If you took a Required Minimum Distribution (RMD) last year, you may be seeing its effects now as you look over your tax return. That moment of “wait, what just happened?” is completely understandable and very common. RMDs are a normal part of retirement for many people, but they often affect taxes in ways that aren’t obvious at first glance. Understanding how RMDs fit into your overall income picture can help explain this year’s tax bill—and make future years feel far more predictable.
Why RMDs Can Increase Your Taxes
RMDs are taxed as ordinary income, which means they’re added directly to your taxable income for the year. What catches many retirees off guard is that RMDs don’t arrive alone. They’re layered on top of other common retirement income sources, such as Social Security benefits and interest, dividends, or capital gains from investment accounts. When combined, these income streams can push total income higher than expected. As a result, some retirees find themselves in the same tax bracket they had while working—or even a higher one. Retirement may bring more flexibility in your schedule, but it doesn’t always bring lower taxes (unfortunately, the IRS didn’t retire when you did).
Why RMDs Keep Getting Bigger
RMDs are calculated using your tax-deferred account balances as of December 31 of the prior year, and an IRS life expectancy factor based on your age. As you get older, that life expectancy factor decreases. This means the percentage you’re required to withdraw increases each year. Even if your spending stays the same, the amount you must take—and pay taxes on—grows over time. This is why RMDs often feel manageable at first and more noticeable as the years go on.
Why Accuracy Is So Important
Many custodians calculate RMD amounts and send reminders, which is helpful—but the IRS ultimately holds you responsible for withdrawing the correct amount on time. If an RMD is missed, taken late, or miscalculated, the penalty can be significant—up to 25% of the amount not withdrawn, though it may be reduced if corrected promptly. That’s not the kind of surprise anyone wants to discover after the fact, which is why reviewing RMDs carefully when preparing your tax return is so important.
Planning Strategies That Can Help Reduce Future RMD Impact
If RMDs are pushing your income higher than expected, there are planning strategies that may help reduce their impact over time—especially when implemented as soon as possible.
I. Maximizing Your Current Tax Bracket
Of course, hindsight is 20/20. If you had known to begin withdrawing more strategically from tax-deferred accounts before RMDs hit, you might have already reduced your current RMDs. That said, it might not be too late to employ some version of this strategy moving forward, even if that window may have partially closed. If you still have some headroom in your current tax bracket, with the right guidance and depending on your situation, you might be able to explore ways you can prevent bumping into even higher brackets in the future as RMDs continue to grow. The trade-off is that withdrawing earlier may reduce the amount left to grow tax-deferred, so this strategy works best when carefully planned rather than improvised. Done thoughtfully, this approach can:
- Reduce the size of tax-deferred accounts
- Lower future RMDs
- Help smooth taxable income across more years
II. Converting to a Roth Account
Another option is a Roth conversion, which involves moving money from a tax-deferred account into a Roth account. Roth conversions are often most effective in years when income is lower—such as early retirement, before RMDs begin. While the converted amount is taxable in the year of conversion, Roth accounts:
- Are not subject to RMDs
- Offer tax-free withdrawals when you eventually do need distributions from them
- Can be appealing for long-term planning and heirs
Note: because conversions increase taxable income in the year they’re done, they should be evaluated carefully to avoid creating a tax bill that feels worse than the problem you were trying to solve.
III. Using Qualified Charitable Distributions
For retirees who are charitably inclined and over age 70½, a Qualified Charitable Distribution (QCD) may help reduce the tax impact of RMDs. While QCDs don’t create a charitable deduction, they can lower adjusted gross income, which may help reduce the overall tax impact of RMDs and other income sources. It’s one of those situations where doing good can also make your tax return a little easier to look at. With a QCD:
- Funds go directly from your IRA to a qualified charity
- The distribution counts toward your RMD
- The amount is excluded from taxable income
The Big Picture
If your tax return looks different after taking an RMD, it may simply be the result of how RMDs interact with other retirement income. With thoughtful planning and the right guidance, RMDs don’t have to be a recurring surprise. A coordinated withdrawal strategy can help support your long-term financial goals—and keep retirement focused where it belongs: on family, flexibility, and enjoying the life you’ve worked so hard to build.