In this conversation, Speaker A and Bob Fraser explain how an IRA that continues to compound unchecked can create a massive tax liability once Required Minimum Distributions (RMDs) begin around age 73. The IRS mandates an initial withdrawal rate of roughly 4%, which rises with age, and because the account balance typically grows (e.g., from $2 million at age 65 to $3.5‑4 million by age 73), the first RMD can be about $150,000. The speakers argue that the common belief that retirees will be in a lower tax bracket—and thus can defer taxes—rarely holds true. Even if income temporarily drops, the larger balance offsets any bracket benefit. Consequently, they recommend front‑loading taxes on smaller balances rather than waiting for a potentially lower bracket, as they have not seen a scenario where delayed taxation outweighs the higher tax on the grown balance.
Chapters
If you don't do anything with it, that IRA is just going to continue to grow and compound to be a bigger and bigger balance. And by the time you get to the point where you're 73-ish, now you're forced to live by the rules of how much you have to distribute every year. And the first year you do it, it's roughly 4%. I mean, they have these funky tables that are not difficult for math whizzes, but if you're not a math whiz, just know this, the first year you got to take about 4% out. And then every year you get older, the idea is the IRS says the older you get, the more you got to take because theoretically the day you die, you emptied out your IRA and you paid all the taxes on it. Theoretically doesn't work because what happens most of the time is not only does the amount you have to take out get bigger just in the multiplication factor, but your balance gets bigger typically, unless you're spending it down.
The thought is that you're in a lower tax bracket by that age. And so you're going to pay less taxes.
I have not found that to be true.
So mostly people's tax brackets don't really go down as they retire.
Most people don't, but even if they do go down for a few years, let's say they had a really nice paying job or business that they own. And they had a lot of money coming in, that income may lull for a few years. And I'm giving you a generality. Everybody has their own situation, right? But even if it does lull, then what happens is by the time RMDs kick in, you take, you got a $2 million account when you're 65 years old and you retire. By the time you're 73 years old, it's not hard to imagine that that's $3.5 or $4 million. Well, now you take that 4% number for the very first year. Now you got $150,000 that you have to distribute the very first year you do RMDs. You take that $150,000 and you add it back on top of Social Security for a couple people, maybe a little pension, some investment income, and you're right back to wherever you probably started the whole game at. And so part of the logistics is to front-load the taxes you pay on the smaller balances. I've yet to see a case where we could model waiting till a potential lower tax bracket will offset the higher amount of tax on the added balance that accrued over those years.
