RMDs, Taxes, and the Ghost Expenses of Retirement

There’s a line item missing from most retirement income projections. It doesn’t show up in the financial plan, it isn’t in the withdrawal strategy, and it tends to arrive as a surprise — even for people who thought they had accounted for everything.

Taxes.

Not the broad concept of taxes, which everyone knows they’ll owe. The specific, recurring, sometimes-compounding tax consequences that follow retirees from one account withdrawal to the next. The kind that show up as larger-than-expected quarterly estimated tax bills, as Medicare premium surcharges that arrive two years after the income that triggered them, as a higher Social Security tax inclusion that nobody warned you about.

Call them ghost expenses. They’re real, they compound, and the time to understand them is before you start drawing on your accounts — not after.

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Required Minimum Distributions: the bill you can’t defer forever

If you have a traditional IRA, 401(k), 403(b), or similar tax-deferred retirement account, you have been postponing taxes, not avoiding them. The IRS has always intended to collect on that deferred income. Required Minimum Distributions are how they make sure it happens.

Under SECURE 2.0, the RMD age is 73 if you were born between 1951 and 1959, and 75 if you were born in 1960 or later. Each year, you’re required to withdraw a minimum amount calculated by dividing your prior year-end account balance by an IRS life expectancy factor from the Uniform Lifetime Table. The older you get, the larger the factor applied to a growing account — which means RMDs tend to grow over time, not shrink.

Failure to take your RMD means a penalty of 25% of the amount not withdrawn, reduced to 10% if the RMD is corrected within two years. Your brokerage will typically calculate the amount for you and remind you — but the responsibility is yours.

A few things worth understanding about RMDs that don’t always make it into the standard explanation:

They create taxable income whether you need it or not. This is the part that surprises retirees whose spending is already covered by Social Security or other income. The RMD doesn’t care whether you need the money. It hits your tax return as ordinary income regardless. If your guaranteed income already covers your expenses and your RMD pushes your total income significantly higher, you may find yourself in a higher bracket than expected.

The first RMD has a timing trap. If this is your first RMD year, you have until April 1 of the following year to take it. The catch: you would then owe both your first and second RMDs in the same tax year, which could push you into a higher tax bracket. Taking the first RMD in the year you turn 73 — rather than delaying it — avoids this problem.

Roth IRAs are exempt while you’re alive. Roth IRA owners are not subject to RMDs during their lifetime. This is one of several arguments for Roth conversions in lower-income years before RMDs begin — converting traditional IRA money to Roth reduces the future RMD base and removes that portion from the mandatory distribution schedule.

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The Medicare surcharge nobody mentions at enrollment

Here is one of the less-publicized features of Medicare. Your premium isn’t fixed. It depends on your income — specifically, your Modified Adjusted Gross Income from two years ago.

In 2026, the IRMAA surcharge threshold is $109,000 for a single individual and $218,000 for a married couple. If your income stays below those thresholds, you pay the standard Part B premium of $202.90 per month. If it crosses above them, you pay more — potentially substantially more.

For 2026, total monthly Part B premiums range from $284.10 to $689.90 for those subject to IRMAA surcharges. At the top bracket, that’s more than three times the standard premium. For a married couple, both on Medicare, the additional cost can run several thousand dollars per year.

Two things make this particularly relevant for retirees managing income:

The two-year lag. Your 2026 IRMAA is based on your Modified Adjusted Gross Income from your 2024 tax return. A large IRA withdrawal, a Roth conversion, or a capital gains event in 2024 affects your Medicare premiums in 2026 — two years later. Most retirees don’t connect those dots until the Social Security Administration sends a notice.

The cliff structure. IRMAA is a cliff system — if your income is even $1 over a threshold, you owe the full surcharge for that entire tier. There’s no gradual increase. That single dollar can cost you hundreds more per year. For retirees with income near a bracket boundary, understanding exactly where you stand before making a large withdrawal or conversion is worth the time.

The income that counts for IRMAA is broader than most people expect. It includes wages, Social Security income, IRA distributions, capital gains, and even tax-exempt municipal bond interest. This is the kind of thing your CPA should be calculating in October, before year-end, when there’s still time to act.

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Social Security: the partial taxation most people underestimate

Social Security benefits are not fully taxable for most recipients — but they’re not fully exempt either. The amount of your benefit included in taxable income depends on your “combined income”: adjusted gross income plus non-taxable interest plus half of your Social Security benefit.

At certain thresholds, up to 85% of your Social Security benefit becomes subject to federal income tax. The thresholds haven’t been indexed for inflation since they were set in the 1980s and 1993 respectively, which means that over time, a larger proportion of Social Security recipients have become subject to partial taxation — including many who didn’t expect to be.

This interacts with RMDs in a specific way. An RMD that pushes your AGI above the relevant threshold doesn’t just add to your taxable income directly — it can also increase the portion of your Social Security benefit that’s included in income. The marginal effective tax rate on that last dollar of RMD income can be higher than the headline rate suggests.

This is not exotic tax planning. It’s a basic feature of the retirement tax system that affects a large proportion of retirees with meaningful IRA balances. Knowing about it before you’re in it gives you options. Finding out after the fact gives you a tax bill.

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Quarterly estimated taxes: the cash flow issue

If your retirement income comes from a mix of Social Security, IRA distributions, taxable investment income, and RMDs, you likely don’t have enough withholding to cover your tax liability automatically. Unlike a paycheck — where withholding happens without your involvement — retirement distributions often require you to either elect withholding from each distribution or pay quarterly estimated taxes directly to the IRS.

Miss the quarterly deadlines (April 15, June 15, September 15, January 15 of the following year) or underpay significantly, and you owe an underpayment penalty on top of the tax itself.

This is a cash flow and planning issue, not a complicated tax concept. But it catches retirees who have spent decades with taxes handled automatically through payroll withholding and never had to think about quarterly payments before.

The fix is straightforward: work with your CPA to estimate your annual tax liability early in the year, divide it into quarterly payments, and set up direct debit from your checking account. Build the quarterly payment into your regular cash flow the same way you’d build in any other recurring expense.

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“No Tax on Social Security” — what actually passed and what it means for you

During the 2024 campaign, President Trump promised to eliminate federal income taxes on Social Security benefits entirely. Many retirees took that promise at face value and began planning around it. When the One Big Beautiful Bill Act was signed into law on July 4, 2025, the Social Security Administration sent a press release claiming that “nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits.”

That press release caused significant confusion — and for higher-income retirees, acting on it could be an expensive mistake.

Here’s what the law actually did.

What passed: a temporary Senior Bonus Deduction

The One Big Beautiful Bill did not eliminate the taxation of Social Security benefits. The longstanding rules governing how much of your benefit is subject to federal income tax remain unchanged. What the law added was a new Senior Bonus Deduction — an additional $6,000 standard deduction for taxpayers aged 65 and older, or $12,000 for married couples where both spouses qualify. This deduction applies to tax years 2025 through 2028, after which it expires unless Congress extends it.

For lower-income retirees — roughly those with combined income below $75,000 for singles or $150,000 for joint filers — the additional deduction is often large enough to reduce taxable income below the threshold where Social Security benefits become taxable. For those retirees, the practical effect is that their Social Security benefit is no longer taxed. The SSA press release was technically accurate for them.

For higher-income retirees, the deduction reduces taxable income by $6,000 or $12,000, which is helpful — but it doesn’t eliminate Social Security taxation. The underlying rules still apply. Up to 85% of your benefit can still be included in taxable income depending on your combined income. The deduction offsets some of that, but not all of it.

What unchanged: the combined income thresholds

The provisional income thresholds that determine how much of your Social Security benefit is subject to tax haven’t moved. They were set in 1984 and 1993 and have never been indexed for inflation. For a married couple filing jointly:

• Below $32,000 combined income: no Social Security benefit is taxable
• Between $32,000 and $44,000: up to 50% of the benefit may be taxable
• Above $44,000: up to 85% of the benefit may be taxable

For single filers the thresholds are $25,000 and $34,000 respectively. These numbers haven’t changed in decades, which is why a growing proportion of retirees find themselves paying tax on their benefits even at modest income levels — the thresholds simply haven’t kept up with inflation or rising Social Security payments.

What this means in practice

If your combined income — AGI plus non-taxable interest plus half of your Social Security benefit — is well above $44,000 for a married couple, the new Senior Bonus Deduction reduces your tax bill modestly but doesn’t fundamentally change your Social Security tax exposure.

More importantly: if you adjusted your withdrawal strategy, Roth conversion plan, or RMD approach based on the assumption that Social Security is now fully tax-free, revisit those decisions with your CPA. The underlying mechanics haven’t changed. Planning as if they have could push income into higher brackets or trigger IRMAA surcharges you weren’t expecting.

The full elimination of Social Security taxation remains a legislative proposal — H.R. 904, the “No Tax on Social Security Act,” was introduced in the 119th Congress but has not passed as of mid-2026. Watch for developments, but plan under current law until something actually changes.

Roth conversions: the window worth understanding

For retirees in the years between retirement and when RMDs begin — or in years when income is lower than usual — there is often a window to convert traditional IRA money to a Roth IRA at relatively favorable rates.

The logic: you pay tax on the converted amount now, at your current rate, and avoid both future RMDs on that portion and future taxes on its growth. If tax rates rise in the future, or if your income climbs in later retirement as RMDs grow, converting earlier at lower rates can be a meaningful advantage.

The tradeoff is that the conversion adds to taxable income in the year it happens — which means it can affect your IRMAA two years later, your Social Security inclusion in the conversion year, and your bracket position generally. The math is specific to each person’s situation and changes year to year.

What’s consistent is that the window tends to close. Once RMDs are fully underway and Social Security is maximized, there are fewer years with meaningfully lower income. If you’re in the years before RMDs start and your income is lower than it will eventually be, it’s worth at least running the numbers with your CPA.

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The practical takeaway

Taxes in retirement are not a single event. They’re a recurring calculation that responds to every decision you make about which accounts to draw from, when to take Social Security, how much to convert, and whether to harvest or hold appreciated assets in your taxable portfolio.

The retirees who navigate this well tend to share one habit: they have a conversation with their CPA in the fall — October or November — before the year ends. That’s when there’s still time to adjust a distribution, make a conversion, harvest a loss, or avoid crossing an IRMAA threshold. January is too late.

The ghost expenses are real. They’re also manageable, once you know to look for them.

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Content reflects personal experience and independent research. Not legal, tax, or financial advice. Consult qualified professionals for your specific situation.

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Further Reading

• IRS Publication 590-B — Distributions from Individual Retirement Arrangements. The definitive IRS guide to RMDs, including the Uniform Lifetime Table used to calculate annual distributions. irs.gov/publications/p590b

• IRS RMD FAQs — Plain-language answers to common questions about required minimum distributions, aggregation rules, and inherited accounts. irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

• SECURE 2.0 Act Summary — The 2022 legislation that raised the RMD age to 73 (and eventually 75) and modified inherited IRA rules. Search “SECURE 2.0 Act summary” for IRS guidance and Congressional Research Service summaries.

• Medicare IRMAA — Official CMS Information — The Centers for Medicare & Medicaid Services’ explanation of income-related premium adjustments, current thresholds, and how to appeal a determination. medicare.gov/your-medicare-costs/part-b-costs

• IRS Form 5329 — Used to report additional taxes on qualified plans, including the RMD penalty and how to request a waiver. irs.gov/forms-pubs/about-form-5329

• Social Security Benefit Taxation Worksheet — IRS guidance on calculating what portion of Social Security benefits is subject to federal income tax. Found in IRS Publication 915. irs.gov/publications/p915

• One Big Beautiful Bill Act — Senior Bonus Deduction — Summary of the $6,000/$12,000 Senior Bonus Deduction enacted in 2025, including eligibility requirements and sunset provisions. Search “One Big Beautiful Bill Senior Deduction IRS” for current guidance.

• H.R. 904 — No Tax on Social Security Act — The pending legislative proposal that would fully eliminate federal income taxation of Social Security benefits. Current status at congress.gov.