Money
A Seven-Figure IRA Can Make 85% of Social Security Taxable
By Bear Creek Staff, . Bear Creek Capital Network.
Saving aggressively for retirement can trigger a tax bill most people never anticipated. 24/7 Wall St. walked through the mechanics in detail, and the numbers are worth understanding before mandatory withdrawals begin.
The savings gap and the tax trap
An HSBC survey found that affluent Americans now put their retirement number at $2.6 million, a figure that has risen 26% year over year. On average, respondents have accumulated only 52% of that target. Among those still working, 64% said they expect to ease out of their careers gradually rather than stop all at once.
That gradual exit matters for tax planning, but the more immediate issue is what happens once the IRS requires withdrawals from a traditional IRA. For people born between 1951 and 1959, required minimum distributions (RMDs, the mandatory annual withdrawals the IRS imposes on traditional retirement accounts) begin at age 73. Those born in 1960 or later start at 75. A missed deadline triggers a 25% excise tax on the amount that should have been withdrawn, though that penalty drops to 10% if the error is corrected promptly.
How Social Security gets pulled in
The IRS calculates what it calls combined income to determine how much of a retiree's Social Security benefit is taxable. The formula adds adjusted gross income, tax-exempt interest, and half of annual Social Security benefits. For a single filer, benefits are generally untaxed when that combined figure stays at or below $25,000. Between $25,000 and $34,000, up to half the benefit can become taxable. Above $34,000, as much as 85% of the benefit is included in taxable income.
To be clear: that 85% is not a tax rate. It is the share of the benefit that gets counted as taxable income, where ordinary federal rates then apply.
The piece illustrates this with a hypothetical retiree named Linda, collecting roughly $2,170 a month, close to the average retired worker's benefit after the projected 2027 adjustment. With little other income, her combined income sits around $13,020 and none of her benefit is taxed. Add a $60,000 RMD and combined income jumps to $73,020, pulling more than $22,000 of her Social Security into taxable income.
The steepest effect comes in the range just before the 85% ceiling is reached. In that zone, each additional $1,000 of IRA income can cause $850 more in Social Security benefits to become taxable. For a retiree in the 22% federal bracket, that works out to roughly $407 in extra federal tax on the $1,000 withdrawal. Once the 85% ceiling is hit, that compounding effect stops.
Medicare premiums add another layer
Large withdrawals can also raise Medicare Part B premiums two years later through a surcharge called IRMAA (income-related monthly adjustment amount). The piece notes that in 2026, a single filer whose modified adjusted gross income exceeds $109,000 pays $284.10 monthly for Part B, compared with the standard rate of $202.90.
Three tools worth knowing before RMDs start
The piece describes three planning approaches. First, the gap between leaving work and the RMD start age can be used to draw down a traditional IRA at lower tax rates, reducing the balance that will eventually drive mandatory withdrawals. Second, Roth conversions involve shifting funds from a traditional IRA into a Roth IRA during a lower-income year, which generates a taxable event at the time of conversion but ensures that later Roth withdrawals neither add to combined income nor drag more Social Security benefits into taxable territory. Third, qualified charitable distributions allow IRA holders aged 70½ and older to send up to $111,000 per person directly to an eligible charity in 2026, satisfying part or all of the RMD without the distribution appearing in taxable income.
What to watch
The practical question for anyone with a large traditional IRA is how much combined income will look like once RMDs begin. Running that estimate now, including half of expected Social Security benefits, shows whether the years before mandatory withdrawals start offer room to act. Filing status, a spouse's income, and state tax rules all shift the thresholds, so the calculation is household-specific. Once RMDs begin, the options narrow considerably.
Bear Creek Capital Network publishes content for informational and educational purposes only. Nothing in this article constitutes financial, investment, tax or legal advice, or a recommendation to buy or sell any security. Consider your own circumstances and consult a qualified professional before making financial decisions.