The RMD on a $1.5 Million 401(k) and What It Costs You in Taxes

The IRS is a silent partner in your 401(k)

If you have $1.5 million in a 401(k), the RMD on that account is a number the IRS has already calculated for you. You spent a career putting pre-tax money into a 401(k) or a traditional IRA and the government let it grow untaxed. They didn't forget about it. Starting at age 73, or 75 if you were born in 1960 or later, they require you to pull money out every year so they can tax it.

These forced withdrawals are required minimum distributions, and they aren't optional. You can take more than the minimum. You can't take less. Skip one or come up short and the penalty is 25% of the amount you should have withdrawn. Roth 401(k)s and Roth IRAs are exempt, since the taxes on those are already paid.

Your RMD grows even while you're taking it

The IRS publishes the Uniform Lifetime Table, which assigns you a distribution period based on your age, and that number shrinks as you get older. To find your RMD, take your account balance on December 31 of the prior year and divide it by the distribution period.

At 73, the distribution period is 26.5. On a $1.5 million balance, that's $56,600 for the year. About $4,700 a month you are forced to withdraw whether you need it or not, and every dollar of it is taxed as ordinary income.

Here's the part worth planning around. The distribution period keeps dropping, so the required amount keeps climbing. If the portfolio stays invested and earns a reasonable return, the balance can hold steady or even grow, which pushes the withdrawal higher still. At 5% a year, taking only the minimum, the RMD is $56,600 at 73, roughly $80,000 by 80, around $94,000 at 85, and over $106,000 a year by 90. After 17 years of minimum withdrawals totaling $900,000, the account is still sitting at $1.3 million. The balance keeps growing and so does your ordinary income. It's a good problem to have, and it's still a problem if you don't plan for it.

The tax bill for a married couple, then for a single filer

Take a couple, both 73, married filing jointly. Their combined Social Security is $55,200 a year, $2,800 a month for the higher earner and $1,800 for the lower. Their RMD is $56,600, and they have no other income.

Step one is figuring out how much of the Social Security is taxable. The IRS uses provisional income, which is adjusted gross income plus tax-exempt interest plus half your Social Security benefit. That's $56,600 plus $27,600, or about $84,200. For married couples, provisional income below $32,000 means none of the benefit is taxed. Between $32,000 and $44,000, up to half can be. Above $44,000, up to 85%. Those thresholds were set decades ago and have never been adjusted for inflation, so more retirees get caught by them every year. At $84,200 this couple is past the top one, and roughly $40,200 of the benefit is taxable.

Now build the return. $56,600 in RMDs plus $40,200 in taxable Social Security gives $96,800. Their 2026 deductions come to about $47,500, made up of the $32,200 standard deduction, $3,300 in bonus deductions for being over 65, and $12,000 from the One Big Beautiful Bill Act senior deduction at $6,000 per person. That drops taxable income to $49,300, with the first $24,800 taxed at 10% and the remaining $24,500 at 12%.

Total federal tax is about $5,420 on $112,000 of income, an effective rate under 5%. If paying 5% on $112,000 in retirement is your biggest problem, you're doing fine.

Now change one thing. Same $1.5 million, same $56,600 RMD, this time for a single filer collecting the higher earner's $2,800 a month in Social Security, or $33,600 a year.

The provisional income thresholds for single filers are dramatically lower, $25,000 and $34,000 against $32,000 and $44,000. A much bigger share of the benefit gets taxed right out of the gate, about $28,000 of the $33,600, and adjusted gross income lands near $85,200. The deductions are where it starts to hurt. The single standard deduction is $16,100 and the senior bonus is $2,050. The new senior deduction starts at $6,000 but phases out above $75,000 of adjusted gross income, so only about $5,400 of it survives here. Total deductions are roughly $23,550, leaving taxable income of $61,600.

The married couple stayed entirely inside the 10% and 12% brackets. The single filer gets pushed into 22%, with the last $11,875 taxed there. Total federal tax is around $8,340 on $90,200 of income, an effective rate near 9%. Same 401(k), same RMD, over 50% more tax on less overall income.

The widow's penalty

Every married couple should be watching this one, because statistically one spouse outlives the other. The survivor inherits the IRA and the 401(k), so the balance stays the same or goes up if accounts are combined. They keep the larger of the two Social Security checks and lose the smaller one, and the next tax year they file as single.

That same couple who owed $5,400 becomes a survivor owing $8,000 to $9,000 a year. Nothing about the investments changed. The filing status did. Planners call this the widow's penalty, and it's the strongest reason to do your planning while married filing jointly status is still working in your favor.

The Social Security tax torpedo

Tax brackets are only part of the picture. Every extra dollar of income raises the tax on that dollar and can also increase how much of your Social Security becomes taxable, which is what I call the Social Security tax torpedo. The effective marginal rate can exceed 40% in some income ranges while your bracket still technically reads 12%. This is why Roth conversions are more complicated than they usually sound.

Four things worth doing

Roth conversions before RMDs start. The window between retiring and turning 73 or 75 is the most valuable tax planning window you get. Income is usually at its lowest then, so you can convert at lower rates, and every dollar converted is a dollar that won't trigger an RMD later. Be honest about the math. If your effective rate on RMDs is going to be 5%, paying 12% or 22% now means paying more tax. Conversions earn their keep when you expect a higher future bill from growing RMDs or the widow's penalty, and when you can cover the tax from savings rather than from the converted money.

Qualified charitable distributions. At 70 and a half or older you can send up to $111,000 a year from an IRA straight to a qualified charity. It counts toward your RMD without showing up as taxable income, so it doesn't raise adjusted gross income, change your Social Security taxation, or raise your Medicare premiums. QCDs can only come from an IRA, so money still in a 401(k) has to be rolled over first, and they can't go to donor-advised funds or private foundations.

Strategic early withdrawals. You don't have to wait until 73 for the IRS to tell you to take money out. Drawing down traditional accounts in your fifties and sixties, even if you're only filling up the 10% and 12% brackets, smooths the bill over a longer stretch. A smaller bill for 10 years can beat a larger one for 20.

Reinvesting what you don't need. An RMD forces the withdrawal. It doesn't force you to spend the money. Move it into a taxable brokerage account and you'll still pay the tax on the withdrawal, but the money stays invested, and anything held longer than a year is taxed as long-term capital gains when you sell, usually at a lower rate than ordinary income.