A situation arises that most retirees do not expect.
At 73, a single retiree is pulling in $30,000 annually from Social Security. She also has $980,000 tucked away in a traditional IRA and an extra $250,000 in a regular brokerage account. To the casual observer, her financial situation seems pretty secure.
But, by IRS rules, she must start taking annual withdrawals from her traditional IRA at this age. The first Required Minimum Distribution (RMD) can shift her overall tax picture pretty dramatically.
This isn’t a unique case; each spring, retirement forums buzz with stories of people who realized too late that their federal tax burden, instead of being a manageable 12%, has ballooned.
Where does 40% come from?
The IRS Uniform Lifetime Table says that for her age, she has to divide her IRA balance by 26.5. This means her first RMD would be roughly $36,981.
This withdrawal bumps up her ordinary income and, unsettlingly, also makes some of her Social Security benefits taxable. If a single filer’s provisional income exceeds $34,000, up to 85% of those benefits come into play. With an initial income nearing $52,000, that means 85% of her $30,000 Social Security benefit—about $25,500—gets counted as income.
After accounting for her IRA withdrawals and the taxable portion of Social Security, and deducting the standard amount of $18,150 for single filers over 65 in 2026, her taxable income ends up around $44,331. That results in about $5,072 in federal taxes, all falling within the lowest bracket.
The real kicker hits with the next dollar she takes. For every dollar she takes from her IRA, it reduces her taxable Social Security by $0.85, essentially generating an effective new taxable income of $1.85 for each dollar withdrawn. If she crosses into the 22% bracket at a taxable income of $50,400 in 2026, that multiplier results in an effective marginal tax rate approaching 40.7%.
It’s like a tax landmine, and her first RMD put her right in its path.
How the other parts are connected
Two outside factors intensify the situation. Right now, the federal funds rate is at 3.75%, and the 10-year Treasury yield hovers around 4.49%, meaning her cash and bonds in the brokerage don’t help in calculating provisional income. Additionally, the Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharge kicks in at $109,000 of Modified Adjusted Gross Income (MAGI) for each applicant. Just exceeding that threshold can add over $1,000 annually to her Part B and Part D premiums.
Here are three key strategies:
- Qualified Charitable Distributions. If she gives directly from her IRA to a qualified charity, those funds count toward her RMDs but won’t show as taxable income. It’s a straightforward way to comply with the rules without getting burned.
- Intermediary base and step-up at death. To avoid generating new income via RMDs, she might spend from her brokerage or hold onto appreciated stocks, ensuring a better basis for her heirs.
- Roth conversion with pre-73 brackets in mind. The situation makes a strong case for partially converting to Roth IRAs while she’s in her 60s. Each dollar converted now is one less she’ll have to worry about in future RMDs.
What do you get from this?
One of the toughest errors to reverse is thinking that the percentages listed in the IRS table represent actual tax rates. For retirees receiving both Social Security and withdrawals from a traditional IRA, the effective tax rate on their next withdrawal can often be nearly double the quoted marginal rate.
Before making any significant withdrawal or conversion to a Roth, it’s wise to model the potential impacts on interim income, IRMAA surcharges, and tax returns for the following year. Finding guidance can be tricky, as the implications of where funds come from can vary widely. Those tax professionals experienced in these calculations often earn their keep on that first discussion.
