The RMD Trap: How to Avoid Giving the IRS More Than You Should

Understanding RMDs: How to Avoid Unnecessary Taxes After 73

As you enter retirement, managing your income becomes more than just tracking expenses—it’s also about navigating the IRS rules that govern your retirement accounts. One of the most important of these rules involves Required Minimum Distributions (RMDs), which start at age 73 for most retirees.

 

Failing to plan properly for RMDs can lead to unnecessary taxes and missed opportunities. Let’s break down what RMDs are, why they matter, and how you can take proactive steps—like Roth conversions—to reduce your future tax burden.

What Are RMDs?

 

Required Minimum Distributions are the minimum amounts the IRS requires you to withdraw each year from certain retirement accounts, starting at age 73. This includes:

 

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Employer-sponsored retirement plans like 401(k)s (if you’re no longer working)

 

RMDs are treated as ordinary income, and they can push you into a higher tax bracket, impact your Medicare premiums, and potentially trigger taxes on your Social Security benefits.

Why Do RMDs Exist?

 

RMDs are the government’s way of ensuring tax-deferred retirement savings don’t grow indefinitely. You got a tax break when contributing to these accounts—RMDs make sure Uncle Sam eventually gets his share.

The Problem with RMDs

 

If you’ve accumulated substantial savings in pre-tax retirement accounts, RMDs can cause surprise tax bills in your 70s and beyond. Many retirees find themselves withdrawing more than they need, just to satisfy the IRS—and paying more in taxes as a result.

 

Other unintended consequences include:

  • Higher marginal tax rates
  • Increased Medicare Part B/D premiums (IRMAA surcharges)
  • Taxation of up to 85% of your Social Security benefits
Planning Ahead with Roth Conversions

 

One powerful way to reduce your RMD exposure is to convert a portion of your traditional IRA to a Roth IRA in the years before RMDs begin. Here’s why that can work:

 

✅ Roth IRAs do not have RMDs during your lifetime
✅ Withdrawals are tax-free in retirement
✅ You can control how much income you recognize each year

 

By strategically converting funds in your 60s (and early 70s), you can “fill up” lower tax brackets now, avoiding larger RMDs and higher taxes later.

 

Tip: Roth conversions are most effective in years when your income is relatively low—such as the gap years between retirement and when RMDs or Social Security kick in.

A Coordinated Withdrawal Strategy

 

Smart planning includes:

  • Reviewing your projected RMDs well before age 73
  • Coordinating IRA withdrawals, Roth conversions, and Social Security timing
  • Managing your tax brackets annually to avoid unintended spikes

This is where working with a financial planner can add meaningful value—we model tax outcomes and help you make informed, tax-efficient choices each year.

Final Thoughts

 

RMDs are a reality for most retirees, but they don’t have to catch you off guard. By understanding how they work and planning ahead—especially with the use of Roth conversions—you can reduce your tax exposure and keep more of your hard-earned savings working for you.

 

If you’re approaching age 73 (or even age 60+), let’s talk about how we can help you build a custom strategy for managing RMDs and minimizing taxes.