At 75, His Pension Pays the Bills — but the IRS Still Wants a $33,333 Withdrawal From His $820,000 Traditional 401(k)

His pension and Social Security already pay every bill, so he had no intention of drawing from his 401(k). Yet one mandatory withdrawal could nudge part of his Social Security into a higher tax bracket, and the timing he chooses matters more than he may expect.

Consider a 75-year-old former engineer who has enough retirement income to live comfortably. His pension and Social Security cover his expenses, and his $820,000 traditional 401(k) is money he would rather leave alone for his children. The IRS, however, has different rules.

Because he worked beyond age 73, he was allowed to delay required withdrawals from his employer retirement plan. But once he retired, that exception ended. He now faces a $33,333 distribution he did not want, along with a federal tax bill. If he waits too long, the tax consequences can become even more complicated.

A Required Withdrawal He Did Not Ask For

The calculation uses two figures: the account value on December 31 of the previous year and a divisor from the IRS Uniform Lifetime Table. At age 75, that divisor is 24.6.

Dividing his December 31 balance of $820,000 by 24.6 produces about $33,333. That is his required minimum distribution for the year. He may take more, but he cannot take less. Because the divisor shrinks over time, the percentage of the account he must withdraw rises as he gets older.

What Happens to Money He Does Not Need

The distribution is usually taxed as ordinary income in the year it leaves the 401(k). He also cannot roll a required minimum distribution into an IRA or Roth IRA, since the IRS does not allow RMDs to be rolled over.

What he can do is pay the tax and invest the remaining money in a taxable brokerage account. The assets can stay invested, with only the tax treatment changing. A broad, low-yield index fund such as Vanguard Total Stock Market ETF (NYSEARCA:VTI) can keep future taxable dividends relatively small. Money held in taxable accounts also receives a stepped-up cost basis when passed to heirs, which may be more valuable to his children than leftover pre-tax 401(k) money.

How One Withdrawal Can Set Off a 41% Tax Rate

Assume he receives a $30,000 pension and $45,000 a year from Social Security, and files as a single taxpayer.

Social Security benefits become taxable once provisional income exceeds $25,000. Above $34,000, as much as 85% of the benefit can be taxed.

Without the distribution, $20,225 of his benefits would be taxable. With it, the taxable amount rises to $38,250, which is the 85% maximum.

In other words, the $33,333 withdrawal increases taxable Social Security by another $18,025, lifting his adjusted gross income by $51,358.

That is the tax torpedo effect. Part of the withdrawal lands in the range where every extra dollar makes another 85 cents of Social Security taxable. In the 22% bracket, that creates a marginal federal tax rate of about 41%, and the phaseout of his extra senior deduction can raise it further. Under 2026 rules, the withdrawal increases his federal income tax by roughly $9,217.

The real solution is something he should have addressed before age 75. Lowering the account balance before the first required withdrawal arrives can reduce the damage later.

Medicare is the next issue. His modified adjusted gross income of about $101,583 remains below the current $109,000 threshold for higher premiums for single filers. But Medicare generally uses a two-year lookback, so his 2026 income could affect whether he owes an income-related monthly adjustment amount in 2028, based on that year's thresholds.

Missing the Deadline Can Be Expensive

In the first year only, he can delay his 2026 distribution until April 1, 2027. But his 2027 distribution would still be due by the end of that year. If his account is still near $820,000 at the end of 2026, the next required withdrawal would be about $34,600. Both distributions would then appear on his 2027 tax return.

With his pension and Social Security unchanged, that could push his adjusted gross income above $136,000. It could also lead to higher Medicare premiums later on, depending on the thresholds then in effect. For him, taking the first distribution during the year is the simpler choice.

Missing the deadline can trigger a 25% excise tax on the amount not withdrawn. That penalty drops to 10% if the taxpayer corrects the mistake and files the return within the correction period. The IRS may also waive the penalty for a reasonable error. The correction window can end earlier if the IRS sends a deficiency notice or assesses the tax.

Three Ways to Handle the Next Required Withdrawal

1. Consider Roth conversions. Moving traditional 401(k) assets into a Roth IRA can reduce future required withdrawals, and Roth IRAs do not have lifetime RMDs for the original owner. But he must take his annual RMD before converting more money. The conversion is taxable and could also raise Medicare premiums two years later.
2. Roll over to an IRA and use QCDs. Qualified charitable distributions sent directly from an IRA to an eligible charity can satisfy IRA required withdrawals without increasing adjusted gross income. The 2026 limit is $111,000 per person. He must first take the required distribution from the 401(k) before rolling the rest into an IRA, where QCDs can help manage future taxes.
3. Prepare for the tax bill. Since his pension already covers his living costs, the required withdrawal creates income he does not need to spend. He can set up federal tax withholding on the distribution or make estimated payments to avoid a surprise bill at filing time.