Imagine you’ve spent decades carefully saving for retirement. Your nest egg is ready. But then, a not-so-welcome surprise arrives: your first Required Minimum Distribution (RMD). The IRS is knocking, and you’re asking the right question: “Is my RMD considered earned income?“
The direct answer is no. But as a financial planner who has guided hundreds of retirees through this exact moment, I can tell you that’s the wrong question to ask.
The right question is: “How will this new ‘ordinary income’ impact my taxes, Medicare, and Social Security?”
Understanding that distinction is the key to protecting your retirement savings. This guide is the playbook I used with my clients. We’ll break down what an RMD is, why its tax treatment is so tricky, and the exact strategies you can use to navigate it like a pro.
📌 Key Takeaways: RMDs vs. Earned Income
- RMDs Are Not Earned Income: These mandatory withdrawals are taxed as ordinary income, but they do not count as wages or self-employment income for IRA contribution or Social Security earnings test purposes.
- They Create a “Tax Torpedo”: RMDs increase your overall income, which can push you into a higher tax bracket, make more of your Social Security benefits taxable, and trigger higher Medicare premiums (IRMAA).
- Strategic Planning is Critical: You can significantly reduce the tax bite of RMDs with proactive strategies like Roth conversions before age 73 and Qualified Charitable Distributions (QCDs) after age 70½.
Key Takeaways Ahead
The account owner is taxed at his or her income tax rate on the amount of the withdrawn RMD. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is tax free.”
IRS.GOV Website
What Are RMDs and Why Aren’t They “Earned Income”?
A Required Minimum Distribution (RMD) is the annual withdrawal the IRS mandates from your tax-deferred retirement accounts—like traditional IRAs and 401(k)s—once you reach a certain age (currently 73, thanks to the SECURE Act 2.0). It’s the government’s way of finally collecting taxes on the money you’ve been growing tax-free for years.
The core confusion lies in the difference between two types of income.
🔍 Explained Simply: Earned vs. Ordinary Income
Think of it this way: Earned Income is your paycheck for a job you’re doing now. Ordinary Income from an RMD is like getting a deferred paycheck for the work you did 20 years ago. Both are taxable, but only the “work now” paycheck qualifies you for things like making new IRA contributions.
To see how an RMD might affect you, it’s helpful to run the numbers. You can use this simplified calculator from the new RMD tables to get an estimate based on your age and account balance.
Required Minimum Distribution (RMD) Calculator
The RMD Tax Torpedo: How One Withdrawal Creates Three Tax Hits
The biggest mistake I’ve seen retirees make is underestimating the ripple effect of an RMD. It’s not just one tax event; it’s a “tax torpedo” that can impact your entire financial picture.
Let’s look at a real-world scenario based on a former client, “Jane.”
Jane’s Situation (Age 73):
- Pension Income: $30,000
- Social Security: $20,000
- Traditional IRA Balance: $500,000
- First RMD: ~$20,000 (based on the IRS Uniform Lifetime Table)
Here’s how that single $20,000 RMD impacts her finances:
1. It Pushes Her Into a Higher Tax Bracket
Without the RMD, much of Jane’s income would fall into the 12% federal tax bracket. But adding $20,000 of ordinary income pushes a significant portion of her earnings into the 22% bracket, immediately increasing her overall tax bill.
2. It Makes More of Her Social Security Taxable
The IRS uses a formula called “combined income” to determine if your Social Security is taxable. Because Jane’s RMD increases her income, the taxable portion of her Social Security jumps from roughly 50% to the maximum of 85%.
3. It Can Trigger Higher Medicare Premiums (IRMAA)
This is the surprise that hits the hardest. Your Medicare Part B and Part D premiums are based on your Modified Adjusted Gross Income (MAGI) from two years prior. A higher income from RMDs can trigger the Income-Related Monthly Adjustment Amount (IRMAA), a surcharge that can add hundreds or even thousands of dollars to your annual premiums.
📊 2025 Medicare IRMAA Thresholds
For 2025, higher Medicare premiums are triggered for individuals with a 2023 MAGI above $103,000 (or $206,000 for couples). An RMD can easily push you over these cliffs. According to the official Medicare site, this can increase your monthly Part B premium significantly.
Your Pre-RMD Playbook: 3 Smart Moves to Make Before Age 73
After seeing the RMD tax torpedo in action, my proactive clients (“Strategic Susans”) would always ask, “What can I do now to prepare?” Here is the playbook for those aged 65-72.
1. Strategize Roth Conversions
From age 65 to 72, you are in the “golden window” for Roth conversions. By converting portions of your traditional IRA to a Roth IRA each year, you pay taxes on that money now, while you may be in a lower tax bracket. Once the money is in a Roth, it grows tax-free and has no RMDs for you during your lifetime.
💡 Michael’s Tip: The “Fill the Bracket” Strategy
When doing Roth conversions, the goal is to “fill up” your current, lower tax bracket without spilling into the next, higher one. For example, if you have $20,000 of room left in the 12% bracket, consider converting just that amount. Doing this for several years in a row is far more tax-efficient than one large conversion.
2. Review Your Asset Location
Look at what you hold in your taxable brokerage accounts versus your tax-deferred IRAs. If you have high-growth assets in your IRA, they are creating a bigger future RMD tax bomb. Consider holding more of your high-growth assets in a taxable account where they’ll be taxed at lower long-term capital gains rates, and more stable, income-producing assets in your IRA. This is a core principle of a good asset allocation strategy.
3. Plan for Large, One-Time Expenses
Do you plan to buy a new car or replace your roof in your early 70s? It may be financially smarter to pull that money from your IRA before age 73. This allows you to take a larger, voluntary distribution in a year of your choosing, potentially at a lower tax rate, rather than being forced to take it on top of an RMD later.
4 Strategies to Mitigate the Tax Impact of Your RMDs
If you’re already 73 or older, you still have powerful tools at your disposal. This is the exact playbook of strategies I would walk my clients through after they received their first RMD notice.
1. Use a Qualified Charitable Distribution (QCD)
For clients with charitable goals, the QCD is the single most powerful tool. If you are 70½ or older, you can donate up to $105,000 (for 2024) directly from your IRA to a qualified charity. The amount you donate counts toward your RMD for the year, but it is excluded from your taxable income. This is one of the most effective ways to handle RMDs you don’t need.
2. Aggregate Your IRA Withdrawals
If you have multiple traditional IRAs, you must calculate the RMD for each one separately. However, you can add those amounts together and take the total RMD from just one (or any combination) of the accounts. This allows you to strategically withdraw from the IRA with the worst-performing investments, leaving your better assets to continue growing. Our guide on RMD aggregation rules explains this in detail. Note: This rule does not apply to 401(k)s.
3. Withhold Taxes at the Source
You can request that your IRA custodian withhold federal (and state) taxes directly from your RMD. I often had clients withhold 20-25% to cover the taxes on the distribution itself and to help pay the taxes on their Social Security and other income, avoiding a big bill in April.
4. Reinvest in a Taxable Account
Just because you have to take the money out of your IRA doesn’t mean you have to spend it. If you don’t need the funds for living expenses, you can simply take the RMD, pay the taxes, and immediately reinvest the net amount in a regular (taxable) brokerage account.
📚 Master Your Distributions
- What happens if you miss the RMD deadline?
Learn about the steep penalties for missing a distribution and the steps you can take to fix it. - Understand the complex rules for an inherited IRA
The 10-year rule changed everything for beneficiaries; make sure you know how it applies to you. - Do RMD rules apply to non-qualified annuities?
Get a clear answer to this common and often misunderstood question about your annuity income.
Now, try searching for: RMD penalty, inherited IRA rules, or Roth conversion strategies.
Conclusion: Take Control of Your Retirement Income
Understanding that RMDs are not earned income but are fully taxable ordinary income is the first step. The next, more important step is recognizing the powerful ripple effect this income has on your entire financial life.
Retirement should be a time to enjoy the fruits of your labor, not to be caught off guard by complex tax rules. By using the proactive strategies in this playbook, you can move from being a passive recipient of these distributions to an active manager of your retirement income. A solid retirement planning guide always accounts for these distributions. You have the tools to navigate the RMD tax torpedo and keep more of your hard-earned money.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
