April 15th is right around the corner, so taxes seem to be on many people’s minds. While some people like surprises, most don’t when it comes to how much money they may owe in taxes to the Federal and State Governments.
While the April deadline focuses on finalizing your 2025 taxes, it is also an ideal time to begin planning ahead for your 2026 tax picture.
To minimize some of the possible surprises you may incur next year, you may want to look at your projected 2026 taxable income now.
For those people taking Required Minimum Distributions (RMDs) from their retirement plans, RMDs may be the largest component of their taxable income. Let’s start with a simple primer about RMDs.
What are RMDs and How Are They Calculated?
A Required Minimum Distribution is the minimum amount the IRS requires you to withdraw from your retirement accounts each year once you reach a certain age (currently 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later). These withdrawals are taxed as ordinary income. These rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k)s and 403(b)s. Because these accounts contain earnings that have never been taxed, the IRS mandates that these withdrawals be made so it can finally collect income tax on the distributions.
The formula for calculating your RMD is relatively straightforward, but the timing of the variables is critical:
RMD = (Account Balance as of December 31 of the previous year) ÷ (Life Expectancy Factor)
The IRS provides “Life Expectancy Factors” in the Uniform Lifetime Table. The Life Expectancy Factor is based on the age you are as of the last day of the current tax year. This factor generally decreases as you age, which means the percentage of the account you must withdraw increases over time.
Why 2026 RMDs May Be Larger Than Expected
If you are looking ahead to your 2026 distributions, you may notice a significant jump compared to 2025. This is due to two primary factors:
- The Aging Factor: As you move from one year to the next, your life expectancy factor in the IRS table gets smaller. Dividing your (potentially larger) account balance by a smaller number results in a higher required withdrawal amount.
- Market Appreciation: Your 2026 RMD is based on your account balance as of December 31, 2025. Stock and bond markets performed well throughout 2025, resulting in higher year-end balances for many. Even if the market remains flat or dips in early 2026, your 2026 distribution amount is already “locked in” based on that high-water mark from the end of the previous year.
For many retirees, this “double whammy” of a higher starting balance and a higher distribution percentage can lead to an RMD that exceeds their actual cash flow needs.
Planning for a Larger Distribution
A larger RMD isn’t just about having more cash on hand; it also means a higher taxable income, which could potentially push you into a higher tax bracket or impact the cost of your Medicare premiums (IRMAA).
If you find that your 2026 RMD will exceed your lifestyle needs, there are several strategies to consider to reduce the tax impact. For example, those who are charitably inclined may benefit from a Qualified Charitable Distribution (QCD), which allows you to send up to $111,000 (indexed for inflation) directly from your IRA to a qualified charity. This satisfies your RMD requirement and reduces your taxable income.
Alternatively, you might look at Strategic Roth Conversions or adjusting your tax withholding to account for the larger distribution. The Strategic Roth Conversion does not reduce your 2026 RMD but can reduce future RMDs.
Your Next Steps
A larger RMD is not just a cash flow consideration; it’s a tax planning consideration. Understanding how these required withdrawals fit into your overall income picture can help you avoid unintended consequences, such as moving into a higher tax bracket or increasing your Medicare premiums.
If market performance in 2025 has increased your projected 2026 RMD, now is a good time to review your expected taxable income and consider whether any adjustments may be appropriate. Strategies such as Qualified Charitable Distributions, Roth conversions, or changes to tax withholding may help better align your income and tax outcome.
We encourage you to connect with your EKS advisor to run a projection and review your options so there are fewer surprises when it comes time to file your 2026 taxes.
