Your $2 Million IRA Could Become a Tax Problem in Retirement
A $2 million IRA looks like a retirement success story. But it can also become a future tax problem.
Traditional retirement accounts let investors defer taxes for decades, allowing savings to compound without annual taxation. The trade-off comes later, when required minimum distributions, Social Security taxation and Medicare surcharges can all begin stacking on top of one another. For retirees with large pre-tax balances, the years before those mandatory withdrawals begin may be some of the most valuable tax-planning years of retirement.
A Large IRA Comes With a Deferred Tax Bill
Traditional 401(k)s and IRAs are tax-deferred, not tax-free. Contributions may reduce taxable income while working, and investment gains can compound inside the account without annual taxation. But withdrawals are generally taxed as ordinary income.
That becomes more important as balances grow. A retiree with $2 million in a traditional IRA may not need much of that money early in retirement, allowing the account to continue compounding. By the time required minimum distributions begin, the balance could be substantially larger.
At age 73, the IRS Uniform Lifetime Table uses a divisor of 26.5. A $2 million balance would therefore produce an initial RMD of about $75,500. A balance closer to $3.45 million would generate roughly $130,000 of mandatory taxable income. (irs.gov)
That is the real risk. The larger the account becomes, the less control the retiree may eventually have over taxable income.
RMDs Don’t Start at the Same Age for Everyone
Current law divides retirees into different RMD starting ages. People born from 1951 through 1959 generally begin required minimum distributions at 73. Those born in 1960 or later generally begin at 75.
The extra years can be valuable because they provide more time for tax planning. But they can also allow large tax-deferred balances to grow even larger before mandatory withdrawals begin.
Each year’s RMD is calculated using the prior Dec. 31 account balance and an IRS life-expectancy factor. As retirees age, the divisor declines, generally forcing a larger percentage of the remaining account to come out.
That can create a problem for people who do not actually need the money. The IRS does not care whether the distribution is required for living expenses. The taxable income arrives either way.
RMDs Can Make More of Social Security Taxable
A large required distribution can create more than one tax problem.
Social Security taxation depends on a formula that includes other household income. For married couples filing jointly, the base amount is $32,000. For many single filers, it is $25,000. As combined income rises, up to 85% of Social Security benefits can become taxable. (irs.gov)
That does not mean Social Security is taxed at an 85% rate. It means as much as 85% of the benefit may be included in taxable income.
Still, the interaction matters. A large RMD creates taxable income on its own and can simultaneously cause more Social Security to become taxable. That can make the true tax cost of an additional retirement-account withdrawal higher than the tax bracket alone suggests.
Medicare Can Add Another Surprise
Higher income can also make Medicare more expensive.
In 2026, the standard Medicare Part B premium is $202.90 per month. But higher-income retirees can face IRMAA surcharges once modified adjusted gross income exceeds $109,000 for an individual or $218,000 for a married couple filing jointly. At the highest income level, Part B premiums can reach $689.90 per person per month. Part D can carry an additional surcharge as well. (cms.gov)
RMDs count toward the income used for those calculations. That means a distribution a retiree did not even need could push the household into a higher Medicare premium tier.
The effect is delayed because Medicare generally looks back two years at tax-return income. A large RMD today can therefore show up later as a higher Medicare bill.
Then One Spouse Dies
The tax problem can become even more severe after the death of a spouse.
Household expenses usually decline somewhat, but tax brackets can shrink dramatically when the surviving spouse eventually files as a single taxpayer. For 2026, the 24% federal tax bracket begins above $105,700 of taxable income for a single filer, compared with above $211,400 for married couples filing jointly. (irs.gov)
Medicare thresholds narrow too. The first 2026 IRMAA surcharge begins above $109,000 for an individual versus $218,000 for a married couple filing jointly.
Meanwhile, the surviving spouse may inherit most of the couple’s retirement assets and continue facing RMDs from a large traditional IRA. One Social Security check may disappear while taxable income remains relatively high.
This is commonly called the widow’s or widower’s tax penalty. It is not a separate tax. It is the result of similar income being squeezed into much narrower single-filer thresholds.
The Best Tax-Planning Window May Come Before RMDs
This is where early retirement can create an opportunity.
Someone who leaves work at 60 may have years before Social Security begins and more than a decade before RMDs start. Salary disappears, taxable income may drop sharply, and the retiree suddenly has unused room in lower tax brackets.
Instead of simply enjoying a low tax bill, that room can be used strategically.
One option is a Roth conversion. Money is moved from a traditional IRA into a Roth IRA, creating taxable income today but reducing the traditional balance that will generate future RMDs. Qualified Roth withdrawals can generally be tax-free, and Roth IRAs do not require lifetime RMDs for the original owner.
The goal is not necessarily to empty the traditional IRA. It is to reduce the balance enough that future RMDs fit more comfortably alongside Social Security, pensions and other income.
Roth Conversions Are About Paying Tax at the Better Time
Suppose a retiree converts $110,000 annually for several years. That strategy will increase taxes today, so the question is not whether the conversion creates a tax bill. It will.
The better question is whether paying those taxes now is cheaper than paying them later.
If future RMDs would push the household into higher tax brackets, make more Social Security taxable and trigger Medicare surcharges, paying some tax earlier may reduce lifetime costs. The converted money also has the opportunity to continue growing inside the Roth.
But $110,000 is not a universally correct conversion amount. The ideal figure depends on deductions, other income, capital gains, Social Security timing, ACA subsidies before 65 and IRMAA after 65.
That is why Roth conversions should be modeled across many years rather than judged by whether this year’s tax bill goes up.
Converting Too Much Can Backfire
More conversion is not automatically better.
Someone who converts aggressively into a 32% tax bracket today to avoid future withdrawals taxed at 22% may succeed in reducing RMDs while still increasing lifetime taxes. Medicare surcharges or reduced ACA subsidies can make an oversized conversion even more expensive.
Traditional accounts also retain valuable uses. Retirees who give to charity, for example, may eventually be able to use qualified charitable distributions from an IRA to satisfy part or all of an RMD while keeping the qualifying distribution out of taxable income.
The goal should usually be flexibility. Having assets spread among traditional retirement accounts, Roth accounts and taxable investments gives retirees more control over future income.
Don’t Wait Until the First RMD Arrives
The biggest mistake may be waiting until 73 or 75 to start thinking about this problem.
Once required distributions begin, retirees lose some control over how much taxable income leaves traditional accounts each year. They can always withdraw more than the minimum, but generally not less.
Someone who identifies the issue at 60 may have 13 or 15 years to gradually restructure a large pre-tax balance. That can mean smaller annual Roth conversions, better bracket management and more opportunities to coordinate taxes with Social Security and Medicare.
A retiree who waits until the first RMD arrives has far fewer levers left to pull.
Your IRA Balance Isn’t the Same as Spendable Wealth
A $2 million IRA is still a valuable retirement asset. But the entire $2 million is not economically available for spending because some portion ultimately belongs to federal and possibly state tax authorities.
The planning question is not whether those taxes can be eliminated. For most retirees, they cannot.
The opportunity is deciding when the taxes are paid, at what rate, and whether paying some earlier could reduce the amount paid later.
Retirees who use the years before RMDs strategically may be able to reduce future mandatory distributions, control Medicare costs, improve the surviving spouse’s tax position and build a larger pool of tax-free assets.
The earlier that planning begins, the more choices remain.
