Divorce the IRS

Tax Time Bomb 6: Required Minimum Distributions (RMDs)

• James Miller

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In this episode of The Divorce the IRS Podcast, we continue our series on retirement tax time bombs by breaking down one of the most overlooked triggers of higher taxes later in life—Required Minimum Distributions (RMDs).

While many retirees assume they can leave their tax-deferred accounts untouched for as long as they’d like, the reality is very different. Once you reach age 73, the IRS requires you to begin withdrawing a portion of your IRA and traditional 401(k) balances each year—whether you need the income or not. And every dollar withdrawn is subject to taxation.

We explain how RMDs are calculated using IRS life expectancy tables, how the required withdrawal percentage increases over time, and what this looks like in a real-world scenario. More importantly, we highlight how these forced withdrawals can create unintended consequences, including higher overall tax exposure, increased taxation of Social Security benefits, and rising Medicare premiums.

We also explore the challenge many retirees face when they don’t need the income—yet are still required to take it. Once those funds leave the tax-deferred environment, they are often placed into accounts where earnings are taxed annually, potentially compounding the long-term tax burden.

Finally, we introduce strategies that may help reduce or avoid the impact of RMDs altogether, including the role of tax-free accounts like Roth IRAs and Roth 401(k)s. By understanding how and when to shift assets, you can begin to take more control over how your retirement income is taxed.

If you want to avoid being forced into higher taxes later in retirement and better understand how to plan around RMDs, this is an episode you won’t want to miss.


SPEAKER_00

Welcome to the Divorce the IRS podcast, the retirement income planning podcast designed specifically for those who want to pay the least amount of taxes possible and build a retirement income that lasts. Inspired by the best-selling book, Divorce the IRS, you get to go behind the scenes with financial planner, author, and speaker Jimmy Miller. Learn how to set yourself up to pay the least amount of taxes in retirement when you'll need your money the most. And now, here's your host, Jimmy Miller.

SPEAKER_01

Welcome. Welcome to episode 15 of the Divorce the IRS podcast. By this point, you know that if you take money from your IRA or traditional 401k, you will owe taxes on it. And that those withdrawals could trigger other taxes as well, like on your Social Security and Medicare premiums. Now, let's imagine you're lucky to have enough retirement income from other sources, like a pension, and maybe your Social Security has started, and you haven't had to take any money from your tax-deferred accounts yet. Wouldn't it be nice if you could leave those accounts alone to continue their growth tax deferred for as long as you'd like? It would, but you can't. The IRS has had a lien on those accounts from the moment you contributed your first dollar to them and you accepted the tax deduction loan they gave you. Like all loans, there comes a time when they come due and you need to start paying. If you haven't started paying on these accounts, by the time you're 73 years old, the IRS will require it. They will start collecting on those tax loans they gave you through required minimum distributions, or RMDs for short. Let's take a look at how RMDs work. Once you turn 73, you are required to withdraw a certain percentage of all your tax-deferred money based on your age and pay taxes on it. Whether you need the money or not is irrelevant. You must withdraw it and pay the tax. In 2026, the amount you must take out at age 73 is equal to 3.78% of your tax-deferred balances on December 31st of the previous year. The percentage you must withdraw then increases every year. By the time you're 80, this percentage will have increased to 4.96%. And by 90, it's 8.2%. Let's take a look at an example of how all this works and consider Joe retiree. Joe retiree, who is 80, has an IRA that was worth$500,000 at the end of last year. Joe would use the IRS Uniform Lifetime Table to calculate how much money he must withdraw from his IRA to pay tax on. Now the IRS uses several tables to calculate distributions based on personal circumstances. The most common one, which applies to Joe retiree and also probably you, would be the uniform lifetime table. To calculate the year's minimum distribution amount, we take Joe retiree's age on December 31st of this year and find the corresponding distribution period in the table. Then we divide the value of the IRA on December 31st of the previous year by the distribution period to find Joe's required minimum distribution. So in this example, the table indicates a distribution period of 20.2 years of life expectancy for an 80-year-old. So we divide$500,000 by 20.2 and find out that Joe must take out at least$24,753 this year from his IRA and pay tax on it, regardless of whether he needs to or wants to. This is exactly why those tax deductions taken during all those years you were working were actually like loans from the IRS. You have to pay them back, even if you don't want to. You have no choice. They're mandated by law. And if you choose to or accidentally break this law, the penalties are pretty stiff. As a penalty, you will owe 50% of what you were supposed to withdraw. And then on top of the penalty, you still must take out the RMD amount and pay tax on that as well. See, there's another big problem with RMDs for some retirees, and it's the fact that you're forced to take money out of your pre-tax accounts that you don't need. And there are very limited places you can put that money. Most retirees in this situation would just deposit the money they don't need into the bank or into their regular investment accounts. And the problem with this is that all the earnings, interest, dividends, and capital gains are taxable each year now and no longer tax deferred. And some of that, like interest from a bank account, is taxable at ordinary income rates. The IRS literally makes our most senior citizens take money out of tax-deferred retirement accounts, even if they don't need the money. And the only place to put the money is into accounts that get taxed yearly now. It's like a tax death spiral for our senior citizens that just increases their tax burden every year. If you don't want to end up in this tax death spiral when you're in your 80s and 90s, you need to learn how to diffuse this tax time bomb now. There's a way to get around RMDs and not be forced to withdraw your money from your accounts and pay taxes. You guessed it. It's by utilizing tax-free strategies and accounts like the Roth IRA and Roth 401k. You see, there are no RMDs for Roth accounts. You can leave the money in your Roth account to grow tax-free for as long as you'd like and only take money out on your terms and when you need it. As a bonus, you might like to know that anyone who inherits your Roth IRA account will also get the money tax-free, which we'll discuss in more detail in the upcoming episode called Paying Taxes from the Grave. If you're not convinced yet that you should consider paying your taxes now at known historically low rates and saving your money in tax-free accounts, you or your spouse could get rocked hard by the next tax explosion, which happens when one of you outlives the other.com or the Bayabwealth website at bayablewealth.com and subscribe to the blog to stay up to date on issues affecting retirement income planning.

SPEAKER_00

Don't forget to subscribe to the podcast so you never miss an episode. Bayob Wealth and Bayabut Wealth Abroad are DBAs of Bayobup Wealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.