I retired at 60 and have an untouched $700k nest egg. Are RMDs going to skyrocket my taxes owed?

Earlier this year, Alice learned that Required Minimum Distributions (RMDs) could help her money go further. Now she wants to know the optimal way to comply with RMD rules without overpaying in taxes down the line. While she has 12 years before she has to worry about RMD rules going into effect, she doesn’t want to drain her nest egg unnecessarily fast and would prefer to have something left over to leave behind for her kids.

Beyond planning for potentially needing long-term care, Alice should also consider a plan for RMDs in her retirement. Since much of Alice’s nest egg is saved in a traditional IRA, the funds will be subject to RMDs once she reaches age 73.

Here’s what she could do next.

Planning for higher costs

While your golden years can be full of memorable times, the reality of aging is that it can also come with increased living expenses. At some point, you may no longer be able to take care of certain tasks on your own.

Some retirees simply need an extra hand with groceries or household chores. Others may require long-term care with daily support for everyday tasks. And while it’s easy to imagine staying healthy and independent forever, things don’t always play out that way.

Alice is a relatively young retiree and likely has many independent years ahead of her. But it’s helpful to consider that at some point, she may need to outsource some daily living tasks. In fact, according to the Center for Retirement Research (CRR) at Boston College, 80% of 65-year-olds will need long-term care at some point over their remaining years (1).

Unfortunately, the price tag for long-term care is steep. The CRR also reported that in 2023, the median annual cost for a private nursing home room was $116,800, compared to $75,500 for a home health aide, or $64,200 for an assisted living facility.

One way to mitigate the potential costs of long-term care is to purchase long-term care insurance. For a single male, the average annual premium purchased at 65 is $1,200. For a single female, like Alice, that same premium is $1,900, according to the American Association for Long-Term Care Insurance (2). If possible, Alice should find a way to pay for this insurance policy — especially given her premium will only increase if she waits longer to purchase.

Since she’s spending less than her income each month, it’s an expense worth considering to safeguard her financial future.

Long-term care insurance to protect your health

When considering long-term care insurance, GoldenCare offers different options based on your needs. These include hybrid life or annuity insurance with long-term care benefits, short-term care, extended care, home health care, assisted living and traditional long-term care insurance, too.

With GoldenCare, Alice could even combine her term life insurance policy with a long-term care insurance policy to give her and her family peace of mind.

Crafting a tax-smart RMD plan

Think of RMDs as the minimum amount an account holder must withdraw after a set age.

Starting at 73, you’ll need to withdraw a set amount each year from accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs and employer retirement plans, according to the IRS. They’re the IRS’s way of making sure you don’t let your retirement money sit forever. And if you skip your RMD, you will be hit with a 25% tax penalty on the set amount.

Per NBC, 53% of Fidelity investors with an RMD for 2025 haven’t yet taken one. If they aren’t taken by April 1 of the year after turning 73, or December 31 for every following year, then they’ll face that hefty IRS penalty (3).

There are many considerations needed to craft the best strategy to reduce your RMDs. And that can be a crucial financial move, given RMDs are taxed as ordinary income once distributed. That added income can have a profound impact on your financial situation — potentially launching you into a new tax bracket, reducing your deductions or even increasing Medicare premiums.

An optimal process involves understanding multiple tax rules and seemingly unrelated consequences. Because of that, it’s often best to enlist the help of a financial advisor.

An advisor may suggest to Alice that if she wants to minimize her RMDs, the best way is by lowering the balance of the relevant account. For example, she could pursue a conversion strategy that would pull funds out of her traditional IRA and put them into a Roth IRA, which isn’t subject to RMDs.

In that case, she would still have to pay income taxes on funds she withdraws from her traditional IRA before she tucks them into a Roth IRA.

Alternatively, an advisor may simply tell Alice that she should opt for the simpler path. While she could further optimize her situation through RMDs, the hassle of properly timing conversions and managing the tax consequences may not be worth it, both financially and administratively, for her.

Get help from a qualified financial advisor

Clearly, RMD strategies are both individual and complex. But finding a financial advisor that suits your specific needs and financial goals is simple with Vanguard.

Vanguard’s hybrid advisory system combines advice from professional advisors and automated portfolio management to make sure your investments are working to achieve your financial goals.

With a minimum portfolio size of $50,000, this service is best for clients who already have a nest egg built and would like to try to grow their wealth with a variety of different investments. All you have to do is set up a consultation with a Vanguard advisor, and they will help you set a tailored plan and stick to it.

Choose the optimal strategy for your net worth

Another option for Alice, although it would require long-term planning, is to capitalize on the back-door Roth IRA method. It’s a strategy that those with high net worths may wish to consider when retirement planning.