401(k) millionaires face 5 tax traps as RMDs begin at 73

A $1 million nest egg no longer guarantees retirement security — withdrawal order and tax strategy determine whether it lasts.

Retirees with seven-figure portfolios face a tax gauntlet beginning at age 73, when required minimum distributions can push modified adjusted gross income across Medicare premium thresholds, triggering surcharges that add hundreds of dollars to monthly bills.

"If you've managed to save a million, or two, or three million for retirement, you've done a great job," said Sheryl Rowling, certified public accountant and editorial director of financial advice at Morningstar. "But it doesn't mean you can just sit back and spend money and not pay attention to it."

For 2026, a single filer with MAGI at or below $109,000 pays the standard Part B premium of about $203 per month. Cross that threshold by one dollar, and the monthly bill jumps to roughly $284, with a $15 Part D adjustment on top. At the top end — MAGI of $500,000 or more for singles, or $750,000 for joint filers — Part B premiums reach about $690 per month. The Social Security Administration uses tax returns from two years prior to set premiums, meaning today's Roth conversion or capital gain appears in Medicare bills two years later.

The two-year lookback creates a planning trap: aggressive Roth conversions designed to reduce future RMDs can simultaneously trigger higher Medicare premiums. "When you're looking at converting to Roth or recognizing significant income, you should really work with your CPA to make sure that you're balancing tax savings from one side with possible increased Medicare premiums down the road," Rowling said.

The period between retirement and age 73 offers a unique opportunity. Retirees who stop working at 60 or 65 and delay Social Security often have very low taxable income. "That gives you a unique opportunity to convert some of your IRAs to Roth," Rowling said. Conversions done during these low-income years can be executed at little to no tax cost. Once converted, Roth assets never incur tax on principal or earnings again, and they don't count toward RMD calculations. A retiree who converts aggressively during a five-to-10-year tax valley can shift a substantial portion of their pre-tax IRA into Roth accounts, permanently reducing the RMD base at age 73.

The tax and spending bill also raised the state and local tax deduction to $40,000 for taxpayers earning under $500,000, up from the previous $10,000 cap. For retirees in high-tax states like California and New York, this change enables itemization where it was previously impractical. But the $500,000 threshold is a cliff: earn $500,001 and the $40,000 deduction disappears. "You have to be careful about where your income lands," Rowling said.

Withdrawal Order and the Cash Bucket

The order in which retirees draw from taxable, tax-deferred, and Roth accounts determines whether discretionary income pushes MAGI over IRMAA brackets. The standard framework: take RMDs first (they're mandatory), fund remaining spending from taxable accounts where long-term capital gains and qualified dividends receive preferential rates, and use Roth withdrawals as a MAGI safety valve for lumpy expenses. A cash bucket — held in a savings account or money market earning a decent interest rate — shields retirees from selling portfolio assets during market downturns. "You don't want to invest your emergency cash or your ongoing cash needs bucket because you're going to be withdrawing from it regularly," Rowling said. With the 10-Year Treasury yield near 5 percent and the federal funds upper bound near 4 percent, short taxable bonds and T-bills can service annual spending without adding a full dollar of ordinary income for each dollar withdrawn.

Large pre-tax IRAs passed to children create a tax burden under the 10-year rule. A child inheriting a $1.5 million IRA must withdraw an average of $150,000 per year, pushing them into higher tax brackets. Charitable beneficiaries face no such haircut, and appreciated securities or real estate passed to heirs receive a basis step-up, eliminating capital gains tax if sold immediately. Roth conversions during the tax-valley years reduce the pre-tax balance that heirs must distribute.

Early overspending remains the most common mistake. "When you're retired, you're not putting money in," Rowling said. "If you spend too much in the early years, your portfolio doesn't have enough room to grow to handle you for the later years." A portfolio that loses 20 percent in a market downturn during early retirement has less time to recover than one that experiences the same decline later. As retirees age, reducing portfolio volatility becomes more important. "If the market drops, you don't have as much to build back with," Rowling said. A higher proportion of bonds in the portfolio reduces drawdown risk, though retirees should avoid being overly conservative because they need growth to keep pace with inflation.

Readers should verify all figures — including IRMAA thresholds, Medicare premiums, and the SALT deduction — against the latest official announcements from the Social Security Administration, Centers for Medicare & Medicaid Services, and the IRS, as these figures can change annually.

This article is for informational purposes only and does not constitute investment advice.