A $1.65 Million Portfolio, Two Withdrawal Plans: One Triggers IRMAA and RMD Taxes, One Never Does

Two retirees, same age, same $1.65 million balance, same seven holdings in identical weights. One will pay a Medicare premium surcharge stacked on top of a rising required withdrawal starting at 73. The other will not. Only the order they draw from, and the accounts those draws come from, separates the outcomes.

The seven positions are SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD), Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB), NEOS S&P 500 High Income ETF (NYSEARCA:SPYI), Ares Capital (NASDAQ:ARCC | ARCC Price Prediction), iShares 0-3 Month Treasury Bond ETF (NYSEARCA:SGOV), and STAG Industrial (NYSE:STAG). Blended, they produce meaningful cash income on a $1.65 million base. The character of that income decides the tax bill.

What the Portfolio Actually Pays

Big names in the investor space, VIG and SPYD distribute mostly qualified dividends taxed at long-term capital-gains rates. SPYI passes through option premium from a covered-call overlay, and a portion of its distribution is often classified as return of capital, which reduces current-year taxable income and defers recognition until sale.

ARCC and STAG are the ordinary-income producers. Business development company distributions and REIT dividends are taxed at ordinary rates, though STAG’s REIT payout qualifies for the pass-through deduction. VTEB pays municipal interest exempt from federal tax. SGOV pays short T-bill interest, federally taxable and state-exempt. With 13-week bill yields near 4% and the fed funds upper bound at 3.75%, the Treasury sleeve is a real income source.

Municipal Bond Trap Most Retirees Miss

The income measure used to set Medicare Part B and Part D surcharges adds back tax-exempt municipal interest. VTEB interest escapes federal income tax, yet it counts in full toward the number that decides your Medicare premium two years later. A retiree who loaded up on munis to keep Medicare costs down didn’t solve that problem (we mapped the IRMAA brackets and other premium traps in a free Medicare guide here).

Two Plans, One Portfolio

The plan that triggers both: leave the traditional IRA untouched, spend from the taxable account, let the tax-deferred balance compound. Required minimum distributions kick in at 73 on a much larger number and stack ordinary income on top of the dividends and interest the portfolio already pays. That stacked total sets the Medicare surcharge two years out.

The plan that never triggers either: draw deliberately from the tax-deferred account during the low-income years between retirement and 73, spending it or converting to Roth. Keep ARCC and STAG inside tax-advantaged accounts so their ordinary-income distributions never appear on a return. Hold VIG and SPYD in the taxable account, where qualified rates apply. Manage each year’s total to the surcharge measure. The forced withdrawal later lands on a smaller balance, and the premium bump never arrives.

Where Each Holding Belongs

ARCC and STAG are the least tax-efficient names and belong in the IRA or 401(k). VIG and SPYD are natural taxable holdings because qualified dividends already get preferential treatment. VTEB’s federal exemption is wasted inside a tax-advantaged account. SGOV sits wherever the cash buffer needs to be.

A Candid Look at the Holdings

Withdrawal order cannot rescue weak positions. VTEB has moved under 1% over five years. ARCC is down roughly 3% over the past year while VIG returned 15% and SPYD 14%, so the BDC’s 9.8% yield is partly offset by price. SPYI has roughly 1,000 trading days of history. STAG yields 4.1% and just reported core FFO of $0.65 per diluted share, up 3% year over year.

Limits Worth Naming

The surcharge works in brackets, not a slope, so crossing a step by one dollar costs the same as crossing it by thousands. Required withdrawals can be redirected directly to charity in a way that keeps them off the return for readers who give anyway. Spending down the tax-deferred account early means paying tax sooner, which is a real cost. A surviving spouse eventually files under a less favorable structure, which strengthens the case for shrinking the deferred balance while both are alive. Nearly everything here except VTEB and SGOV moves with equity and credit conditions in overlapping ways.

Order decides the tax outcome, not the holdings themselves. The retiree who never thinks about order pays for it twice.

Contact [email protected] for any questions or corrections.