When It Comes to Your RMDs, Be Very, Very Afraid!
If you’ve saved heavily in a traditional IRA or 401(k) you may feel great about your retirement savings now, but your required minimum distributions can be frighteningly large in retirement. And the tax bill they generate can be even scarier.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

Editor’s note: This is part two of a seven-part series on retirement tax bombs. It dives more deeply into how required minimum distributions (RMDs) from tax-deferred savings can become a snowballing tax liability in retirement. If you missed the introductory article, you may find it helpful to start here.
For the remaining articles in this series, I’ll use a case study of a couple aged 40 who has saved $500,000 combined in pre-tax retirement accounts. Presumably, this couple is tracking well for a secure retirement. After maxing out their retirement plan contributions, they may not have much cash flow left over and may feel like they’re barely making ends meet. I meet couples like this all time. They aren’t rich, they’re simply good savers doing exactly what conventional wisdom has taught them to do.
The couple keeps making the maximum contribution each year ($20,500 each through age 49, then $27,000 from age 50 to 64, which are the current maximums), and each get a $6,000 employer match. I assume contribution limits rise by 2% annually. The couple’s contributions are in growth allocations that earn an annual 7% return. By the time they retire on their 65th birthdays, their retirement accounts will have grown to an impressive $7.3 million! They’re in great shape, right?

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Snowballing RMD Income
For simplicity, let’s assume they don’t draw down their pre-tax savings early in retirement, so their tax-deferred savings grows to about $11.9 million by age 72, when they must take their first RMD, which is $435,820. The RMD is 100% taxable, at their ordinary income rate, and by itself may put them in a high tax bracket. As you can see in the chart below, the RMD grows to $533,818 at age 75, $739,569 at age 80, $1 million at age 85 and $1.3 million at age 90.
The RMD income dwarfs their annual Social Security income, which I assume at $36,000 each at age 67, with a 2.0% annual cost of living adjustment.
Most people assume their taxable income in retirement will be very low because they’re not working, and will be receiving only Social Security benefits and perhaps some interest and dividend income. But clearly, if you’ve saved a lot in tax-deferred accounts, your RMD income can be frighteningly large. Meet your retirement tax bomb.
Even though the couple would take $15.6 million in total RMDs from age 72 to 90, their tax liability keeps growing, although at a decreasing rate as the RMDs gets larger. It’s not until age 89 that the RMD exceeds the projected portfolio growth and the tax liability starts shrinking.
Future Tax Rates
As scary as this sounds, think about where future tax rates may be headed. Current tax rates are near historical lows and may be the lowest we'll see for the rest of our lives. Consider solvency issues with Social Security and Medicare, chronic infrastructure issues, exploding deficits, climate change and pandemics. Each of these issues in isolation will require a lot of money to solve. And that doesn't even account for potential policy changes that would tax the wealthy more.
Simply put, paying taxes at today’s low rates may be a bargain compared to deferring, and growing, your tax liabilities into the future.
My next article will focus on problem No. 2: Medicare means testing surcharges.
- Part 1: Is Your Retirement Portfolio a Tax Bomb?
- Part 2: When It Comes to Your RMDs, Be Very, Very Afraid!
- Part 3: RMDs Can Trigger Massive Medicare Means Testing Surcharges
- Part 4: Will Your Kids Inherit a Tax Bomb from You?
- Part 5: How to Defuse a Retirement Tax Bomb, Starting With 1 Simple Move
- Part 6: Using Asset Location to Defuse a Retirement Tax Bomb
- Part 7: Roth Conversions Play Key Role in Defusing a Retirement Tax Bomb
- Bonus article: 2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
David McClellan is a partner with Forum Financial Management, (opens in new tab) LP, a Registered Investment Adviser that manages more than $7 billion in client assets. He is also VP and Head of Wealth Management Solutions at AiVante, a technology company that uses artificial intelligence to predict lifetime medical expenses. Previously David spent nearly 15 years in executive roles with Morningstar (where he designed retirement income planning software) and Pershing. David is based in Austin, Texas, but works with clients nationwide. His practice focuses on financial life coaching and retirement planning. He frequently helps clients assess and defuse retirement tax bombs.
-
-
Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
By Kelley R. Taylor • Published
-
Protect Your Retirement: Seven Things You Can Do Right Now
Whether you’re preparing to retire or already retired, a proactive plan is critical to help safeguard your retirement, especially amid uncertainty.
By Jessica Cervinka, IAR • Published
-
Protect Your Retirement: Seven Things You Can Do Right Now
Whether you’re preparing to retire or already retired, a proactive plan is critical to help safeguard your retirement, especially amid uncertainty.
By Jessica Cervinka, IAR • Published
-
Buffer ETFs Can Limit Investing Losses in Uncertain Times
Doing your own risk-reward investing analysis might be easier said than done, especially when markets are volatile. That’s where buffer ETFs can come in handy.
By Kirk Tushaus • Published
-
Three Ways Technology Will Fix What's Broken in Philanthropy
Charities stand to benefit from evolving fintech and artificial intelligence that will make charitable giving more efficient, transparent, relevant, collaborative and impact-focused.
By Stephen Kump • Published
-
Four Steps for Teens Who Want to Test the Investing Waters
Teens who feel ready to try their hand at investing should first get educated, with adult supervision, and then it’s all about diversify, diversify, diversify.
By Kerim Derhalli • Published
-
Is Retirement in 2023 Still Possible?
Yes, it is, if you have a customized plan specific to your retirement. If you do, you’re in the minority, though, so here are some ways to develop that plan.
By Nicholas J. Toman, CFP® • Published
-
Being Rich vs. Being Wealthy: What’s the Difference?
It’s all about where you put the zeros — having a large bank account isn’t the same as having zero regrets and focusing on what brings you joy.
By Andrew Rosen, CFP®, CEP • Published
-
I Wish I May, I Wish I Might: Estate Planning’s Gentle Nudge
Contrary to what you might expect, using precatory language such as ‘I wish’ or ‘I hope’ can play an important part in three estate planning objectives.
By Allison L. Lee, Esq. • Published
-
Donor-Advised Funds: A Tax-Savvy Way to Rebalance Your Portfolio
Long-term investors who embrace charitable giving can easily save on capital gains taxes by donating shares when it’s time to get their portfolio back in balance.
By Adam Nash • Published