Many retirees assume that once their paychecks stop, their taxes will fall as well.
Yet for households that accumulated substantial savings in traditional IRAs and 401(k)s, the opposite can sometimes happen. Required withdrawals from these accounts can create taxable income later in retirement—often at levels retirees did not anticipate.
Over decades of disciplined saving, tax-deferred retirement accounts can grow into one of the largest components of a household’s wealth. While the tax deferral was valuable during working years, those same accounts can eventually generate required withdrawals that affect taxes, Social Security benefits, and even Medicare premiums.
Large retirement accounts eventually generate required taxable withdrawals, and those withdrawals can affect more than just a retiree’s tax bracket.
In a recent article, we discussed why taxes often increase after retirement and how factors such as Required Minimum Distributions, Social Security taxation, and Medicare premiums can affect retirees. One of the most common drivers behind those changes is the accumulation of large tax-deferred retirement accounts.
How Large Retirement Accounts Create Taxable Income
Beginning at age 73, the IRS requires withdrawals from most traditional retirement accounts. These withdrawals are called Required Minimum Distributions (RMDs).
The amount withdrawn each year is determined by IRS life-expectancy tables and the value of the account at the end of the prior year.
For households that saved consistently over many decades, the required withdrawal can be substantial.
| IRA Balance | Approximate First-Year RMD |
|---|---|
| $1,000,000 | ~$37,700 |
| $2,000,000 | ~$75,400 |
| $3,000,000 | ~$113,100 |
The percentage of the balance that is required to be withdrawn each year increases. These withdrawals occur whether the retiree needs the income or not, and they are generally taxed as ordinary income.
The Ripple Effects of Large Withdrawals
Required withdrawals from retirement accounts can influence several other aspects of a retiree’s financial picture.
Social Security Taxation
Depending on total income, up to 85% of Social Security benefits may become taxable. Required withdrawals from retirement accounts often push income into the range where this taxation occurs.
Medicare Premium Adjustments
Higher income can also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA).
When income crosses certain thresholds, Medicare Part B and Part D premiums increase. For some retirees, large IRA withdrawals can inadvertently trigger these higher premiums.
Higher Marginal Tax Brackets
Large withdrawals later in retirement can push income into higher tax brackets than retirees expected, especially if several income sources begin around the same time.
The Years Before RMDs Can Be Important
For many retirees, the period between retirement and the beginning of Required Minimum Distributions creates an opportunity for thoughtful planning.
During these years:
employment income may have ended
Social Security may not yet have started
required withdrawals have not yet begun
This combination can temporarily place retirees in lower tax brackets.
Some retirees use this period to gradually draw from retirement accounts or reposition assets across different tax categories. The goal is not to avoid taxes entirely but to manage when and how retirement savings become taxable over time.
Retirement Planning Is About Coordinating Decisions
During the accumulation phase of life, the primary focus is often on saving and investing.
In retirement, the focus gradually shifts toward coordinating decisions such as:
which accounts to draw from first
when to begin Social Security
how to manage Required Minimum Distributions
how taxes affect retirement income
For households with substantial retirement savings, these decisions can have a meaningful impact on after-tax income throughout retirement.
A Perspective on Large Retirement Accounts
Large retirement accounts are ultimately the result of disciplined saving over many years.
Rather than viewing required withdrawals as a problem, the goal of retirement planning is simply to approach them thoughtfully—coordinating investment strategy, withdrawal timing, and tax considerations in a way that supports long-term financial security.
With a clear plan in place, retirees can focus less on unexpected tax outcomes and more on the opportunities that retirement provides.
Frequently Asked Questions
What is a Required Minimum Distribution (RMD)?
An RMD is the minimum amount the IRS requires individuals to withdraw annually from most traditional retirement accounts starting at age 73.
Why do large IRAs sometimes create higher taxes?
Large tax-deferred accounts eventually generate required withdrawals, which are taxed as ordinary income and may affect Social Security taxation and Medicare premiums.
Can retirees manage when retirement income becomes taxable?
In some cases, thoughtful coordination of withdrawals and retirement income sources can help retirees manage how and when taxes are paid during retirement.
The content is developed from sources believed to provide accurate information. The information in this material is for educational purposes only and is not intended as tax, investment, or legal advice. It may not be used to avoid any federal tax penalties. Please consult legal, investment, or tax professionals for specific information regarding your situation. Mayfair Financial and FMG Suite developed and produced this material to provide information on a topic of interest. FMG is not affiliated with the named state-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.