When I first began saving for retirement, I found myself torn between funding a traditional IRA versus a Roth. At the time, my income was well below the limit for funding a Roth IRA directly, so both options were equally on the table.
I opted for the traditional IRA to get the up-front tax break. And since then, I've continued to save in traditional retirement accounts, from employer-sponsored 401(k)s to the solo 401(k) I have now.
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Of course, I've known all along that there would be consequences to keeping my nest egg in a bunch of traditional retirement accounts. In addition to having to pay taxes on withdrawals, all of these accounts will be subject to required minimum distributions (RMDs).
Due to my age, I won't have to take those at 73 like many retirees today. Rather, for people born in 1960 or later, RMDs don't become obligatory until age 75.
But on top of the tax hassle RMDs might cause me, I've realized they might have another really bad consequence. And it's a problem I now need to address.
The hidden problem with RMDs
It's not a secret to most retirement savers that RMDs can increase your tax bill year after year. But a tax hassle is only the ice of the iceberg. Another big issue with RMDs is that they could propel you into IRMAA territory, making your Medicare premiums cost more.
IRMAAs stand for income-related monthly adjustment amounts. And they could raise the cost of Medicare Part B by hundreds of dollars each month, depending on your income.
Without RMDs, you may be able to keep your income in retirement low enough to avoid IRMAAs. But if you have a large nest egg, those RMDs could raise your income enough to make them unavoidable.
That's a big concern I have. Thankfully, since I'm nowhere close to retirement, I have an opportunity to take action.
One way to minimize RMDs
I don't know that I can avoid RMDs completely, since I have a decent chunk of money socked away in a combination of traditional retirement accounts. But one thing I'm starting to plan for is a series of Roth conversions.
Some people do their Roth conversions in a single year, but my fear is that doing so will result in a massive tax bill. So instead, I think doing those conversions gradually is a smarter move for me. You may want to spread your conversions out, too, to ease the tax blow.
If you have all of your retirement savings in a traditional account (or several of them), know that having to take RMDs doesn't just mean being forced to hand the IRS money every year once you reach a certain age. Those mandatory withdrawals could also substantially raise the cost of Medicare premiums, which are expensive enough to begin with.
The sooner you start making plans to minimize your RMDs, the better.
