The benefit of saving for retirement in a traditional IRA or 401(k) is obvious -- you get a tax break on the money that goes in. But there are a few drawbacks you should know about, like having to pay taxes on your withdrawals and being subject to required minimum distributions, or RMDs, once you turn 73 (or later, depending on your year of birth).
If you're turning 73 this year and are therefore on the hook for your first RMD, you could technically delay it to April 1 of 2027 without a penalty. But if you do that, you'll have to take two RMDs next year, which could drive your tax bill up substantially. So you may want to get that first RMD over with by Dec. 31 of this year.
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Taking that mandatory withdrawal, however, could have consequences beyond just raising your tax bill for 2026. So it's important to know what to expect -- and how to avoid a huge financial hit.
How your first RMD can raise your Medicare costs
Although Medicare Part A is free for most people, enrollees have to pay a premium for Part B coverage. There's a standard monthly premium for Part B that changes from year to year. But if you're a higher earner, you may be subject to surcharges on your Part B premiums called income-related monthly adjustment amounts, or IRMAAs.
IRMAAs are based on your income from two years prior. What this means is that if you have a large RMD to take this year, come 2028, you could be looking at much higher costs for Medicare Part B.
You should also know that IMRAAs can apply to Part D drug plans, too. So all told, you could end up spending a lot more money to put health coverage in place down the line if your RMD drives your income up substantially this year.
How to minimize the risk
Now that you're aware that a large RMD could increase your IRMAA risk, there are steps you can take to lower that risk.
First, there may be ways to lower your taxable income, like selling investments at a loss to offset capital gains and even some ordinary income. Secondly, if you use your retirement savings to make qualified charitable distributions (QCDs), those can satisfy your RMDs without increasing your taxable income.
To make QCDs, money must go from your retirement plan directly to a qualifying charity. But it's a good way to put your RMD to good use without raising your tax bill -- and potentially subjecting yourself to Medicare surcharges.
Your first RMD is a milestone you may not exactly be looking forward to if you don't need the money and are worried about the tax implications. While it's important to know that RMDs could result in IRMAAs, it's equally important to implement strategies that could prevent that from happening.
