At 68, tapping a $1.2 million IRA first could cost $45,000 in forced withdrawals

At 68, Tom Martinez faces a retirement puzzle that many Americans share. His $1.8 million portfolio divides into a $1.2 million IRA and a $600,000 taxable brokerage account. He needs $85,000 annually, receives $32,000 from Social Security, and faces a $53,000 annual gap to fill. Most retirees would reflexively tap the IRA first, reasoning that the bigger account should carry the load. That instinct, while understandable, can quietly forfeit significant tax advantages.

The Tax Math That Changes Everything

The taxable brokerage account holds a distinct structural edge. When selling stocks held longer than a year, the long-term capital gains rate is just 15%, applied only to the profit, not the full sale proceeds. If shares were purchased for $400,000 and grew to $600,000, only the $200,000 gain faces tax. The federal bill comes to $30,000, or roughly 5% of the account's total value.

Compare that to pulling money from the IRA. Every dollar withdrawn arrives as ordinary income, taxed at 22% in the relevant bracket for this scenario. A $53,000 IRA withdrawal generates $11,660 in federal tax, netting only $41,340, which means a larger gross withdrawal is required just to cover the gap. The same $53,000 sold from the appreciated taxable account nets $50,250 after tax. That $8,910 annual difference is real money, and it compounds meaningfully across a decade or more of retirement.

The Five-Year Window Before RMDs

Required Minimum Distributions begin at age 73, per the SECURE 2.0 Act of 2022. A $1.2 million IRA at that point forces roughly $45,000 in annual withdrawals whether the money is needed or not. Stack those RMDs on top of $32,000 in Social Security income and the combined total reaches $77,000 before Tom touches the taxable account at all. Depending on his filing status, that level of income can trigger Medicare IRMAA surcharges ranging from $74 to $444 per person per month on top of standard Part B premiums.

Drawing from the taxable account first shrinks the IRA before RMDs kick in, changing the math substantially. If the IRA is trimmed to $900,000 by age 73 rather than staying at $1.2 million, the annual RMD drops to roughly $34,000. That smaller forced withdrawal keeps modified adjusted gross income below the IRMAA threshold, which for 2026 sits at $109,000 for single filers and $218,000 for married couples filing jointly. It also preserves the 15% capital gains rate on taxable account proceeds rather than pushing income into the 24% ordinary income bracket. IRMAA works as a cliff surcharge: crossing the income threshold by even one dollar triggers the full surcharge for the year, so the margin matters.

One additional tool worth noting: retirees aged 70.5 or older can make Qualified Charitable Distributions directly from an IRA to a qualified charity. These transfers count toward satisfying the RMD but are excluded from taxable income. The 2025 QCD limit is $108,000, indexed annually for inflation, making it a meaningful lever for reducing future IRMAA exposure and keeping income below critical thresholds.

Flexibility for Real Life

Unexpected expenses do not follow a withdrawal schedule. When a roof needs replacing or medical costs spike, the taxable account can respond without tax penalties or additional complexity. IRA withdrawals are locked into ordinary income rates regardless of timing, and there is no mechanism to soften the tax hit for a given year. The taxable account, by contrast, allows selling specific tax lots to harvest losses during market downturns. A 20% decline becomes a source of deductible losses that can offset gains or up to $3,000 of ordinary income annually, with excess losses carried forward to future years. No equivalent offset exists inside an IRA.

Estate planning adds another dimension. Taxable accounts receive a step-up in cost basis at the account holder's death, meaning heirs inherit the full market value with no embedded capital gains liability. An inherited IRA carries no such reset. Under the 10-year rule that applies to most non-spouse beneficiaries, the full balance must be distributed within a decade, with ordinary income taxes due on every dollar withdrawn. A large inherited IRA can push adult children into higher brackets during their peak earning years, compounding the tax cost across generations.

The Withdrawal Strategy

Drawing $53,000 annually from the taxable account through age 72, then blending RMDs with remaining taxable account withdrawals to stay below key income thresholds, creates a durable multi-year advantage. The approach preserves the IRA for later years, captures the 15% long-term capital gains rate on taxable gains, and reduces the IRMAA exposure that arrives alongside larger forced distributions. The smaller taxable account is not a consolation prize. Used strategically before RMDs begin, it serves as the most tax-efficient source of retirement income available to many retirees in this situation. Individual results depend on filing status, state taxes, and total income sources, so a qualified financial planner can help tailor the sequencing to specific circumstances.

Editor's note: This update revised the Medicare IRMAA surcharge range to current 2025 figures ($74 to $444 per person per month for Part B, per Kiplinger) from the prior stale estimate, updated the 2026 IRMAA income threshold for single filers to $109,000, and added context on the Qualified Charitable Distribution limit ($108,000 for 2025) as a tool for managing RMD-related tax exposure.

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