The Full Cost Stack of a $40K RMD
Every RMD dollar carries multiple tax layers. Federal income tax is the most visible but IRMAA Medicare surcharges, state income taxes, and the effect on Social Security taxability all add hidden costs that most retirees do not fully account for in retirement income planning.
Full cost of a $40,000 RMD by tax layer
| Cost Layer | On $40K RMD | Single 22% Bracket + $80K Other Income | Notes |
|---|---|---|---|
| Federal income tax (22%) | $8,800 | $8,800 | Ordinary income rate |
| IRMAA Part B (if triggered) | $838–$4,612/yr | $838–$2,096 | Depends on total MAGI |
| State income tax (avg 5%) | $2,000 | $2,000 | Varies by state — 0% to 13% |
| Additional SS taxability | $0–$400 | Minimal at 85% threshold | Usually maxed at $80K base |
| Total effective cost rate | 38%–50% | ~35% | Real effective tax on the RMD |
The 25% Missed RMD Penalty Explained
Missing an RMD or taking less than the required amount triggers a 25% excise tax on the shortfall under SECURE 2.0 (reduced from 50% prior to 2023). If you correct within the IRS two-year correction window by filing Form 5329 and taking the corrected distribution the penalty drops to 10%. On a $30,000 shortfall: $7,500 penalty (or $3,000 if corrected promptly).
Medicare IRMAA is based on your income from 2 years prior. A large RMD in 2025 affects your Medicare premiums in 2027. A one-time large RMD (such as a delayed first RMD when two are required in one year) can permanently bump your IRMAA tier for the following year. Plan large RMD years carefully.
RMD penalty vs. tax cost comparison
| Shortfall Amount | 25% Penalty | 10% Corrected Penalty | Break-Even (take the RMD vs. penalty) |
|---|---|---|---|
| $10,000 | $2,500 | $1,000 | Always pay 22% taxes on RMD rather than 25% penalty |
| $25,000 | $6,250 | $2,500 | Always pay 22% taxes on RMD rather than penalty |
| $50,000 | $12,500 | $5,000 | Always pay 22% taxes on RMD rather than penalty |
State Income Tax on RMDs
Most states with income taxes also tax traditional IRA withdrawals as ordinary income. Some states with income taxes partially or fully exempt retirement income (Pennsylvania IL Illinois exempt IRA distributions). Florida Texas Nevada and other no-income-tax states have no state RMD tax. High-income retirees in California pay up to 13.3% state tax on RMDs — dramatically increasing the total cost.
- Always take RMDs on time — the 25% penalty is never financially justified
- Account for IRMAA when planning large RMDs — the two-year lookback creates future Medicare cost surprises
- Check your state’s treatment of retirement income — some states exempt IRA distributions
- Consider relocating to a no-income-tax state for retirement if RMDs are substantial
Calculate Your True All-In RMD Cost
Enter your income and state to see the complete tax picture including IRMAA and state taxes on your RMD.