Retired Ironworker’s $5,400 Monthly Union Pension and $800,000 401(k) Could Face Three Tax Hits He Never Saw on His Paycheck

Quick Read

• A $64,800 yearly pension uses up the lower tax brackets, so nearly every 401(k) dollar is taxed at 22% or more for life.

  

• By age 73, RMDs, Social Security, and the pension can lift income to about $134,000, which can make 85% of Social Security taxable and trigger Medicare IRMAA surcharges.

• Converting as much as $44,200 a year to a Roth IRA before 73 can reduce future RMDs taxed at 22%, helping avoid higher brackets and later IRMAA charges.

A single retired ironworker in his mid-60s with a $5,400-a-month union pension and $800,000 in a 401(k) is in a situation many longtime building-trades workers eventually encounter. For years, taxes were withheld automatically from every paycheck, but retirement can bring three separate tax pressures: ordinary income tax on pension and 401(k) withdrawals, federal taxation of Social Security benefits, and Medicare premium surcharges tied to income.

The pattern is familiar, and a retirement planning podcast recently highlighted the same three issues: RMDs at 73, taxes on Social Security, and Medicare income surcharges. Households headed by people ages 55 to 69 hold 48% of all U.S. defined benefit pension entitlements and 50% of defined contribution balances, which means millions of Americans are bringing both types of retirement plans into retirement.

His Pension Already Uses Up the Lower Brackets

In this case, the pension provides $64,800 a year, and pensions count as gross income under 26 U.S.C. § 61(a)(10). After subtracting the single standard deduction of $16,100 and the temporary senior deduction of $2,000, taxable income comes to about $46,700 before any 401(k) money is withdrawn. The 22% bracket begins at $50,400, and the 24% bracket starts at $105,700.

Because the pension fills the lower brackets for life, nearly every dollar taken from the 401(k) is layered on top of it at 22% or higher.

Three Tax Layers Arrive Together at Age 73

Another key factor is that required minimum distributions begin at age 73 under 26 U.S.C. § 401(a)(9)(C)(v). If the 401(k) is left alone and grows at 6% a year, it could reach roughly $1.28 million by then, making the first RMD about $48,000 under the IRS Uniform Lifetime Table, using a divisor of 26.5. Add in a Social Security benefit near the average retired-worker payment of $2,095 a month.

1. Income tax: Adjusted gross income rises to about $134,000. The senior deduction applies only to tax years beginning before January 1, 2029, so taxable income lands near $118,000. That places the top portion in the 24% bracket.

2. Social Security tax: Benefits begin to become taxable once income exceeds a single filer's base amount of $25,000 and adjusted base amount of $34,000. Those figures are written into law and have never been indexed to inflation. At this income level, as much as 85% of benefits are taxable, or about $21,000 a year.

3. Medicare surcharges: Single filers with income above $109,000 pay an income-related monthly adjustment amount, or IRMAA. At current thresholds, Part B rises from $202.90 to $284.10 a month, plus $14.50 for Part D. Because the surcharge is based on earlier tax returns, a high-income year affects premiums two years later.

Roth Conversions Before RMDs Can Reduce All Three

One common strategy for single retirees in this position is to shift 401(k) money into a Roth IRA each year between retirement and age 73. With the $109,000 IRMAA line and the pension already consuming part of that room, about $44,200 a year remains for conversions, most of it taxed at 22%. Delaying Social Security until closer to 70 can preserve that room and increase the eventual monthly benefit. Qualified Roth withdrawals are not included in gross income, and each dollar converted lowers future RMDs that would otherwise affect all three tax layers.

There are tradeoffs. Paying the tax from cash outside the 401(k) leaves more money in the Roth account. Income above $75,000 also reduces the senior deduction by 6% of the amount over that level, a modest but real drag through 2028.

The other route is to take only the RMDs. That defers taxes, but the balance keeps compounding into larger forced withdrawals on top of a fixed pension, and for a single retiree with this size of pension, that usually means higher taxable income later. Married couples have more flexibility: a joint Social Security base of $32,000, an IRMAA threshold of $218,000, and a 12% bracket that runs to $100,800. Still, a surviving spouse eventually files as single while keeping much of that income.

Two Numbers to Watch Before Taking Any Withdrawal

Each year, the first step is to compare projected income with two key lines: the 24% bracket at $105,700 and the IRMAA threshold at $109,000. A pension creates a predictable starting point, which makes conversion planning much easier than it is for retirees whose income changes from year to year.

Many retirees leave the 401(k) untouched until 73 because the pension already covers their bills. Those years before RMDs often represent the lowest-tax window for paying tax on the money. A survivor pension election or a spouse can also matter. A CPA can model the widowhood years, since a surviving spouse’s tax brackets fall to roughly half the joint levels, which can change how much should be converted.

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