RMD Exposure: What Your 401(k) Balance Really Costs You

Your 401(k) does not ask whether you need the money. At 73 or 75, depending on your birth year, it forces you to take some anyway, and the IRS decides how much based on your balance and your life expectancy, not your spending plan.

Required Minimum Distributions begin the year you reach RMD age, calculated by dividing your prior year-end account balance by a life expectancy factor the IRS publishes in the Uniform Lifetime Table. On a large pre-tax balance, that forced withdrawal can land you in a higher tax bracket, raise your Medicare premiums, and increase the taxable share of your Social Security benefit, often in the same year. None of that is optional once the calendar turns.

When do RMDs start, and how are they calculated?

Under the SECURE 2.0 Act, RMDs begin at 73 for anyone born from 1951 through 1959 and at 75 for anyone born in 1960 or later, up from 72 under the earlier rules. The amount is not a percentage you choose. It comes from a formula: your traditional 401(k), traditional IRA, SEP IRA, and SIMPLE IRA balances as of December 31 of the prior year, divided by a factor tied to your age from the IRS Uniform Lifetime Table.

The factor shrinks every year, which means the required withdrawal grows as a share of your balance even if the balance itself does not move. At 73, the factor is 26.5. At 76, it is 23.7. The same dollar balance produces a larger required withdrawal three years later, from a shrinking divisor alone.

What does an RMD look like on a large balance?

The table below isolates the effect of the shrinking divisor. It assumes an unchanged $2,500,000 balance at each age, which will not match how a real portfolio behaves, so you can see how much of the increase comes from the IRS formula alone, before the market has any say.

A balance that grows with the market, the more common case, produces an even larger required withdrawal, since a rising numerator and a shrinking divisor work in the same direction. A required withdrawal in the $80,000 to $170,000 range on a $2 to $4 million balance by the mid-70s is common for executives who saved through a long career, and every dollar of it counts as ordinary income.

What happens if you miss one?

The penalty is steep by design. Miss an RMD, or take less than required, and the IRS can assess a 25% excise tax on the shortfall, reduced to 10% if you correct the mistake within two years. On a $100,000 required withdrawal that was never taken, a 25% excise tax adds $25,000 in penalty on top of the income tax still owed once the distribution is made.

Most missed RMDs are not deliberate. They happen when an account is forgotten after a job change, when a beneficiary does not know a rule applies to an inherited account, or when a custodian’s automatic calculation is wrong for a household with accounts at several firms. Executives who left balances scattered across two or three former employers face a higher version of this risk, since more accounts mean more places for a calculation to go wrong. A plan that tracks every pre-tax account in one place is the simplest defense against a mistake with a five-figure cost.

How do RMDs raise costs beyond the tax bracket?

An RMD is ordinary income, so it stacks on top of Social Security, pension income, and anything else you report, which can push other income into a higher bracket even though the RMD itself is a fixed calculation. Two costs compound from there.

The first is Medicare. RMD income raises Modified Adjusted Gross Income, and MAGI above certain thresholds triggers IRMAA surcharges on Part B and Part D premiums, assessed two years after the income that caused them. A household that ignored RMD planning in its early 70s can see the bill arrive as a Medicare premium increase well into retirement, disconnected in time from the decision that caused it. Before a large RMD year arrives, read what IRMAA is and how the surcharge gets calculated.

The second is Social Security. RMD income counts toward provisional income, and above $44,000 for a married couple, up to 85% of your Social Security benefit becomes taxable. A large RMD can turn a benefit you assumed was mostly tax-free into one that is 85% taxable, in the same year the RMD itself pushes you into a higher bracket.

Does RMD exposure carry over to your heirs?

RMD exposure does not end with you. Since 2020, most non-spouse beneficiaries who inherit a traditional IRA or 401(k) have to empty the account within ten years of the original owner’s death, under rules tied to the SECURE Act. A large pre-tax balance left to an adult child in their peak earning years can force that child to withdraw a sizable account on a compressed schedule, on top of a salary that already sits in a high bracket.

Beneficiaries of a traditional account often owe tax at their own marginal rate, which can run higher than the rate you paid throughout your own retirement if a large distribution lands in a peak earning year. A Roth account inherited under the same ten-year rule carries no income tax for the beneficiary, since the tax was already paid at conversion. This is where RMD planning during your own lifetime and legacy planning overlap. A dollar converted from pre-tax to Roth before RMDs begin does two things at once. It lowers the RMD you face while you are alive, and it turns an eventual inheritance from a taxable withdrawal schedule for your children into a tax-free one.

Can you reduce RMD exposure before it starts?

Two strategies do most of the work, and Roth conversions do the most good before RMDs begin.

Roth conversions move money out of the pre-tax accounts that generate RMDs, for good. A dollar converted and taxed today never generates a forced withdrawal again. Qualified Charitable Distributions let you direct money from an IRA straight to a qualified charity after age 70½, and the amount counts toward that year’s RMD without ever appearing as taxable income. QCDs remain available at any age past 70½, which makes them the rare strategy that still works once RMDs are already running.

A narrower option, the still-working exception, lets you delay RMDs from a current employer’s 401(k) past your RMD age if you remain employed there and do not own more than 5% of the company. It does not apply to IRAs, to 401(k)s from prior employers, or once you retire, which limits its use to the final working years before the rule stops applying.

Can you convert the same year an RMD is due?

Once RMDs start, the order matters. The IRS requires that year’s RMD to come out of the account before any additional withdrawal counts as a Roth conversion. Convert first and try to call part of it your RMD afterward, and the attempt does not hold up. The RMD has to leave the account, as an RMD, before conversion dollars can move.

This rule caps how useful conversions become after RMDs begin. Every year’s RMD arrives as taxable income no matter what happens, and only the amount above the RMD is available to convert. It is one more reason the years before RMDs start carry more weight in a conversion schedule than the years after.

What does this look like inside a full plan?

RMD exposure gets managed in the decade before RMDs begin, not in the year itself, through the same withdrawal sequencing and Roth conversion decisions that shape every other part of a retirement income plan.

A plan that models your projected first RMD under a do-nothing scenario, then tests how much a multi-year conversion schedule can reduce it, turns an abstract future tax bill into a specific number you can act on today, in this year’s tax return rather than a hypothetical one a decade out. This is the calculation Robert Boeck runs for a household with a pre-tax balance large enough to make RMDs a meaningful part of the plan. Once RMDs have started, the questions turn to which account pays each year’s bills; planning for retirees in Crossville and Fairfield Glade covers that stage.

What should you do next?

Two numbers turn RMD exposure from an abstraction into a plan.

First, get a projection of your first RMD based on your current balance and its likely growth, so you know what you are managing. Second, test what a Roth conversion schedule between now and your RMD age does to that number, measured in dollars of future RMD avoided, not just in tax paid today.

Both numbers change every year, as balances move and tax law shifts, which is why a projection built once in your early sixties needs a second look well before RMDs begin. Schedule a conversation with Robert Boeck, to see your specific RMD exposure modeled against your accounts.