Retirees with large nest eggs face significant tax exposure once required minimum distributions begin at age 73, especially those with a $1 million retirement account. Understanding the rules for managing RMDs and learning how to structure withdrawals can help reduce the tax burden these mandatory distributions create.
Experts say early planning and strategic use of tax-advantaged tools can meaningfully lower lifetime tax costs for retirees.
Smart Ways to Reduce Taxes
| Key Fact | Detail |
|---|---|
| RMD age | Age 73 under SECURE 2.0 |
| RMD calculation | Previous year-end balance ÷ life-expectancy factor |
| Charitable giving advantage | Up to $108,000 via Qualified Charitable Distributions (QCDs) in 2025 |
| Roth conversions | Reduce future RMDs because Roth IRAs have no lifetime RMDs |
| Tax impact | Higher RMDs increase Medicare IRMAA, Social Security taxation, and marginal tax bracket |
Why Managing RMDs Is Essential for High-Balance Retirement Accounts
The IRS requires withdrawals—known as required minimum distributions—from most tax-deferred retirement accounts beginning at age 73. These include traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored 401(k) and 403(b) plans.
For retirees holding a $1 million retirement account, the tax impact can be considerable. The first year’s RMD typically ranges from $35,000 to $40,000, depending on market performance. That amount is treated as ordinary income, which can move retirees into higher tax brackets.
Financial advisers emphasize that managing RMDs is not only about satisfying the IRS requirement, but also about minimizing the indirect tax pressures that large withdrawals create. According to Vanguard’s senior financial planner, Andrew Olson, “Higher RMDs can trigger a chain reaction—raising Medicare premiums, increasing taxes on Social Security, and reducing eligibility for certain deductions.”
These effects are a growing concern for retirees who accumulated large balances over decades of pre-tax contributions and market growth.
How RMDs Are Calculated and What Drives the Tax Burden
The IRS Formula
The IRS calculates RMDs using:
- Account balance on December 31 of the previous year
- Life-expectancy factor from the IRS Uniform Lifetime Table
If a retiree has a $1 million traditional IRA at the end of the year and their applicable divisor is 28.0, the RMD for the year is:
$1,000,000 ÷ 28.0 = $35,714
Because withdrawals are fully taxable, retirees must include this amount in their adjusted gross income (AGI). That income may also:
- Increase Medicare IRMAA surcharges
- Push Social Security benefits into taxable status
- Raise the marginal tax bracket
- Reduce eligibility for certain credits and deductions
These side effects underscore why retirees benefit from applying RMD tax strategies earlier rather than later.
Strategy 1 — Using Roth Conversions to Reduce Future RMDs
For retirees aiming to reduce taxes in retirement, the Roth conversion remains one of the most effective tactics. Converting funds from a traditional IRA to a Roth IRA moves assets into a tax-free environment. Once inside the Roth IRA, these funds:
- Are not subject to RMDs during the owner’s lifetime
- Grow tax free
- Can be withdrawn tax free in retirement
Financial analysts at Morningstar note that Roth conversions can be especially advantageous when market volatility temporarily suppresses account values. Converting during a down market reduces the taxable cost of the conversion.
However, conversions create immediate tax liability because the converted amount is added to income for that year. For retirees managing the transition to RMD age, focusing on “tax bracket management” is essential. Converting only enough to fill a desired tax bracket can prevent unintended bracket jumps.
Strategy 2 — Qualified Charitable Distributions (QCDs)
Lower Income Without Lower Giving
Retirees who are charitably inclined can use Qualified Charitable Distributions to satisfy part or all of their RMD. Under IRS rules, individuals age 70½ and older may donate up to $108,000 (in 2025, indexed for inflation) directly from an IRA to a qualified charity.
Because the funds go straight to the charity:
- The withdrawal does not count toward taxable income
- The amount still satisfies RMD requirements
- There is no need to itemize deductions
For retirees with a $1 million retirement account, QCDs can significantly reduce both taxable income and future RMD obligations. IRS data shows that QCDs are among the most tax-efficient tools available to older Americans who support charitable work.
Strategy 3 — Using Pre-RMD Withdrawals to Smooth Tax Exposure
Many retirees fail to use the window between age 59½ and 73 to manage future tax liabilities. Partial withdrawals before RMD age can:
- Reduce the future account base
- Lower long-term RMD obligations
- Smooth income over multiple tax years
This strategy is particularly useful for retirees who experience “low-income years”—periods when Social Security has not begun or employment income has tapered. Spreading distributions over more years avoids large taxable spikes later.
Certified financial planner Karen Sutherland explains:
“For retirees with higher balances, pre-RMD withdrawals can dramatically reduce future RMDs, especially when taken strategically during low-income periods.”
Strategy 4 — Taking Advantage of Employer Plan RMD Deferral
Retirees who continue working past age 73 may be exempt from RMDs on their current employer’s 401(k) plan, if the plan allows deferral. These individuals can:
- Avoid taking RMDs from the active employer plan
- Roll eligible IRA assets into the employer plan
- Defer RMDs until they fully retire
This option does not apply to IRAs, but employer plans often allow roll-ins that can provide additional flexibility for older workers.
Additional Factors That Can Raise or Lower RMDs
Market Performance
A strong market increases RMD obligations. Volatility can create unpredictable swings. Retirees should check balances near year-end.
Tax Law Updates
Congress has recently changed RMD age requirements through the SECURE Act and SECURE 2.0. Future changes may adjust age thresholds or withdrawal rules.
Beneficiary Considerations
Heirs of large IRAs face their own RMD obligations under the 10-year rule. Roth IRAs often provide more flexible and tax-efficient legacy options.
What Financial Experts Are Advising Right Now
Recent commentary from leading analysts indicates that large IRA balances pose growing tax challenges.
A Schwab retirement report notes:
“Retirees often underestimate how much RMDs will increase over time, especially when balances exceed $1 million.”
The Center for Retirement Research at Boston College adds:
“Tax-deferred accounts were built for accumulation, but distribution rules increasingly define retirement outcomes.”
The consensus is clear: early analysis and pre-RMD planning have become essential for wealthier retirees.
Related Links
Checklist — What Retirees Should Do This Year
- Estimate your required minimum distribution for the coming year.
- Determine whether a Roth conversion fits your tax bracket.
- Consider using QCDs if you plan to donate.
- Evaluate early withdrawals if currently in a lower tax bracket.
- Review Medicare IRMAA thresholds before finalizing distributions.
- Confirm whether employer plan RMD deferral applies.
- Meet with a tax adviser and financial planner before December 31.
Analysts expect continued discussions in Congress about future adjustments to RMD ages and retirement tax policy. For retirees managing RMDs on high-balance accounts, staying informed and conducting annual tax planning remains essential to reducing lifetime tax exposure while maintaining sustainable income.
FAQ About Smart Ways to Reduce Taxes
1. Does RMD planning differ if I have multiple accounts?
Yes. RMDs from IRAs can be aggregated, but 401(k) plan RMDs must be taken separately.
2. Can I skip an RMD if the market drops?
No, unless Congress issues temporary relief. The IRS enforces annual withdrawals regardless of market conditions.
3. Do Roth IRAs have RMDs?
Not during the original owner’s lifetime. Beneficiaries must follow their own schedule.
4. Will QCDs reduce future RMDs?
QCDs reduce the IRA balance, indirectly lowering future RMD obligations.
