How RMDs Are Taxed: Smart Strategies for High-Net-Worth Investors

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For affluent investors, Required Minimum Distributions (RMDs) are one of those milestones that signal a new financial chapter. With it, they also signal a new tax challenge.

You’ve spent decades building your portfolio through disciplined saving, tax-deferred compounding, and smart investing. But once RMDs enter the picture, the IRS starts requiring you to withdraw (and pay ordinary income tax on) a portion of your pre-tax retirement assets each year.

For high-net-worth investors, those withdrawals can quickly add up to significant taxable income. Often, it’s enough to push you into higher tax brackets, trigger Medicare surcharges, or increase the taxes on your Social Security benefits.

At Plancorp, we help hundreds of clients manage the tax impact of their RMDs every year by zooming out to use a long-term strategy. Through more than 40 years of guiding high-net-worth investors through this challenge, we’ve developed a deep understanding of the tax implications of RMDs and the right strategies to help clients keep more of their hard-earned dollars in their pockets.

Below, we'll explain how RMDs are taxed, why large portfolios face unique complications, and the strategies that can help you manage, and ideally reduce, the tax impact.

What Are Required Minimum Distributions (RMDs)?

Required Minimum Distributions are mandatory withdrawals that the IRS requires from most tax-deferred retirement accounts once you reach a certain age.

They apply to accounts such as:

Traditional IRAs

401(k)s and 403(b)s

SEP and SIMPLE IRAs

Rollover IRAs

RMDs do not apply to Roth accounts while the original owner is alive, which is one reason Roth conversions often play a key role in RMD planning. Learn more about RMD's directly from the IRS here.

When RMDs Start

Under current law (SECURE 2.0 Act), RMDs begin at:

Age 73 if you turned 72 after 2022

Age 75 if you turn 74 after 2032

Your first RMD must be taken by April 1 of the year after you reach your required age. After that, they’re due by December 31 each following year.

If you delay your first withdrawal until the following April, you’ll take two RMDs in one calendar year, potentially increasing your tax bill, so careful timing matters.

Pro tip: Investors who self-manage their accounts often get tripped up by this first-year deadline. Custodians typically remind you of the required deadline (April 1), not the optimal one, which can result in the double RMD in one tax year. A wealth manager can help you plan the timing to avoid that costly overlap.

How RMDs are Calculated

The amount you must withdraw each year as a Required Minimum Distribution is determined by a simple formula — but the details can get tricky if you have multiple accounts or inherited assets.

At its core, the RMD calculation is:

Account Balance (as of December 31 of the prior year) ÷ IRS Life Expectancy Factor = RMD Amount

Each year, the IRS publishes a Uniform Lifetime Table, which assigns a “life expectancy factor” based on your age. For example:

At age 73, the divisor is 26.5

At age 80, it’s 20.2

At age 90, it’s 12.2

So, if you’re 73 with a $2 million IRA, your first RMD would be roughly:

$2,000,000 ÷ 26.5 = $75,472

That amount must be withdrawn (and taxed) by December 31 of the current year.

A few nuances high-net-worth investors should keep in mind:

Multiple accounts: If you have several IRAs, you can take your combined RMD from any one or more of them — but 401(k) RMDs must be taken separately.

Inherited IRAs: Different tables apply, and beneficiaries often face accelerated withdrawal rules under SECURE 2.0.

Timing matters: Market performance, partial-year contributions, and rollover timing can all affect year-end balances and RMD size.

For large portfolios, calculating RMDs correctly — and coordinating across custodians — ensures compliance, avoids penalties, and creates opportunities for smarter tax planning.

How RMDs Are Taxed

RMDs from traditional IRAs and other pre-tax accounts are taxed as ordinary income in the year you withdraw them. They are not eligible for capital gains rates, even if your investments have appreciated significantly.

That means the amount you withdraw:

Is added to your Adjusted Gross Income (AGI) on your tax return

Can push you into a higher marginal tax rate

May increase Medicare Part B and D premiums (through IRMAA)

May cause more of your Social Security to become taxable

Let’s look at a quick example.

Joan, age 73, has a $2.5 million traditional IRA. Her first RMD is roughly 3.8% of the balance — or about $95,000.

That entire amount is added to her taxable income. If she already has $100,000 of other income (pension, dividends, etc.), her taxable income could jump to nearly $200,000 — pushing her into a higher tax bracket and triggering Medicare surcharges.

For investors with seven-figure portfolios, these distributions can quickly change the overall tax landscape.

The Cost of Missing an RMD

If you fail to take your full RMD, the IRS imposes a 25% excise tax on the amount not withdrawn (reduced to 10% if corrected promptly). The penalty is steep, so proactive planning and coordination with your advisor and custodian is key.

Why Large Portfolios Face Unique RMD Challenges

For many retirees, RMDs might represent a modest portion of income. But for high-net-worth individuals, particularly those with multimillion-dollar IRAs, 401(k)s, or rollover accounts, RMDs can be enormous.

Consider a few examples:

A $3 million IRA requires an RMD of roughly $113,000 at age 73.

A $5 million IRA requires an RMD of about $188,000.

Those withdrawals can:

Bump you into a higher federal tax bracket

Increase exposure to the Net Investment Income Tax (NIIT)

Trigger Medicare IRMAA surcharges

Raise the taxable portion of Social Security benefits

Disrupt carefully planned estate strategies by accelerating withdrawals

In other words, RMDs don’t just affect your tax bill. They ripple through your entire financial plan.

Smart Strategies to Manage (and Reduce) RMD Taxes

The good news: with proper planning, you can control when and how you pay taxes on your retirement assets. Here are several proven approaches we have used with our high-net-worth clients with sizable portfolios.

1. Roth Conversions Before RMD Age

One of the most effective long-term strategies is to convert part of your traditional IRA to a Roth IRA before you reach RMD age.

A Roth conversion is a taxable event, so you’ll pay federal income tax on the amount converted. But once the money is in the Roth, it grows tax-free and future balances are not subject to RMDs.

This approach is particularly valuable in low-income or gap years, such as the period between retirement and age 73, when earned income may be minimal.

Strategic “filling of lower tax brackets” during those years can reduce your future RMDs and overall lifetime tax liability.

Let’s look at an example:

Alan retires at 65 with a $4 million traditional IRA and modest income from other sources.

By converting $200,000 per year into a Roth between ages 65 and 72, he gradually reduces his pre-tax balance and avoids an enormous RMD at 73.

The conversions raise his taxes slightly when they’re executed, but potentially save hundreds of thousands in later-life RMD taxes.

2. Qualified Charitable Distributions (QCDs)

For charitably inclined investors, QCDs are one of the most tax-efficient ways to satisfy RMDs.

A Qualified Charitable Distribution allows you to transfer up to $108,000 directly from your IRA to a qualified charity. The amount counts toward your RMD but is excluded from taxable income.

This can be especially valuable for investors who:

Don’t itemize deductions under current tax law

Want to keep AGI low to reduce Medicare or Social Security impacts

Already planned to give to charity anyway

Here’s an example:

Susan, age 75, has a $120,000 RMD. She directs $80,000 as a QCD to her favorite foundation and takes $40,000 in cash.

Only the $40,000 is included in her taxable income, even though the full $120,000 satisfies her RMD.

3. Strategic Withdrawals and Income Smoothing

Not every RMD strategy needs to be complex. Sometimes, the best approach is simply to spread income strategically over time.

Take voluntary withdrawals in lower-income years before RMD age.

Use those withdrawals to rebalance or fund taxable investments.

Align RMD timing with other income events — capital gains, business sales, deferred compensation payouts — to avoid stacking income in one year.

Coordinating these withdrawals with your CPA or advisor can minimize the risk of unexpected bracket creep.

4. Account Aggregation and Source Rules

For investors with multiple IRAs, understanding aggregation rules can prevent costly mistakes.

If you have multiple traditional IRAs, you can calculate the total minimum amount across all accounts and withdraw it from a single account or several.

However, 401(k) RMDs must be taken separately from each employer plan.

Getting this wrong can result in missed RMD penalties — an easily avoided issue with coordinated planning.

Common RMD Mistakes (and How to Avoid Them)

Even sophisticated investors can stumble on RMD rules. Here are common missteps to watch for:

Missing the First-Year Deadline

The first RMD isn’t due until April 1 of the year after you turn 73. But waiting until then means doubling up in one tax year.

Taking RMDs from the Wrong Account

Remember: IRA and 401(k) RMDs follow different aggregation rules.

Overlooking Inherited Accounts

Beneficiaries under the 10-year rule still may need annual RMDs in certain situations (especially when the original account owner died after their required beginning date).

If this is the case for you, our helpful article here outlines key points of clarification from the IRS on inherited accounts.

Ignoring the Ripple Effects

RMD income can affect Medicare IRMAA brackets and Social Security taxation. Always consider the broader impact.

Forgetting State Taxes

Some states tax IRA withdrawals differently; planning should include both federal and state implications.

When to Talk with an Advisor

Managing RMDs isn’t simply about meeting IRS deadlines. It’s about aligning your withdrawal strategy with your broader wealth plan.

A fiduciary advisor like our team at Plancorp can help you:

Model different Roth conversion and withdrawal scenarios

Coordinate with your CPA for broader tax strategy management

Incorporate charitable giving, estate, and legacy planning

Evaluate the interaction between RMDs, portfolio withdrawals, and long-term goals

For high-net-worth investors, small decisions, like when and how to withdraw, can compound into meaningful differences in after-tax wealth over time.

Key Takeaways

RMDs are taxed as ordinary income, not capital gains.

Timing matters: your first RMD is due April 1 following the year you turn 73 (or 75 for younger cohorts).

High-net-worth investors face unique challenges due to large account sizes and secondary tax effects.

Roth conversions, QCDs, and income smoothing are core tools for tax efficiency.

Early, coordinated planning across your advisory team is the best way to minimize taxes and preserve flexibility.

Final Thoughts

Required Minimum Distributions are a reality for anyone who’s built substantial tax-deferred savings, but they don’t have to be a tax nightmare. With thoughtful, proactive planning, you can control your tax exposure, support your charitable goals, and extend the life of your wealth.

If you’d like to explore how strategies like Roth conversions, QCDs, and tax-efficient withdrawals can fit into your broader retirement plan, connect with a Plancorp advisor to discuss your personalized RMD strategy.