Beware This Ticking Time Bomb Hiding in Your 401(k)

During your working years, a traditional 401(k) might seem like a win for your finances. You don't have to pay income taxes on the contributions you're making or any gains until you withdraw them in retirement, which is appealing when your current tax rate is high.

But while that money grows over the years, you might overlook a ticking time bomb that especially impacts those with large balances. The IRS controls the timing of future mandatory taxable withdrawals, called required minimum distributions (RMDs). Knowing how they will affect you and what you can do about them is important for reaching your retirement goals.

What to expect when RMDs start

For tax-deferred accounts like a traditional 401(k), RMDs either start when you're 73 (born before 1960) or 75 (born in 1960 or later).

At that point, you must withdraw a minimum amount from your traditional 401(k) each year. The calculation is based on the prior year's balance and the life expectancy factor applied to your situation.

The larger your 401(k) balance, the larger your forced withdrawal.

If your actual withdrawal falls short in a year, the IRS can charge a penalty of up to 25%. That's on top of the income taxes owed on your withdrawal itself.

How RMDs can hurt your retirement finances

According to FINRA, a 73-year-old with a $1 million traditional 401(k) balance could face a first-year RMD of over $37,000.

Since that amount is typically taxable income, the RMD can have cascading effects on your retirement finances, including your yearly income tax bill and Medicare premiums. The impact may become even costlier if you're married and your spouse dies.

You might end up in a higher tax bracket

Depending on your other taxable income, your RMD may be enough to push you into a higher tax bracket, leaving you owing more to the IRS than you planned for.

For example, if you're married and file jointly with your spouse, having a $85,000 taxable income means a 12% marginal tax rate. However, that rate jumps to 22% once you exceed $100,800 for the 2026 tax year. While even a $16,000 RMD is enough to move you up, the tax difference is especially substantial with a $37,000 RMD.

More of your Social Security may become taxable

A higher taxable income from RMDs can increase federal income taxes on your Social Security benefits. Even a small RMD may be enough to trigger this.

The income threshold for avoiding taxes on your benefits entirely is less than $25,000 if you're a single filer or $32,000 if you're a joint filer. From there, you'll pay taxes on up to half your benefits if your taxable income falls between $25,000 and $34,000 as a single filer or $32,000 and $44,000 as a joint filer.

Exceeding those already-low thresholds can make up to 85% of your Social Security benefits taxable. That doesn't include any state income taxes you owe.

Your Medicare premiums may go up

While monthly Medicare Part B premiums start at $202.90 in 2026, they can reach as high as $689.90. This happens if the SSA applies an income-related monthly adjustment amount (IRMAA) based on your income over the last two years (2024 and 2025 for 2026).

Higher premiums start once you exceed $109,000 as a single filer or $218,000 as a joint filer and top out once you earn $500,000 as a single filer or $750,000 as a joint filer.

So, if you must take a large RMD in 2026, the two-year lookback period means that this higher income may raise your premiums in 2028. Larger premiums make it harder to stretch your savings.

Widows and widowers may face compounding effects

If your spouse dies, these effects on your tax bill and Medicare premiums can compound further, especially if you're a higher earner.

First, you'll eventually have your tax filing status changed to single, usually after two years of your spouse's death. That comes with lower income thresholds for marginal tax rates, taxability of your Social Security, and potential IRMAAs for Medicare Part B. Plus, you'll have a narrower standard deduction.

Additionally, inheriting a spouse's retirement account with RMDs usually means additional annual withdrawals that increase your taxable income moving forward.

How to permanently reduce your RMDs

Between when you retire and when you reach your RMD start age, your income is typically at its lowest, so this is a good window to make Roth conversions. Typically, you move the funds you want to convert to a Roth IRA and pay taxes in that year at your current tax rate.

Since Roth accounts normally don't require RMDs while you're alive, a conversion lets you permanently reduce future forced distributions. Plus, you won't owe taxes on the Roth account's growth once you've had the account for five years or more.

Bottom line

Since RMDs often catch retirees by surprise, now's the time to revisit your retirement plan. Look at your current and projected 401(k) balance and consider how future withdrawals might impact your tax bill, Medicare costs, and retirement budget. Also, estimate your Social Security benefits and consider contributing or moving funds to Roth accounts that won't have RMDs.

Since retirement tax planning can be tricky, ask a financial advisor about money-saving strategies, such as optimizing different withdrawals and using a tax-free health savings account.