The Retirement Tax Torpedo!
- Will Riggs
- Jun 8
- 3 min read
When planning for retirement, most people focus on saving and investing. However, there is a critical piece that often gets overlooked and it can have a major impact on your financial future. It is called the Required Minimum Distribution (RMD). It is also known in the industry as the “retirement tax torpedo.” This is not just something to consider when you reach retirement. This should be a part of your retirement planning years, even decades, in advance.
RMDs are mandatory withdrawals from tax-deferred retirement accounts, such as:
401(k)s
IRAs
403(b)s
TSP accounts
These withdrawals typically begin at age 73 or age 75 if you were born after 1960. While that timing may seem distant, delaying taking action now does not eliminate the issue. It can make it more significant. The longer your money grows tax-deferred, the larger your future RMDs may become.
While many retirees assume their tax rates will drop in retirement, that outcome doesn’t always occur. RMDs are a major reason why. Here is how they can create unexpected challenges:
RMDs Increase Your Taxable Income - Every dollar withdrawn as an RMD is added directly to your taxable income. This means:
Larger RMDs result in higher tax exposure.
You could move into a higher marginal tax bracket than you expected.
RMDs Can Trigger Taxes on Your Social Security - This is where the “tax torpedo” becomes especially impactful. RMDs can push your income high enough that up to 85% of your Social Security benefits become taxable. Even more concerning, the income thresholds that trigger this taxation have not been adjusted for inflation since 1983. As a result:
More retirees reach these thresholds each year.
A larger portion of Social Security income becomes taxable.
3. Missing an RMD Comes With Penalties - RMDs are mandatory. If you fail to take your required distribution, the IRS can impose a significant penalty. In fact, the IRS collects over a billion dollars annually in RMD penalties. This is a costly mistake that retirees should avoid.
There are proactive strategies that may help reduce or prevent these issues. One effective strategy is a Roth conversion, where money moves from a tax-deferred account into a Roth account.
The Potential benefits include:
Paying taxes now, possibly at a lower rate.
Access to tax-free withdrawals in the future.
Reduction or elimination of future RMDs.
However, Roth conversions are not a one-size-fits-all solution. A structured approach over multiple years is often more effective. This strategy should account for:
Your current tax bracket.
Future income projections.
Timing of Social Security.
Other retirement assets.
Whether retirement is 10 to 15 years away, approaching soon or already underway, RMD planning should be part of your overall strategy. At some point, every saver transitions from building a portfolio to relying on a retirement income plan. That transition is where tax efficiency becomes essential.
RMDs can gradually reduce your retirement income if left unmanaged. But they don’t have to with proper planning. Understanding how RMDs work and using strategies such as Roth conversions may help you protect your income, reduce taxes and create a more predictable retirement.
If you would like to explore this topic further, including how Roth conversions might fit into your plan, we are here to help. Our comprehensive retirement planning webinar can provide deeper insight into these strategies. This webinar can help you identify how to plan for and manage RMDs. Please click the link below to register for this on-demand, no-cost, no-obligation financial educational event.
This webinar explores:
RMD strategies.
Tax-efficient retirement planning.
The transition from a portfolio to a structured retirement plan.
Retirement is not just about how much you save. It is about how efficiently you use what you have built. Thoughtful planning today can help you avoid unnecessary tax burdens tomorrow.
Plan with purpose. Retire with confidence. Protect what matters most.
Will Riggs, NSSA
Financial Advisor
This content is for informational purposes only and is not investment, legal, or tax advice. Investing involves risk, including loss of principal and past performance does not guarantee future results. Strategic Wealth Partners is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. Any guarantees discussed are backed solely by the issuing insurance company. For more information, including our Form ADV, please visit adviserinfo.sec.gov.