Why Waiting Until Your RMD Age Isn’t Always the Most Tax-Efficient Strategy
One of the most common assumptions retirees make is that they should delay taking money from their Individual Retirement Account (IRA) for as long as possible.
At first glance, that approach seems logical. The longer money remains invested, the longer it has the opportunity to grow tax-deferred.
However, retirement tax planning is often more complicated than simply delaying withdrawals.
For many retirees, intentionally taking IRA withdrawals before Required Minimum Distributions (RMDs) begin may actually reduce lifetime taxes, improve retirement income flexibility, and create opportunities that may not exist later.
The key isn’t withdrawing money as early as possible.
The key is withdrawing it strategically.
The “Tax Valley”
Many retirees experience what planners sometimes refer to as a tax valley.
This is the period after retirement but before:
- Social Security begins
- Required Minimum Distributions begin
- Pension income increases (if applicable)
During these years, taxable income is often lower than it will be later in retirement.
That lower-income period may create opportunities to intentionally recognize income while remaining in a favorable tax bracket.
Rather than allowing your IRA balance to continue growing unchecked until RMDs begin, strategic withdrawals during these years may help smooth taxable income over your lifetime.
Bigger IRA Balances Often Mean Bigger Future RMDs
Required Minimum Distributions are calculated using your retirement account balance and your life expectancy.
Generally speaking:
- Larger IRA balance = Larger RMD
- Larger RMD = More taxable income
Higher taxable income can affect much more than your federal tax bill.
It may also:
- Increase Medicare Part B and Part D premiums through IRMAA
- Increase the taxation of Social Security benefits
- Push you into a higher tax bracket
- Reduce flexibility for future Roth conversions
Planning ahead may help reduce these future challenges.
Should You Spend the Money?
Not necessarily.
One misconception is that taking an IRA withdrawal means spending the money.
In many cases, retirees may withdraw funds, pay any applicable taxes, and reinvest the remaining proceeds into a taxable brokerage account if appropriate for their circumstances.
While future earnings in the taxable account may be subject to taxation, this strategy can reduce the size of future RMDs and create greater flexibility for retirement income planning.
Whether this approach makes sense depends on your overall financial picture and should be evaluated carefully.
Coordinating IRA Withdrawals with Roth Conversions
For some retirees, partial Roth conversions may be more appropriate than simply taking taxable withdrawals.
For others, a combination of modest IRA withdrawals and Roth conversions may provide the greatest long-term benefit.
There is no one-size-fits-all solution.
The objective is to evaluate today’s tax bracket against expected future tax rates and lifetime retirement goals.
Social Security Timing Matters
Another important consideration is when you plan to begin Social Security.
A retiree who delays Social Security until age 70 may have several years with relatively low taxable income.
These years often provide valuable planning opportunities.
Once Social Security begins—and especially after Required Minimum Distributions start—the flexibility to manage taxable income often becomes more limited.
Medicare Planning
Medicare premiums are determined in part by income.
Large IRA withdrawals can increase Modified Adjusted Gross Income (MAGI), potentially triggering higher Medicare premiums through IRMAA.
However, spreading withdrawals over multiple years rather than taking large Required Minimum Distributions later may reduce the likelihood of significant income spikes.
The goal is often to manage lifetime income rather than focusing solely on one tax year.
Point Wealth Insight
One of the biggest misconceptions we hear is, “I’m going to wait as long as possible before touching my IRA.”
Sometimes that’s the right decision.
Often, it isn’t.
The most effective retirement income strategy isn’t necessarily about paying the least tax this year—it’s about managing taxes over the course of your retirement. In many cases, retirees who intentionally recognize income during lower-income years create greater flexibility later when Required Minimum Distributions, Social Security, and Medicare premiums begin to overlap.
Every retirement plan is different, but these decisions should rarely be made in isolation. Coordinating IRA withdrawals with Roth conversions, Medicare planning, Social Security, and investment management can create opportunities that may otherwise be missed.
Ask the Advisor
The best withdrawal strategy isn’t determined by age alone.
It’s determined by how all the pieces of your retirement plan fit together.
Before making significant IRA withdrawals—or deciding to delay them—consider reviewing your retirement income strategy with your financial advisor and tax professional.
Sources
- Internal Revenue Service – Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
- Internal Revenue Service – Retirement Topics – Required Minimum Distributions.
- Social Security Administration – Retirement Benefits.
- Centers for Medicare & Medicaid Services – Medicare premium and IRMAA guidance.