If you have a traditional IRA or 401(k), the IRS eventually requires you to start withdrawing money from it — whether you need the income or not. These are called Required Minimum Distributions, or RMDs, and most people don't think much about them until they're staring one down.
Here's the part that surprises people: RMDs aren't just an annual withdrawal. For a lot of families, they turn into a recurring tax event that quietly gets more expensive every year — and the bigger your account has grown, the bigger that bill becomes.
Why RMDs Exist
The IRS lets your IRA and 401(k) grow tax-deferred for decades. RMDs are simply the government's way of finally collecting tax on that money. Once you hit the RMD age, you're required to withdraw — and pay income tax on — a set percentage of your balance every year, whether or not you actually need the cash.
The Part Most People Don't See Coming
A few years ago, I sat in a seminar with Ed Slott, a well-known CPA and author who works closely with financial advisors on retirement tax strategy. He described RMDs bluntly, as a kind of "lifetime punishment" — because the tax impact doesn't happen once. It happens every single year, for the rest of your life, and it tends to get worse over time as your required withdrawal amount grows.
For a lot of our clients here in Orange County, this cost shows up in a few specific ways:
• Your RMD gets added to your other income each year, which can push you into a higher tax bracket than you expect.
• Larger IRA balances mean larger required withdrawals — and larger tax bills — as the years go on.
• The cumulative cost, added up over a 20-30 year retirement, is often far larger than people realize when they first look at their account balance.
It Doesn't Stop With You
If you don't address this during your lifetime, the tax problem often just passes to your children. An inherited IRA is typically taxed at your child's own tax rate — which, if they're in their peak earning years, can be significantly higher than yours. In other words, the RMD problem you didn't solve becomes their problem too.
What You Can Actually Do About It
The good news: this isn't something you just have to accept. Strategic Roth conversions — moving money from a traditional IRA into a Roth IRA over time — can reduce or eliminate future RMDs and shift that future tax bill to today's rates, which for many people are lower than what they'll face later.
This is exactly the kind of planning I focus on with clients whose retirement accounts have grown large enough that RMDs are becoming a real concern. If that sounds like your situation, I'd be glad to walk through what it could look like for you.
Ready to See What This Means for You?
Schedule a complimentary conversation, or join one of our upcoming ROTH BluePrint webinars, where we walk through real examples of how this strategy works.