His IRA Cratered From $100,000 to $16,000. The RMD Still Came Due and Pulled Social Security Into the Tax Bill.

A Cruel Piece of Timing

A retired man in his mid-seventies ended December with approximately $100,000 in a traditional IRA. Much of it sat in a private-credit investment he had treated as a conservative source of income. Then the investment collapsed. By summer, his account was worth approximately $16,000. He called the custodian expecting his required minimum distribution (RMD) to fall with it. It did not.

December’s balance had already set the year’s withdrawal. The investment had lost 84% of its value. The RMD had not lost a dollar.

The RMD Remembers December 31

An RMD is generally calculated by dividing the IRA’s value on the previous December 31 by a life-expectancy factor published by the IRS. What happens to the investment afterward does not change that calculation. A midyear crash brings no automatic do-over. Using the standard table, a 75-year-old with a $100,000 year-end balance would divide that amount by 24.6. His RMD would be approximately $4,065.

When the account was worth $100,000, that withdrawal represented about 4% of the balance. After the collapse, the same $4,065 consumes roughly one-quarter of what remains. The account loss brings no matching tax relief. Gains and losses inside an IRA generally stay off the current tax return while the account remains open. Unlike a loss in a regular brokerage account, the decline does not produce a capital-loss deduction. The distribution, however, still enters ordinary income.

How a $4,065 Withdrawal Adds More Than $4,065

Social Security taxation depends on a separate measure commonly called provisional income. It generally combines income outside Social Security, tax-exempt interest, and half of the year’s benefits. For a single filer, benefits can begin entering taxable income once that total exceeds $25,000. Above $34,000, as much as 85% of the benefit can become taxable. The corresponding lines for a married couple filing jointly are $32,000 and $44,000. Those thresholds do not rise with inflation.

Suppose this retiree receives $30,000 in Social Security and has $17,000 from a pension, interest, and other sources. Before the RMD, his provisional income is $32,000. Part of his benefit is already taxable.

Add the $4,065 distribution, and provisional income rises above $36,000. Under the Social Security tax calculation, roughly $2,755 more of his benefit can enter taxable income. The $4,065 withdrawal therefore adds approximately $6,820 to his gross income once the extra taxable Social Security is included. That is the tax torpedo. One dollar leaves the IRA and can pull part of another dollar out of Social Security’s protected column.

The Investment Loss Does Not Cancel the Withdrawal

The market and the tax code are keeping separate books. The account statement recognizes the collapse immediately. The RMD calculation continues using the picture taken on December 31. Skipping the distribution does not solve the problem. Failing to withdraw the full amount can bring an additional tax, leaving him with a depleted account and another bill.

If he has other traditional IRAs, he may be able to take the combined IRA distributions from one or more of them after calculating each account’s RMD separately. That can spare him from selling the damaged investment immediately, although it does not reduce the total amount that must come out.

What Can Still Be Done

Three steps can limit the collateral damage:

1. Calculate the RMD from the correct balance. Use the previous December 31 value, not the current statement. Confirm the number with the custodian before assuming the market decline changed it.
2. Run the Social Security tax calculation before withdrawing. The distribution’s face value does not reveal its full effect. It may also cause more of the year’s benefits to become taxable.
3. Consider a charitable transfer only if giving was already planned. Someone age 70½ or older can send money directly from an IRA to an eligible charity through a qualified charitable distribution (QCD). It can satisfy all or part of an RMD without entering adjusted gross income. The transfer must go directly from the IRA to the charity.

A QCD does not recover the investment loss, and it makes little sense for someone who needs every remaining dollar. It can help a retiree who was already planning to give and wants to keep the distribution from pulling more Social Security into taxable income. December 31 took the picture. The investment collapsed afterward, but the RMD remained frozen in time.

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