Social Security and RMDs can push retirement tax rates past 40%

Combining Social Security benefits with required minimum distributions (RMDs) from tax-deferred accounts can push retirees' marginal tax rates above 40 percent, a scenario known as the "tax torpedo" that affects more households each year.

"Most of our clients do not pay less tax in retirement — they pay more," said Hector Castaneda, a certified public accountant who advises retirees on tax planning.

The provisional income thresholds that determine Social Security taxability — $32,000 for married couples filing jointly and $25,000 for single filers — have not been adjusted for inflation since 1985, according to IRS rules. Retirees whose provisional income exceeds $44,000 (joint) or $34,000 (single) can see up to 85 percent of their benefits subject to ordinary income tax. When RMDs from IRAs and 401(k)s are layered on top, each additional dollar of withdrawal can be taxed at effective rates exceeding 40 percent.

With roughly 4 million Americans turning 65 each year and the IRS projecting continued growth in tax-deferred account balances, the number of retirees exposed to the tax torpedo is expected to rise. The standard deduction for seniors — $23,750 for single filers and $47,500 for married couples both over 65 for the 2026 filing year — provides some buffer, but retirees with pensions or substantial IRA balances will likely face higher effective tax rates than they did during their working years.

The Social Security tax thresholds have remained frozen since 1985, a period when the average retiree's income was far lower in real terms. This "stealth tax" means more retirees today find themselves in the 50 percent or 85 percent taxability brackets simply because inflation has pushed their nominal income higher. The last time these thresholds were updated, the average Social Security benefit was roughly $460 per month; today it exceeds $1,900, yet the taxability brackets have not moved.

The tax torpedo occurs in the income band where each additional dollar of RMD or other ordinary income simultaneously pushes more Social Security benefits into taxability. In this zone, the marginal tax rate on IRA withdrawals can exceed 40 percent even when the retiree sits in a 22 percent or 24 percent statutory bracket.

Strategies to stay on the good side of the torpedo

Roth conversions are the most direct lever. Money moved from a traditional IRA to a Roth IRA during low-income years — before RMDs begin at age 73 — reduces future required distributions and keeps provisional income below the Social Security tax thresholds. Health savings accounts offer a second tax-free vehicle, allowing retirees to withdraw funds for qualified medical expenses without counting toward adjusted gross income.

Qualified charitable distributions provide another path for retirees aged 70½ and older. Transferring up to $100,000 annually directly from an IRA to a qualified charity satisfies RMD requirements without increasing provisional income, which can also help avoid spikes in Medicare Part B premiums.

For retirees with pensions or large account balances who cannot avoid the torpedo entirely, the goal shifts to managing the rate at which income is recognized. Contributing to a traditional IRA in years when income is high can pull provisional income below the 50 percent or 85 percent thresholds, as can timing capital gains and dividends.

The state-level picture

Thirteen states fully exempt most retirement income from state income tax, and many others offer property tax relief programs for seniors. Castaneda noted that property tax exemptions are among the most overlooked benefits. "Most seniors don't realize that if they just applied for reduced property taxes, they may qualify," he said.

The federal Credit for the Elderly or the Disabled provides additional relief for lower-income retirees, though its income limits are low. Medical expense deductions above 7.5 percent of adjusted gross income can also reduce taxable income for retirees with significant healthcare costs.

The combination of frozen Social Security thresholds and growing tax-deferred balances means retirement tax planning is no longer optional for households with meaningful IRA or 401(k) savings. Retirees who review their income sources annually — especially after a spouse dies, a home is sold, or medical expenses spike — can identify opportunities to reduce provisional income and avoid the 40 percent-plus marginal rates that the tax torpedo produces. Tax rules and thresholds cited here reflect current IRS guidance; retirees should verify figures against the latest official announcements before making planning decisions.

This article is for informational reference only and does not constitute professional advice.