Picture a 73-year-old retiree who watched his IRA swell through 2025 and into this year. The S&P 500 is up about 9% year to date through July 6, and it has gained approximately 20.5% over the past year. He’s comfortable. Then, in early July, Bank of America (NYSE:BAC | BAC Price Prediction) warned the market could suffer a “snapback” and give back much of this year’s gains, citing “speculation hitting extreme levels”. A separate economist added a caution about a possible “painful repricing” if AI productivity disappoints.
These are warnings, not forecasts. But for our retiree, they also collide with a rule he cannot negotiate with: his required minimum distribution (RMD).
Why the RMD Rule Is the Trap
His 2026 RMD is calculated from his IRA balance on December 31, 2025, divided by an IRS life-expectancy factor from the Uniform Lifetime Table. That number is locked in. If stocks correct sharply this summer or fall, the IRS does not adjust the withdrawal downward to reflect the smaller balance he actually has. He still owes the full distribution, based on the higher balance from a market that no longer exists.
Consider a rounded example. Say our retiree ended 2025 with $800,000 in his IRA. His RMD for the year lands somewhere near $30,000. If the market drops 20% before he takes it, the account is closer to $640,000, but the $30,000 he must withdraw does not shrink. If he raises that cash by selling equities, he’s selling into the drop, converting a paper loss into a permanent one. That is sequence-of-returns risk meeting a non-negotiable IRS deadline.
The market’s recent calm makes the setup more dangerous. The VIX is sitting near 16, in the 22nd percentile of its past year, meaning the market has priced in unusually little near-term risk, the kind of complacency that historically leaves less cushion when a shock actually arrives. Meanwhile, University of Michigan consumer sentiment fell to 44.8 in May, well below the 60-point line that typically signals recession. Calm markets, uneasy consumers. That’s the environment a snapback tends to arrive in.
The Social Security Piece Most People Miss
The forced RMD shrinks the portfolio and shows up on his tax return as ordinary income, which pushes up his provisional income. The IRS uses this figure to decide how much of his Social Security check gets taxed. Once provisional income clears the upper thresholds ($34,000 single, $44,000 joint), up to 85% of Social Security benefits become taxable. That’s the tax torpedo retirees lose sleep about.
It gets worse two years later. A larger modified adjusted gross income (MAGI) this year can trigger higher Medicare Part B and Part D premiums in 2028 through the income-related monthly adjustment amount (IRMAA). A forced sale at the bottom bleeds into Medicare bills a couple of years down the road.
The 2026 cost-of-living adjustment (COLA) came in at 2.8%, which helps on the income side but doesn’t move the tax thresholds, which aren’t indexed to inflation. Each year of raises quietly drags more retirees into the taxable zone.
How to Avoid Selling at the Low
The mechanic is fixed. The liquidity plan is not. A few adjustments blunt most of the damage:
- Keep one to two years of RMD-sized cash or short bonds inside the IRA. With the 10-year Treasury yielding about 4.5% and Treasury bills paying similar levels, a stable bucket lets him satisfy the RMD without touching equities in a drawdown.
- Use a qualified charitable distribution. Anyone 70½ or older can send up to $111,000 directly from an IRA to charity and count it toward the RMD. The distribution never hits adjusted gross income, protecting Social Security taxation and IRMAA in one move.
- Rebalance inside the IRA before selling. Shifting from stocks to bonds inside a traditional IRA has no immediate tax cost. Rebalance first, then draw the RMD from the bond side.
- Take the RMD earlier in the year, or in monthly slices. Waiting until December concentrates the risk into one price. Spreading withdrawals smooths it out.
What Actually Matters Here
The mistake that’s hardest to undo is selling equities at a low to satisfy a distribution sized to a peak. Everything else (tax bracket, IRMAA, Social Security taxation) flows from that first decision. The fix is making sure the money you have to withdraw is already sitting in something you’d be willing to sell at any price, rather than trying to time the market.
Warnings from Wall Street come and go. The RMD arrives on schedule regardless. Our retiree’s job, and yours if you’re in a similar spot, is to make sure the two never meet on the market’s worst day. A conversation with a tax advisor before year-end is usually worth more than it costs.
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