategy that fits your situation. The key is knowing these surprises are coming and getting ahead of them before they arrive.
