How Your RMD Affects Your Tax Bill — And What to Do About It

For most of your working life, your retirement accounts are a place where money goes in and grows quietly. You get a tax break on the way in, the balance compounds over decades, and you try not to touch it.

Then you turn 73, and the IRS says: time to start taking it out.

Required Minimum Distributions — RMDs — are the government's way of collecting the taxes it deferred when you contributed to your traditional IRA or 401(k). And for many retirees, the arrival of RMDs is the first time they realize just how significantly their retirement account withdrawals can affect their overall tax picture.

Here's what you need to know — and more importantly, what you can do about it.

What Is an RMD, and Why Does It Matter?

A Required Minimum Distribution is the minimum amount the IRS requires you to withdraw from your traditional IRA, 401(k), 403(b), and most other tax-deferred retirement accounts each year starting at age 73.

The amount is calculated based on your account balance as of December 31 of the prior year, divided by a life expectancy factor from IRS tables. As your balance grows and your life expectancy factor decreases with age, RMDs tend to increase over time.

Every dollar of your RMD is counted as ordinary income in the year you take it. That means it's taxed at your marginal rate — the same rate as wages, interest, or any other ordinary income. For retirees with large IRA balances, RMDs can push income significantly higher than expected.

How RMDs Affect More Than Just Your Tax Bracket

The tax impact of RMDs isn't limited to your income tax rate. A higher adjusted gross income from RMDs can trigger a cascade of secondary effects that many retirees don't anticipate.

Social Security taxation. Up to 85% of your Social Security benefit can be subject to income tax, depending on your combined income. RMDs add to that combined income — potentially pushing more of your Social Security into the taxable column or increasing the taxable percentage if you're near a threshold.

Medicare premium surcharges (IRMAA). Medicare Part B and D premiums aren't fixed — they increase based on your income from two years prior. A significant RMD in 2026 could increase your Medicare premiums in 2028. These surcharges can add hundreds or even thousands of dollars per year in additional costs.

Net Investment Income Tax. If your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly), investment income becomes subject to an additional 3.8% surtax. Large RMDs can push you over this threshold.

Loss of deductions and credits. Many deductions and credits phase out at higher income levels. A larger RMD can reduce or eliminate benefits you'd otherwise qualify for.

The point is this: an RMD isn't just a line on your tax return. It has ripple effects across your entire financial picture — effects that are much easier to manage when you plan for them in advance.

Strategy 1: Start Planning Before RMDs Begin

The most powerful RMD strategies are the ones you execute in the years before age 73 — not after.

If you retire before 73, you may have a window of several years where your taxable income is lower than it will be once RMDs start. That window is an opportunity to reduce the size of your future RMDs through proactive planning.

Roth conversions. Converting a portion of your traditional IRA to a Roth IRA each year during low-income years reduces your future RMD balance. Roth IRAs are not subject to RMDs during your lifetime, and qualified withdrawals are completely tax-free. Converting systematically — filling up your current tax bracket without spilling into the next — can significantly reduce your future RMD burden over time.

Accelerated distributions. Even without converting to a Roth, taking more than the minimum distribution in lower-income years reduces the balance that future RMDs are calculated on. If you're in a low bracket now and expect to be in a higher one later, it may make sense to take distributions earlier and pay tax at the lower rate.

Strategy 2: Use Qualified Charitable Distributions

If you're charitably inclined — and you're 70½ or older — a Qualified Charitable Distribution is one of the most tax-efficient moves available.

A QCD allows you to transfer up to $111,000 per year (as of 2026) directly from your IRA to a qualified charity. The amount transferred counts toward your RMD and is excluded from your taxable income entirely — it never appears as income on your return.

For retirees who give to charity regularly, this is almost always more tax-efficient than taking the RMD as income and then writing a check. You effectively make your charitable gift with pre-tax dollars, reducing your AGI and all the downstream effects that come with it.

That advantage is even more pronounced under the 2026 tax law. The One Big Beautiful Bill Act limits the deductibility of charitable donations for itemizers and caps the tax benefit at 35% for those in the top bracket. QCDs bypass both of those restrictions entirely — meaning retirees who give through a QCD are now getting a better deal relative to any other giving method than they were before the law changed.

We covered QCDs in depth in a previous post — if you give to charity and you're taking RMDs, it's required reading.

Strategy 3: Time Your RMD Strategically Within the Year

Most retirees take their RMD in December — it's the deadline, and it feels like the responsible thing to do. But timing your RMD is actually a planning decision worth thinking through.

Taking your RMD early in the year gives you more time to invest or use the funds, and removes uncertainty from your annual income picture. It also simplifies estimated tax payments.

Waiting until later in the year preserves your options — if you have a lower-income year than expected, you may want to take additional distributions. If income is higher than expected, you may want to use a QCD to offset some of the RMD.

Spreading distributions throughout the year smooths out your income and can simplify tax withholding, particularly if you don't make quarterly estimated payments.

There's no universally right answer — but there is a right answer for your situation. The key is making the decision intentionally rather than defaulting to December.

Strategy 4: Withhold Taxes From Your RMD

One of the most practical things you can do is elect to have federal (and state) income tax withheld directly from your RMD distribution.

Unlike wages, retirement distributions don't have automatic withholding unless you elect it. Many retirees are surprised to find they owe taxes — and sometimes penalties — in April because they didn't account for the tax owed on their RMD throughout the year.

You can elect withholding of any percentage directly with your IRA custodian. Withholding from your RMD can satisfy your tax obligation without requiring quarterly estimated payments — simplifying the process significantly.

Strategy 5: Consider Aggregating RMDs Across Accounts

If you have multiple traditional IRAs, you're required to calculate an RMD for each — but you can take the total RMD from any one or combination of your IRAs. This gives you flexibility to take distributions from whichever account makes the most sense.

For example, if one IRA holds more tax-inefficient investments than another, it may make sense to take distributions from that account first. Or if you're doing a partial Roth conversion, you can coordinate your RMD and conversion from the same account to simplify the process.

Note: this aggregation rule applies to IRAs but not to 401(k)s — each 401(k) requires its own separate RMD.

The Cost of Doing Nothing

The most expensive RMD strategy is the one most people use: no strategy at all.

When RMDs aren't planned for, they pile on top of Social Security income, push Medicare premiums higher, and create unnecessary tax bills that could have been reduced or avoided with a little foresight. The irony is that most of these outcomes are entirely preventable — but only if the planning happens before the RMD arrives, not after.

Tax season is the right time to look at your RMD picture for the year ahead. You know what last year's income looked like. You can see where your account balances stand. And you still have the entire year to act.

Let's Build a Plan Around Your RMDs

At Sage Street Wealth, RMD planning is a core part of how we manage retirement income. If your RMDs are growing — or if you haven't thought through a strategy yet — this is exactly the conversation we should have.

See if Sage Street is the right fit for you →