Retiree's untouched 401(k) hits $642,000, lifting first RMD tax to 22%

A retiree who stopped working at 64 with $380,000 in a traditional 401(k) made no Roth conversions for nine years, then saw her first required minimum distribution taxed partly at 22 percent once Social Security income arrived.

The scenario, detailed in a 24/7 Wall St analysis, turns on rules in the SECURE 2.0 Act that set the required minimum distribution starting age at 73 for people born between 1951 and 1959 and at 75 for those born in 1960 or later, according to the Internal Revenue Service.

The retiree had no wages, pension or Social Security income during the nine years after leaving work, yet converted none of her savings to a Roth IRA. Assuming a 6 percent average annual return, the original $380,000 grew to roughly $642,000 by age 73. Using a Uniform Lifetime Table divisor of 26.5, that balance produced a first-year RMD of about $24,200. She began collecting Social Security at 70, and up to 85 percent of those benefits can be taxable, which pushed part of the distribution beyond the 12 percent bracket into the 22 percent bracket.

The case shows why the years between a final paycheck and the start of required minimum distributions matter: unused room in lower tax brackets does not carry over from one year to the next. For someone born in 1960 or later, the window extends to age 75, giving retirees more time to weigh partial Roth conversions before mandatory withdrawals begin.

Nine years of unused tax-bracket space

The period between retirement and the start of RMDs is sometimes called the "gap years." For a retiree with little or no taxable income, those years can offer room to move portions of a traditional retirement account into a Roth IRA through partial conversions while staying in relatively low brackets. A conversion generally creates taxable income on the amount moved, but the funds can then grow inside the Roth and be withdrawn tax-free if the applicable rules are met.

The retiree in this example used none of that room. Because tax brackets apply separately to each tax year, the capacity she left unused each year disappeared when that year ended. Meanwhile the account kept compounding, so the balance used to calculate future RMDs grew larger.

How a Roth conversion could have changed the outcome

Making annual conversions during those nine years would not have eliminated taxes — she would have owed tax on each converted amount. But she could have paid those taxes while occupying lower brackets and reduced the balance that later became subject to RMDs. Paying the conversion tax from savings outside the retirement account, when possible, lets the full converted amount stay invested in the Roth.

The timing of Social Security also matters. Once benefits begin, a conversion can raise the tax bill and increase the share of benefits subject to taxation. Roth IRAs are not subject to lifetime RMDs for the original owner under current federal rules, though the conversion itself does not erase the tax owed.

The example does not mean every retiree with a similar balance should convert, or that an RMD will necessarily be taxed at 22 percent. Filing status, other income, when Social Security starts, account balances and the tax rules in effect all shape the outcome. Federal ordinary income-tax brackets for 2026 range from 10 percent to 37 percent, and retirement income is not taxed at a special retiree rate. Readers should verify current RMD ages, brackets and rules against the latest IRS guidance before acting.

This article is for informational purposes only and does not constitute professional advice.