I’ve written previously about withdrawing from my Traditional IRA to help fund our retirement. I’ve also described how I started making Qualified Charitable Distributions (QCDs) in early 2023 after I turned 70 1/2.
In a recent article, I explained how I might optimize my income tax withholding schedule while fully complying with IRS rules. My most recent article described when and how much my RMDs will have to be in 2025. So, in this article, I’ll bring it all together and explain how I came up with a withdrawal plan for RMDs for spending and taxes and QCDs for giving.
First, I need to fully understand the income tax implications, regardless of when I send in withholding for them. Then, I want to calculate the minimal monthly withdrawal that I would have to make to satisfy the IRS’ RMD requirement, assuming I also make additional withdrawals and use them to:
1) Make quarterly QCDs for charitable contributions that partially satisfy the RMD requirement; and,
2) Make a lump sum withdrawal in December 2025 to send to the IRS for income tax withholding, which also counts toward my RMD.
Understanding the tax implications of RMDs
If you read anything about RMDs and taxes, you’ll probably see the phrase ”tax torpedo.” That sounds pretty foreboding, right? Torpedo—boom!
I don’t know if anyone knows exactly where the phrase “tax torpedo” came from. But it makes sense; it refers to how a significant increase in your taxable income due to withdrawing RMDs from your taxable retirement accounts can “torpedo” your marginal tax rate.
Still, ”torpedo” sounds a little hyperbolic to me, but we’ll see.
Perhaps you’re a couple filing jointly, receiving Social Security benefits, and withdrawing from your IRA to fund your retirement, and your “provisional income” is over $32,000. In that case, an ever-increasing portion of your Social Security benefit is subject to income taxes.
For higher incomes, up to 85% of your Social Security benefit is subject to income taxes, which can significantly impact your net after-tax benefit.
The tax torpedo happens when your Social Security benefits, which may not be fully taxable on their own, become more taxable because of other income sources. This creates a domino effect where each additional dollar of income increases your taxable income by more than just $1.
Confused? Well, let’s look at an example couple who are over 65 and file jointly but are not yet at RMD age with the following income sources:
- $25,000 from a pension
- $10,000 from IRA withdrawals
- $1,000 in interest and dividends
- $50,000 in Social Security benefits
The IRS calculates your provisional income to determine how much of your Social Security benefits are taxable. Provisional income includes:
- All taxable income (like pensions, IRA withdrawals, and interest)
- Tax-free income (like municipal bond interest)
- Half of your Social Security benefits
Our couple’s provisional income is:
$25,000 (Pension) + $10,000 (IRA) + $1,000 (Interest) + 50% * $50,000 (Social Security) = $61,500
Because their provisional income exceeds $44,000 (the threshold for couples), up to 85% of their Social Security benefits become taxable. You may already be in that category (I am).
So what does this have to do with RMDs, you ask?
Suppose our example couple reaches RMD age and has to increase their IRA withdrawals by $10,000. That extra withdrawal increases their provisional income to $71,500. As a result, an additional $8,500 of their Social Security benefits becomes taxable.
So, even though they withdrew only $10,000, their taxable income increased by $18,500! This means they pay taxes on the withdrawal and extra taxable Social Security benefits.
Their effective tax rate on the $10,000 withdrawal isn’t the expected 12%—it’s more like 22.2%. This is the “tax torpedo” in action.
If the withdrawal was unplanned (RMDs shouldn’t be), then the “torpedo tax” may come as a surprise. But for most, this is more of a “phenomenon” than something they should lose sleep over. Still, understanding what’s happening here is good, as it isn’t insignificant.
As discussed in the last article, the tax torpedo could also push your MAGI above an IRMAA threshold and raise your Medicare premiums, resulting in a “double whammy.” This would amplify the torpedo effect.
This may be unavoidable for some, but probably because they have large IRA account balances or lots of extra retirement income, neither of which is bad in itself.
Paying taxes with RMDs
QCDs are made using RMDs, which is why they can be used to make charitable contributions and satisfy some (or all) of your RMD requirements, whether you itemize or not.
You may not realize you can also pay your quarterly tax estimates (withholding) using RMDs. All you have to do is take a normal distribution from your taxable IRA and elect withholding in some percentage amount, up to 100%.
For example, if your RMD is $10,000 and you anticipate your total tax bill will be approximately that amount, you could ask your IRA custodian to withhold 100% of taxes before the end of the tax year. That equates to paying $2,500 spread out over four quarterly payments.
Mine is a more likely scenario. I plan to use a percentage of my RMD withdrawals to pay my tax withholding, but I will do that as a lump sum at year-end to satisfy the IRS withholding rule. That will effectively reduce my RMD withdrawals each month.
What if you don’t need the money?
If you don’t need to spend your RMDs in retirement, consider yourself fortunate, as that probably means you have adequate income from other sources. Fortunately, you can always reinvest them in a taxable brokerage account (after the government gets its share).
Those fortunate few who don’t need their RMDs to live on may prefer not to take annual distributions, especially if it might push them into a higher marginal bracket. For those folks (I am not one of them), it’s good to remember that you have to withdraw the money (and pay the taxes), but you don’t have to spend it. You can invest it in a taxable brokerage account if you wish.
Also, as I discussed in a previous article about President-Elect Donald Trump (or is it President-Elect-Former-President Donald Trump? I’m confused), he has said he wants to end taxes on Social Security benefits. If that happens, and it applies to all Social Security recipients, then the tax torpedo would be eliminated, at least the Social Security aspect.
That’s highly unlikely, as there will probably be a means test. If not, such a move would benefit higher-income retiree households, especially those taking large RMDs. I guess we’ll have to wait and see.
IRAs, RMDs, QCDs, and the IRS, oh my!
This section will be a bit technical, but please bear with me; you’ll understand why this is important (at least to me) by the end. The math isn’t complicated, and this is where I’ll bring it all together.
As I plan for 2025, I need to do some additional math to calculate my optimal monthly withdrawal amount, which will differ from what I did in 2024.
Of course, my “optimal rate”—the minimum amount I have to withdraw to satisfy my RMD—could be less than my “actual rate” because we decided to spend more. However, if we give more (via QCDs), our optimal rate would not change unless we can live on less. (If we give more in QCDs and withdraw more for spending, we will exceed the RMD, which is allowable.)
To illustrate, I’ll walk through the methodology with an example that mirrors our situation (and may be similar to yours now or in the future) but without using my actual account and income numbers.
First, I need to estimate taxable income for the year based on RMDs and Social Security (which could be less than what we actually spend) while also accounting for QCDs (which reduce RMDs) and the Standard Deduction, which reduces taxable income.
I can do that with some relatively simple calculations that I can symbolically express as follows:
TI = (IRA × RMDp) + (SS − SSnt) – QCD − SD
Where:
- TI is Taxable Income
- IRA is the Individual Retirement Account EOY 2024 balance (I used $800,000 in this example)
- RMDp is the Required Minimum Distribution percentage (calculated from the IRS table I used in the previous article)
- SS is our total combined Social Security income
- SSnt is Non-Taxable SS income (a little complicated; see a calculator HERE)
- QCD is Qualified Charitable Distributions (for this example, assuming 10% of gross income)
- SD is the Standard Deduction (for married filing jointly, over 65, per the IRS)
- ITe is the estimated federal tax for 2025 (using IRS tax tables for married, filing jointly)
Here are the calculations using the above assumptions:
When I use my actual numbers in these calculations, I can determine the following:
1) The minimum RMD I need to withdraw each month in 2025 to satisfy IRS requirements; and,
2) The amount of income tax I need to withhold by the end of 2025 to satisfy IRS requirements.
The required RMD to be withdrawn each month (RMDm) can be calculated as follows:
RMDm = (RMD – QCD – ITe) ÷ 12, and:
RMDm = ($30,160 – $7,816 – $354) ÷ 12 = $1,833
Now I know the minimum amount I would have to withdraw each month, which, along with QCDs (made quarterly) and taxes (to be withheld in December 2025, as per my previous article), would fully satisfy the RMD of 3.77% at this income level, is $1,833
Expressed that way, it looks like this:
(RMDm x 12) + QCD + ITe, and:
$21,990 + $7,816 + $354 = $30,160
You or I may want to spend more, which means we’d need to withdraw more from our IRA (or give less away).
If the former is assumed, there would be tax implications, but the RMD has already been satisfied, considering the QCDs and tax withholding are also withdrawn over the year. Giving away more QCDs would further reduce taxable income but would have no additional effect on the RMD.
My experience
I used this exact method to calculate my RMDm for 2025 and started it using this month. I worked out the numbers using the little spreadsheet I showed above, and it worked fine. I made some assumptions, but I feel pretty good about them.
I plan to withdraw monthly RMDs, make quarterly QCDs, and then withdraw a year-end RMD in addition to my regular December RMD, which I will allocate 100% to federal tax withholding to satisfy IRS requirements. (As far as I know, my state doesn’t have a withholding requirement, but I need to research that.)
I will also do a mid-year checkpoint because, as I have said many times, expenses (and, therefore, withdrawals and taxes) can be unpredictable. Plus, I want to ensure I stay on track with my RMDs, although I am more likely than not to exceed them. I’ll give you an update this time next year.
