A $1.8 Million Portfolio, Two Withdrawal Plans: One Triggers IRMAA and RMD Taxes, One Never Does
Two retirees retire with identical $1.8 million portfolios, follow similar withdrawal strategies, and end up in completely different tax situations because of one structural decision made years earlier.
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A $1.8 million nest egg is a strong finish line, but the account it sits in decides how much of the income actually reaches your checking account. Two retirees with identical balances can end up in very different places once Medicare surcharges and required minimum distributions enter the picture. The withdrawal plan matters more than the balance.
Start with the income math. At a 3.5% yield, $1.8 million divided by 0.035 produces about $51,000 a year. At 6%, it produces $108,000. At 10%, it produces $180,000. Those three numbers frame the entire conversation, because each one carries a different tax profile depending on where the capital lives.
The Yield Tiers on a $1.8M Base
Conservative tier (3% to 4%). Broad dividend growth equity, quality dividend ETFs, and investment-grade munis. At the nearly 5% on the 10-year Treasury, even Treasuries now sit near the top of this band. Capital required to generate $60,000 at 3.5% is roughly $1.7 million, so a $1.8M portfolio here produces around $63,000 with room to grow. Dividend growth compounds; principal appreciates; income disruption risk is lowest.
Moderate tier (5% to 7%). Covered call equity funds, preferred stock funds, REITs, and high-dividend equity. At 6%, $1.8 million produces $108,000. The tradeoff: dividend growth flattens, upside is often capped, and real purchasing power lags inflation, which matters when Core PCE sits in the 90th percentile of its 12-month range and CPI keeps grinding higher.
Aggressive tier (8% to 14%). Leveraged covered call funds, business development companies, mortgage REITs, and high-yield credit. At 10%, $1.8 million throws off $180,000. That headline income comes with principal erosion, distribution cuts during credit stress, and an asset base that often shrinks in real terms.
Plan A: The Pretax Path That Triggers IRMAA and RMDs
Assume the entire $1.8 million sits in a traditional IRA or 401(k). Every dollar withdrawn is ordinary income. Starting at age 73, the IRS forces distributions whether or not the retiree needs the money. A moderate-tier portfolio yielding 6% generates $108,000 inside the IRA, and every dollar counts toward Modified Adjusted Gross Income.
That MAGI figure drives Medicare’s Income-Related Monthly Adjustment Amount. Cross the first IRMAA tier and Part B and Part D premiums step up. Cross higher tiers and the surcharges compound. At the 22% marginal bracket, which begins at $50,400 for single filers in 2026, a six-figure withdrawal quickly pushes a retiree into the 24% bracket and into IRMAA territory. Add the 2.8% 2026 Social Security COLA and the taxable-income creep accelerates.
Plan B: The Structure That Sidesteps Both
Now split the same $1.8 million: $900,000 in a Roth IRA and $900,000 in a taxable brokerage account holding qualified-dividend equity and municipal bonds. The Roth has no RMDs and no tax on distributions. The taxable account pays qualified dividends taxed at 0%, 15%, or 20% depending on bracket, and muni interest is federally tax-free.
At a blended 4% yield, this structure produces about $72,000 of cash flow. Very little of it lands in MAGI, and none of it is forced. The retiree controls the timing, the character, and the amount. IRMAA becomes a variable they manage rather than a penalty they absorb.
The Insight Most Retirees Miss
Chasing the aggressive tier to boost headline income inside a pretax account is the worst of both worlds: the highest ordinary-income tax rate applied to the least durable income stream. A 3.5% dividend growth portfolio that raises its payout roughly 8% a year doubles income in about nine years. A 10% high-yield portfolio with flat or declining distributions stays where it started, or slips.
Account location often outperforms yield selection. Moving $500,000 from a traditional IRA to a Roth over a decade of conversions, executed in lower-income years before RMDs begin, can permanently remove that capital from the IRMAA calculation.
What to Do Next
- Map every dollar by tax bucket. Separate the $1.8 million into pretax, Roth, and taxable columns. The mix determines your IRMAA exposure long before yield does.
- Model Roth conversions before age 73. With the fed funds rate near 4% and the 24% bracket running to $211,400 for joint filers, there is often room to convert at a known rate today rather than an unknown rate later.
- Compare after-tax yield, not headline yield. A 6% covered call ETF inside an IRA may net less than a 3.5% qualified-dividend portfolio in a taxable account once IRMAA and ordinary-income rates are applied.
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