Why the Years Before Age 73 Are a Critical Tax Planning Window

The Deadline That Starts Before You Notice It

Many people think of required minimum distributions, or RMDs, as a single event: you turn 73, the IRS requires you to start pulling money out of your retirement accounts, and you pay tax on it. That is accurate as far as it goes. IRS guidance says owners of traditional IRAs, SEP IRAs, SIMPLE IRAs, and many employer retirement plan accounts generally must begin taking annual RMDs once they reach age 73.

But treating age 73 as the starting line misses the more important point. The decisions that determine how large those distributions will be, and how much they cost you in taxes, are made in the years before you ever take one. That is why RMDs are less a rule that arrives at 73 and more a planning deadline that begins years earlier.

What an RMD Actually Is

A required minimum distribution is the minimum amount you must withdraw each year from certain tax-deferred retirement accounts once you reach the required age. The purpose is straightforward: you deferred taxes when you contributed and while your money grew, and the government eventually wants its share. The RMD amount is calculated based on your account balance and an IRS life expectancy factor, so larger balances generally produce larger required withdrawals.

Because traditional IRA and pre-tax plan withdrawals are taxed as ordinary income, a large RMD can push a retiree into a higher tax bracket in a year when they may not even want or need the money. And unlike voluntary withdrawals, RMDs are mandatory. You cannot simply skip a year to keep your income down.

The Early Retirement Window

Here is where timing matters. In the years after you stop working but before RMDs begin, many retirees have unusually low taxable income. Wages have stopped. Social Security may not have started yet. RMDs are not required. During this stretch, you may have more control over how much taxable income you create than at any other point in retirement.

That control is valuable because income you do not report in a low-income year is often taxed at a lower rate than income you are forced to report later. The early retirement window is, in effect, a chance to voluntarily recognize income while your tax rate may be lower, rather than waiting until RMDs force the issue.

Roth Conversions as One Example

One common way to use that window is a Roth conversion. IRS guidance says a person may be able to convert traditional IRA money to a Roth IRA regardless of adjusted gross income. There is no income limit that blocks a conversion. However, the taxable portion of the amount you convert is reported as income for that tax year.

In plain terms, a Roth conversion moves money from a tax-deferred account, where future withdrawals would be taxed, into a Roth account, where qualified withdrawals are generally tax-free and which is not subject to RMDs during the original owner's lifetime. You pay tax now on the converted amount in exchange for reducing the balance that will later drive your required distributions.

The appeal in a low-income year is that the conversion may be taxed at a lower rate than the same dollars would be if left in the account and withdrawn as an RMD at 73 or later. The tradeoff is real: you are choosing to pay tax sooner. Whether that makes sense depends on your current rate, your expected future rate, and your ability to pay the tax without dipping into the converted funds.

Why Future Income Can Cost More Than It Looks

The reason this tradeoff deserves careful thought is that retirement income does not exist in isolation. Several costs can stack together in ways that are easy to overlook.

First, RMDs are added to your ordinary income and can push you into a higher bracket. Second, higher income can increase the portion of your Social Security benefits that is subject to tax. Depending on your total income, up to 85 percent of your Social Security benefits can be taxable. Third, higher income can trigger Medicare premium surcharges, known as the Income-Related Monthly Adjustment Amount, or IRMAA, which raise what you pay for Part B and Part D coverage.

When these effects combine, a single dollar of additional income in a later year can carry a much higher true cost than the tax bracket alone suggests. A large RMD that also increases Social Security taxation and pushes you into an IRMAA tier is more expensive than it appears on a tax table.

Reframing the Question

The useful question is not simply whether you would rather pay taxes now or later. It is whether the income you defer today could resurface later in a more expensive form, once RMDs, Social Security taxation, and Medicare surcharges are considered together.

Seen this way, the years before age 73 are not just a quiet stretch of retirement. They are a window in which the shape of your future tax bills is still, to a meaningful degree, in your hands.