If you're approaching retirement with $1 million in a traditional IRA, you may be wondering how much of that money will eventually go to taxes.
After all, withdrawals from a traditional IRA funded with pretax money are generally subject to ordinary income taxes.
But here's something that might surprise you: Your federal income tax bill early in retirement could be much smaller than you expect.
The bigger tax consequences may come years later, when required minimum distributions and Social Security start interacting with each other.
Let's look at an example and why the decisions you make early in retirement matter.
How a $60,000 IRA Withdrawal Results in Just $1,250 in Taxes
Meet Sam and Sally. They're both 66 years old and recently retired.
They have $1 million in a traditional IRA, along with other savings. They spend approximately $100,000 a year and haven't started collecting Social Security.
Here's where their spending money comes from:
-$60,000 withdrawn from their traditional IRA
-$40,000 from savings they've already paid taxes on
Assuming they have no other taxable income, their federal income tax calculation starts with the $60,000 IRA withdrawal.
Under 2026 tax rules, a married couple filing jointly receives a $32,200 standard deduction. Because they're both over 65, they also qualify for an additional $3,300 standard deduction.
They also qualify for the enhanced senior deduction of $6,000 per person, or $12,000 combined. This deduction phases out at higher income levels.
After these deductions, their taxable income is just $12,500.
Their federal income tax bill is approximately $1,250.
That's about 2% of their IRA withdrawal.
Not exactly the enormous retirement tax bill you might expect.
But things can look very different later in retirement.
What Happens When Your IRA Keeps Growing?
Now imagine Sam and Sally take a different approach.
Instead of withdrawing money from their IRA early in retirement, they live primarily on other savings and allow the IRA to grow.
Suppose their $1 million IRA grows to $2 million by age 75. That's an illustration, not a prediction of investment returns.
Under current law, people born in 1960 or later generally must begin taking required minimum distributions (RMDs) at age 75.
The first RMD is approximately 4% of the previous year-end IRA balance.
On a $2 million IRA, that's roughly $80,000 they must withdraw, whether they need the money or not.
And because the money comes from a traditional IRA, those withdrawals generally create taxable income.
But there's another factor that can make the tax bill substantially higher.
How Social Security and IRA Withdrawals Can Increase Your Taxes
Social Security benefits receive different tax treatment than traditional IRA withdrawals.
Depending on your income, anywhere from 0% to 85% of your Social Security benefits can be taxable.
And here's an important detail: The income thresholds used to determine how much of your Social Security is taxable have never been adjusted for inflation.
As your other income increases, more of your Social Security can become taxable.
That creates an interaction many retirees overlook.
For every additional dollar withdrawn from your IRA, as much as another 85 cents of Social Security benefits can become taxable.
In other words, a $1 IRA withdrawal can add up to $1.85 to your taxable income.
That doesn't mean you're paying $1.85 in taxes. It means $1.85 can become subject to income tax.
Let's return to Sam and Sally.
Suppose they're receiving $60,000 a year in combined Social Security benefits.
With $40,000 in IRA withdrawals, approximately half their Social Security is taxable.
Increase those IRA withdrawals to $80,000, and the maximum 85% of their Social Security becomes taxable.
Now they're paying taxes on their IRA withdrawals while more of their Social Security is also being taxed.
And this doesn't require federal tax rates to increase.
Other changes can add to the tax burden, including the scheduled expiration of the enhanced senior deduction after 2028 or one spouse eventually filing as a single taxpayer.
Why Your Early Retirement Years Matter
The years between retirement and the start of required minimum distributions can provide valuable tax-planning opportunities.
Once you reach age 59½, you can generally withdraw traditional IRA money without the 10% early withdrawal penalty.
And before RMDs begin, you have more control over how much you withdraw each year.
That gives you an opportunity to take money out while you're in a relatively low tax bracket.
For example, you might deliberately withdraw enough to take advantage of the 10% or 12% federal income tax brackets.
That can reduce your IRA balance and potentially lower future required withdrawals.
You could also consider converting some traditional IRA money to a Roth IRA.
But Roth conversions aren't automatically the right answer. You're paying taxes today in hopes of improving your future tax situation.
Sometimes the better approach is simply spending more from your IRA during the earlier, more active years of retirement.
And sometimes leaving the IRA alone makes perfect sense.
The important thing is making that decision deliberately rather than allowing it to happen by default.
The Goal Isn't Always to Pay the Least in Taxes
Retirement planning software can compare different withdrawal strategies, Roth conversions, future RMDs, and projected lifetime taxes.
But the strategy that produces the lowest lifetime tax bill isn't necessarily the one that gives you the best retirement.
You might be better off taking additional withdrawals to travel, spend time with family, or enjoy experiences while you're healthy and active.
Taxes matter, but they shouldn't drive every retirement decision.
If you're approaching retirement with a substantial traditional IRA, start by estimating what your IRA balance might be when RMDs begin.
Take approximately 4% of that projected balance, add your expected Social Security income, and compare the total with what you plan to spend.
If that amount is substantially more than you expect to need, it's worth looking at your withdrawal strategy now.
The goal isn't simply to minimize taxes. It's to make smart decisions about when to use your money so you can enjoy the retirement you've worked hard to build.
If you'd like help understanding how your IRA, Social Security, and withdrawal decisions fit together, you can schedule a complimentary Retirement Strategy Call to discuss your situation.