According to a report from the GAO, in 2011 (most recent data) there were over 600,000 Americans with IRAs with a balance of $1 million or more. Suffice it to say, that number is bound to be much larger today, nearly 10 years later. In fact, Fidelity recently reported that the number of folks with $1 million or more in a 401(k) plan is nearly 200,000.

With that in mind, if you’re in this group or plan to be in this group, what are the planning opportunities that you have available to you? Naturally, this fits into the “good problem to have” environment because having a significant amount in retirement accounts can help ensure a comfortable retirement.

On the other hand, $1 million isn’t necessarily that much money when you consider that you’ll need to make it stretch out over (possibly) 30+ years in your retirement. For a 70-year-old with a $1 million IRA, the Required Minimum Distribution (RMD) is only approximately $36,500. For many folks, that’s hardly a drop in the bucket for living expenses, if that’s the only money available.

Thankfully there are other sources many folks have available to them – such as Social Security, pensions, and other investments outside of retirement accounts. 

For some folks, such a withdrawal is more than they’ll need. If the IRA money is likely to be more than you need for living expenses (specifically when you reach age 70½), there can be some opportunities early on in the process to help you ease the tax hit. This is especially important right now, during a time of historically-low income tax rates.

For example, if your taxable income needs are met with an income of $80,000 (for a married taxpayer), this puts you in the 12% tax bracket with approximately $23,000 of headroom (income that would continue to be taxed at the 12% rate). Further, you have an additional roughly $89,000 that could be claimed as income before you breached the 22% bracket. So that makes a total of around $112,000 of income that you could claim before hitting the 24% bracket.

For one possible strategy, you could convert a portion of your $1 million-plus IRA over to Roth, taking advantage of these low rates while we have them. This wouldn’t be without a significant tax burden – it would cost approximately $22,305 extra in taxes to convert this amount (about 20%). If you have other sources of funds to pay the tax, you’ll preserve more of the Roth money for later use (tax-free!). But even if you have to use the IRA withdrawal and only convert approximately $90,000 to the Roth, this still makes a lot of sense.

As you convert this money from traditional IRA to Roth IRA, you’re removing that money from the Required Minimum Distribution calculations, thereby reducing the amount that you’ll be required to withdraw when you reach 70½. Gradually you can reduce the size of the traditional IRA and bolster your Roth IRA, forestalling the over-distribution mentioned earlier.

In addition to the benefit of reducing future RMDs, converting to Roth will set your heirs up with a tax-free fund at your passing. Of course, tax-free is far better than fully-taxable, which is how a traditional IRA is treated when inherited. Plus, when you add in the looming legislation of the SECURE Act, your heirs might be forced to take the full amount of your IRA as taxable income over as little as 5 years (or possibly 10 years).

Rather than convert the money from traditional to Roth, you might also consider using the traditional IRA money in place of income that you could produce from non-IRA assets. For example, if you have a taxable investment account that is subject to capital gains taxes, preserving this money can also be very beneficial from an estate planning standpoint. So instead of taking money from your capital gains-taxed fund, take it from the IRA and preserve the capital gains account.

This is because your taxable account when you die receives a step-up in basis for your heirs. So, for example, if your taxable account is worth $500,000 and $100,000 of it represents capital gains, when your beneficiaries inherit the account the capital gains are wiped out. Your heirs will only have capital gains to the extent of any growth that occurs after your death. This is almost as beneficial as a Roth account, but not quite.

Another strategy you might consider is using the IRA money instead of filing for Social Security early. As detailed in the post Should I Use IRA Funds or Social Security at Age 62?, it can be tax-advantageous to use IRA funds (or another source) and delay taking Social Security until it’s maximized.

In either of the above strategies, since you’ll be withdrawing more fully-taxable money from your IRA you’ll be artificially increasing your income, at least for a few years. Keep in mind the impacts that this might have on any income-based medical insurance expenses – such as if you are eligible for ACA exchange premium reductions.

In general, for a married couple to take advantage of these significantly-lower medical premiums from the ACA exchanges, your taxable income must be less than approximately $67,000. Over that amount, and your medical premiums could increase dramatically. This would be applicable at any age under 65, Medicare eligibility age.

Plus, even if you’re able to get by with an employer-based medical plan and don’t have to worry about the ACA exchange income limitations, once you reach 65 you might be subjected to additional premiums for Medicare if your income is above certain levels. If your MAGI is over $170,000, this would bump up your Medicare premium to $189.60 from the usual $135.50. There’s also an increase of $12.40 a month to your Medicare Part D premium (if you have it) for this income level. This increase is based on your gross income two years previous, so keep this in mind as you plan.

Lastly, if you still have an IRA which is going to cause you a significant amount of extra taxable income when you reach 70½, consider using a Qualified Charitable Distribution (QCD) at that time. The QCD provision allows you to directly distribute funds from your traditional IRA to a qualified charity, and you don’t have to claim this distribution as income on your tax return. This is especially helpful if you are already inclined to make significant contributions to a charity or charities – and whatever money you distribute by QCD is counted toward your RMD for the year.