A 68-Year-Old With $850,000 in a Traditional IRA Is Sitting on a Six-Figure Tax Bill. Here’s How Retirees Shrink It.

An $850,000 traditional IRA looks like a comfortable retirement stash, but every dollar inside it is still owed to the IRS at ordinary income rates. For a 68-year-old single filer, that pretax balance carries a tax bill that can easily cross into six figures depending on how and when the money comes out.

The 2026 federal brackets set the rules. A single filer pays 10% on income up to $12,400, 12% up to $50,400, 22% up to $105,700, 24% up to $201,775, 32% up to $256,225, 35% up to $640,600, and 37% above that. The standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly. Pulling the full $850,000 out in a single year would push the top slice into the 37% bracket even after subtracting that deduction.

Required minimum distributions do not begin until age 73 under current rules, which gives a 68-year-old a five-year window before the IRS forces annual withdrawals. That window is where most of the tax-shrinking work happens.

A New Deduction That Most Retirees Are Not Using Yet

The One Big Beautiful Bill Act, signed into law on July 4, 2025, added a temporary senior deduction of up to $6,000 per qualifying individual for tax years 2025 through 2028. The deduction applies to taxpayers age 65 and older and stacks on top of the standard deduction and the existing age-65 additional standard deduction, regardless of whether the filer itemizes. A married couple filing jointly can qualify for up to $12,000 combined. The deduction phases out for modified adjusted gross income above $75,000 for single filers and $150,000 for joint filers.

For a 68-year-old with a large traditional IRA, this deduction changes the conversion math in the gap years before RMDs. Keeping taxable income below the phaseout threshold during Roth conversions lets the filer claim the full $6,000 benefit each year through 2028, compounding the savings over multiple tax years. Tax advisors note that many retirees have not yet built this deduction into their planning.

Roth Conversion Ladders in the Gap Years

The standard playbook is a partial Roth conversion each year between retirement and the RMD age. The retiree moves a slice of the traditional IRA into a Roth, pays ordinary income tax on the converted amount, and permanently removes that money from future RMD calculations. Converted balances then grow tax-free and pass to heirs without triggering income tax.

Bracket management drives the sizing. Converting just enough to fill the 12% bracket (taxable income up to $50,400 for a single filer) or the 22% bracket (up to $105,700) prepays tax at a lower rate than a future forced withdrawal might trigger. Over five years, a single filer topping off the 22% bracket could convert roughly $90,000 annually and meaningfully reduce the traditional IRA before RMDs begin. Factoring in the new $6,000 senior deduction, those conversion amounts can stretch slightly further without crossing into a higher bracket.

Qualified Charitable Distributions After 70.5

Starting at age 70.5, IRA owners can route money directly from the IRA to a qualified charity through a Qualified Charitable Distribution. The 2026 annual limit is $111,000 per individual, up from $108,000 in 2025. QCDs count toward the RMD once RMDs begin, and the transferred amount is excluded from adjusted gross income entirely. For a retiree already inclined to give, this beats taking the RMD, paying income tax on it, and donating the remainder.

QCDs also hold down AGI, which governs the taxability of Social Security benefits, Medicare IRMAA surcharges, and the portion of long-term capital gains taxed at 0%. Each lever pulled below a threshold compounds the savings elsewhere.

Timing Social Security and Watching AGI

The 2026 Social Security COLA is 2.8%, lifting benefit checks to keep pace with inflation. Every dollar of Social Security added to income can pull up to 85 cents of that dollar into taxable income once combined income crosses the statutory thresholds. A retiree living on portfolio income during the gap years and delaying Social Security until age 70 keeps AGI low enough to make larger Roth conversions cheaper.

Bracket thresholds adjust for inflation each year. Social Security’s taxability thresholds and the IRMAA cliffs do not, quietly pulling more retirees into higher-cost tiers over time. Staying aware of that asymmetry is itself a planning edge.

What the Numbers Look Like in Practice

The Bureau of Labor Statistics puts average annual household expenditures at $78,535 in 2024. Per capita disposable income was $68,391 in the first quarter of 2026. A retiree spending near those figures does not need to withdraw the entire $850,000 quickly, which leaves room for a multi-year conversion plan structured to preserve the senior deduction each year.

The 10-year Treasury yield has climbed to around 4.65% to 4.70% in late August 2026, near its highest level in over a year. Interest from bonds held in a traditional IRA becomes ordinary income when distributed through RMDs. Shifting growth assets into the Roth side during conversions tends to leave the tax-inefficient bond holdings where they already sit, which improves the overall after-tax outcome.

The Takeaway

The six-figure tax bill attached to an $850,000 traditional IRA depends on when the money comes out, in what size chunks, alongside what other income, and whether any of it is redirected before it becomes taxable. The five-year window between age 68 and the start of RMDs at 73 offers the most control a retiree gets. The One Big Beautiful Bill’s temporary senior deduction adds a new, time-sensitive reason to act before 2028. Once RMDs begin, the IRS starts making the timing decisions.

Editor’s note: This update adds coverage of the One Big Beautiful Bill Act’s new $6,000 senior deduction for taxpayers age 65 and older (in effect through 2028), incorporates the current 2026 QCD annual limit of $111,000 per individual, and refreshes the 10-year Treasury yield to reflect the late-August 2026 range of approximately 4.65% to 4.70%.

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