Will you pay more taxes at 80 than today?
Have you ever imagined that, perhaps when you are 80 years old, you are going to be paying even more in taxes than in your best professional years?
It is really difficult to imagine paying such a large tax bill when you are over 80. As a Fee-Only financial advisor in Palm Beach, this is part of what I continuously see with my hourly financial planning clients. Many start to think about Required Minimum Distributions when it is already too late, which is precisely when you have to start taking them.
Don’t worry if you are already in this situation; in this blog, we will share some ideas that you should know.
Why is most retirement money tax-deferred?
Most people didn’t have the chance to save in a Roth 401(k) or a Roth IRA because, perhaps when they retired, those options weren’t the ones they used most.
So, perhaps most of your money is in a traditional 401(k) or a traditional IRA because you have been contributing to these accounts and Uncle Sam has been giving you the opportunity to reduce your taxes with deductions for all those years. That money has been able to grow tax-deferred. This means that, yes, it has deferred taxes. But now Uncle Sam needs this money and wants his share. He has wanted to be your retirement partner during all these years.
The Reality of Mandatory Withdrawals
Uncle Sam says, “I need to get out of here, I need my money.” Because he knows that every time you withdraw money from those accounts, that withdrawal counts as income for you.
You don’t have an option. The IRS is going to tell you how much money you have to withdraw from those accounts, and all that money is going to count as income. What kind of accounts are we talking about? Well, your traditional 401(k), your traditional IRA, your 403(b), your Simple IRA, your SEP IRA, your 457 all these accounts that have been growing all these years with deferred taxes.
When should I start taking my RMDs?
Well, the previous rule was that you had to start taking required minimum distributions at 70.5 years old, which was very difficult for many people to understand I mean, why it was at 70.5.
And then this new law came out,the Secure Act 1.0, in 2019. Those born between 1949 and 1950 had to start withdrawing their required minimum distributions at age 72. Someone born in 1950 would already be 75 or 77 years old; they would have already requested those RMDs, as well as the previous ones.
But now the Secure Act 2.0 has taken effect. Now, the ages have changed:
- If you were born between January 1951 and December 1959, your starting age is 73.
- If you were born in 1960 or later, you should start when you turn 75.
The AI Factor and Longevity
I know it sounds incredible, but are you prepared to live to be 100? Thanks to Artificial Intelligence (AI) and its advancement in medical diagnostics, longevity is no longer just a possibility; it is a statistical reality. Now, although it sounds strange to say, living longer might not be the best thing in financial terms, because you will be retired for a longer period, and that will imply a greater number of years without income.
Of course, part of the promise of AI is that we will live longer, healthier lives. However, we are also seeing how it is already being said everywhere that AI will take over many jobs from a large part of the population.
While it is true we have heard Elon Musk say that we shouldn’t worry because we will simply stay at home and receive a check to cover our expenses, this sounds very beautiful in theory. But so far, what we have learned is that those who enjoy a better retirement are those who prepare for it, not those waiting for a fairy godmother or the government to come and save their finances.
This is why optimizing your taxes and establishing timely strategies to maximize your money become fundamental; we know that taxes will always be there, no matter how advanced AI becomes.
Taxes and Longevity: Living to 100
Let’s look at the following example: if at age 73 you were lucky enough to have accumulated a fabulous $3 million in your retirement plans, I am certain you won’t like the amount of taxes you’ll have to pay every time you take your RMDs. But if you live to be 100, your RMD amount will skyrocket. As each year passes, the formula that determines the withdrawal amount forces you to take out much more, potentially nearly half a million dollars in a single year. This pushes your taxes to the highest level of your life, just when you least expect it. Do you already have a strategy to prevent the IRS from becoming your primary heir?
How Market Volatility Can Make Your RMDs More Complex: Market Risk (S&P 500) and Your RMD
The risk with RMDs is that they are calculated based on your balance as of the previous December 31st. We have seen this during years of high volatility: if the market suffers a sharp correction in April, as the 16% drop in 2025 did, you will be forced to withdraw money based on an ‘inflated’ December balance that no longer exists. This means selling your assets while they are cheap just to pay taxes on a value that has vanished.
The IRS won’t let you change the date. This is why working with a Fee-Only Certified Financial Planner (CFP®) is essential to avoid conflicts of interest or being sold an annuity or some other ‘sophisticated’ investment product that claims to offer guaranteed returns but whose true costs are almost impossible to track.
A professional can work with you to analyze strategies for determining when to take your RMDs, not only by observing what is happening in the stock market but also by holistically analyzing your financial world.
When should I make my RMDs? Deadlines and key dates for withdrawing your money
You turn 73 this year, the starting age for RMD. You can start collecting that money this year, or you can wait until April of the following year to collect your first RMD payment. But from then on, all RMD payments must be claimed before the last day of each calendar year.
Let’s look at an example. This year you turned 73, so you can start with your first RMD, and next year claim the RMD payment for the following period. Some people prefer to wait and say, “I won’t claim it this year. Maybe I’ll wait until next year and claim both at once.” The only thing we’ve seen is that this strategy rarely works out well. Since receiving two large withdrawals in the same tax year, combining the first year’s payment with the second’s, can increase your tax bracket, remember that, as we’ve discussed, these withdrawals are classified as income.
Are there any strategies that allow me to delay or avoid RMDs?
My clients always ask, “Is there any way to stop or postpone these required minimum distributions (RMDs)?”
Usually, those who ask me this are precisely the ones who have done everything correctly. I mean, they saved diligently, knew their spending limits, and invested consistently over the years to benefit from the effect of compound interest over time.
And as with everything related to the IRS, there are very few exceptions, and they rarely apply to many people. The only way would be if you could continue working and you don’t own the company (you don’t own more than 5% of it) where you work. In that case, you could postpone the RMDs of that retirement plan until you stop working for that company.
Roth IRAs: What better way to leave an inheritance to your beneficiaries than tax-free?
What happens when a spouse inherits a Roth IRA? Well, generally, the spouse has the option to treat that account as their own. This means that the mandatory minimum distributions (RMDs) don’t apply to them, and the money can continue growing tax-free.
And what if a child inherits it? Here, the rules change. Under current laws, most non-spouse beneficiaries (like children) have to withdraw all the money from the inherited account within 10 years. If it’s a Roth IRA, those withdrawals are usually tax-free, but the money can’t stay there forever.
What if I forget to withdraw those RMDs? (The Penalty)
Is there a penalty? Yes, there is a penalty, and although it has been reduced, it is still in place. It used to be 50% of the money that should have been withdrawn will be reduced to 25%.
I know it’s a lot of money, but did you know it can be reduced to 10% if you correct it in time? That’s why it’s so important to be careful. You don’t want to face that unnecessary charge,
Financial Advisory: Experts in Roth and RMD Conversions
It’s so important to consult with a Certified Financial Planner who is Fee-Only can help you run through different scenarios for your particular case. This type of analysis is particularly complex, taking into account all the different issues that can be affected, such as your taxes, Medicare premiums, investment portfolio, and cash flow, to name a few.
As a Fee-Only Financial Advisor, we specialize in Roth and RMD conversions, which is why most of our clients in Palm Beach and Boca Raton come to us seeking advice to optimize these withdrawals.
Do you need a personalized RMD strategy?
Not all consultations require long-term asset management. That’s why our hourly Financial Planning services are ideal for these types of specific inquiries about RMD and Roth conversions. It’s the most efficient way to get clear answers from a fee-only fiduciary expert without extended commitments.
