MW I'm 80 and my RMD is $300,000. What the heck am I supposed to do about my huge tax bill?
By Beth Pinsker
A teacher turned $600,000 into $6 million and now has a lot of taxes to pay
Slow and steady saving wins the race. But then what?
Dear Fix My Portfolio,
I just finished reading "Worried about taxes on huge RMDs? Consider this alternative to Roth conversions." How does this work for someone like me who is 80 years old and has a little over $6 million in a traditional IRA that was originally a 403(b)? Over my 40 years as an elementary school teacher, principal and central office administrator, I only contributed about $600,000. I have done very well investing. In fact at one time I had over $8 million.
I was shocked when I saw that my current required minimum distribution is almost $300,000 because of my age and significant IRA balance. I am in the 32%-35% federal tax bracket and 6%-7% state bracket. I also get socked with the highest Social Security taxes and Medicare premiums with IRMAA.
Your scenario is for someone with $1 million. The max amount for a qualified longevity annuity contract of $210,000 doesn't have much effect on someone with my balance. I haven't looked at annuities in a long time but think their max amount to shelter IRA funds is $100,000. Are there other alternatives?
I scrimped, saved and invested during my working years and was fortunate, but now I find it may not have been worth forgoing what others didn't.
Super Saver
Dear Super Saver,
Ah, the magic of compound interest to turn $600,000 in contributions over a career into $6 million at age 80. We are told to save, save, save in order to afford retirement, and when you listen well, like you did, you can end up with excess funds.
This isn't so much a problem as an opportunity. You are obviously a diligent and earnest person, and to honor that, you have to be prudent and efficient about your savings for the rest of your life, too. You probably couldn't even psychologically handle blowing $6 million on something frivolous. It wouldn't make you happy.
So what do you do? The answer hinges on whether you plan to give what's left over after you die to heirs or charity, or a mix of both. I asked financial planner Jeremy Keil about your situation and asked him to apply the principles in his new book "Retire Today: Create Your Retirement Master Plan in 5 Simple Steps" in helping to give you some guidance.
Keil wasn't surprised at all to see a required minimum distribution of $300,000 for somebody your age. "We do come across that," he said. "Some people are good savers and have a tough time spending money. You get to the point where you have RMDs, and you take out what you are forced to take out."
People generally hate paying taxes, but if you avoid them during your working years by contributing to tax-deferred retirement plans, you have to pay later at some point.
If Keil had been able to advise somebody like you earlier, he would have liked to have met you in your 60s, and the first thing he would have done is project out your RMD and tax rates for the rest of your lifetime. He might have suggested you do some conversions to Roth after you were done working. Even high-earners who are in the top tax brackets while working usually have a dip in income in early retirement, and that gives them a time frame to make conversions. But not always.
"The myth is that taxes are lower in retirement, so you're always better off deferring. But if you project things out and you're going to be higher down the road, you might even want to be doing Roth conversions while you're still working," Keil said.
This is actually Step 3 of Keil's plan in his book: Keep. At 80, you're already passed Step 1, which is to figure out your retirement spending plan, and Step 2, which is to maximize the income you can still bring in during retirement.
You're also largely done with Step 4, which concerns how you invest your retirement funds. But you can still fiddle with how you organize your money and what you do with the withdrawals you need to take. You are correct that an annuity won't do you much good with the kind of balance that you have. On a lower balance, a qualified longevity annuity (QLAC) would help with about $210,000 of the balance, but you would want to think about that much earlier, because the chief benefit is removing that amount from your RMD calculation in earlier years.
What you could do is take a qualified charitable distribution (QCD) of $108,000 for the year. Rounding off numbers, that would immediately reduce your income tax down to $200,000, and save you roughly $24,000 in taxes, if it would lower you to the 24% bracket. "He doesn't have $100,000 grand anymore, but what was he going to do with it anyway?" Keil said.
With the remaining $200,000, you might pay $60,000 in taxes and have $140,000 left. You could invest it, and pay capital-gains tax going forward on any dividends or sales. Or you could give away even more of it. If you have friends or family members, you could give them each $19,000 and not have to worry about any gift tax paperwork. Or you could write checks to charities and itemize your deductions to defray some of the taxes on your income.
Giving it away
Then we get to Keil's Step 5, which is what you leave as a legacy. At 80, the tax rate you need to consider is your own, plus 10 years. That's because if you leave tax-deferred savings to anyone but a spouse, they have 10 years to empty out the accounts into a regular brokerage account, paying tax on the distributions as income.
Say you end up leaving $4 million. If you leave that all to one child, they will have to take out about $525,000 per year to smooth out their tax burden, considering a 7% growth rate. If you split it up among multiple heirs, they'd each have to take their portion of that. If you left them that same amount of money in a brokerage account or a Roth account, they'd not owe any tax on it.
"Your kids will like you when you give you money, and love you when you give them tax-free money," Keil said.
Because of this, you might want to consider converting your IRA balance to Roth, either over time, or even all at once. Ripping off the Band-Aid for one big Roth conversion is usually something advisers argue against, but in this particular circumstance, Keil could see it making sense.
"It would be a worthwhile calculation, but I would not do it without calculating all the different scenarios and seeing which is best," Keil said.
If you plan to leave your IRA balance to charity, however, you wouldn't want to do any conversions. The charity would inherit the balance without any tax burden, and would just be very grateful. But even then, why wait until you're dead?
Keil suggested using your annual QCDs as a way to test out which charities you like best, and then giving larger amounts while you're still living. "The charities might appreciate getting some of the money sooner," said Keil. "And maybe you want to be around for them to say thank you."
Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.
You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.
By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
More Fix My Portfolio
-- I'm a teacher, and fees are eating up my retirement savings so much that I don't want to contribute anymore
-- Worried about taxes on huge RMDs? Consider this alternative to Roth conversions.
-- The good news is we got an $800K windfall. The bad news is it came after a layoff. What do we do with it?
-Beth Pinsker
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 10, 2025 16:30 ET (20:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.