Sinking Funds in Retirement: The Roof, the Car and the IRMAA Years

It is money set aside in advance for a known, irregular cost, so that the bill is paid from cash you already hold rather than from whatever the portfolio happens to be worth that month. The idea is the same one a household uses for December gifts. What changes in retirement is the size of the bills and where the money comes from.

While you were working, a sinking fund came out of a paycheck. In retirement there is no paycheck. Every dollar of spending comes from Social Security, a pension, or a withdrawal from savings, and withdrawals have consequences a paycheck never did. A traditional IRA dollar is taxable in the year you take it. Taxable income two years ago sets this year’s Medicare premium. Selling shares in a down market locks in the loss. A sinking fund turns a lumpy bill into a steady, planned series of withdrawals, and it lets you choose the year the income shows up on your tax return.

Most retirees who use a bucket approach already hold one to two years of withdrawals in cash. The sinking fund is simply a labeled part of that bucket. It does not need its own bank account, although some people like one. It does need its own number, its own target date, and a refill plan.

The cash reserve is for what you cannot schedule; the sinking fund is for what you can. A retiree’s reserve exists mainly so you never have to sell stocks after a crash to pay the monthly bills, and secondarily for a sudden health or family cost. Our cash reserve calculator sizes it in years of withdrawals, with a separate line for big one-off bills, and the emergency fund guide explains the reasoning.

The mistake to avoid is letting one pay for the other. If the reserve buys the car you knew was coming, it is not there when the market falls 25% the following spring, and you end up selling stocks at the bottom to cover groceries. Track the two balances separately even if they sit in the same account.

The ones that are large, predictable in kind, and uneven in timing. Go through the last three years of bank and card statements, list every cost that did not recur monthly, and then add the big replacements you know are coming. For most retired homeowners the list falls into six groups.

What stays off the list? Anything monthly and steady, which belongs in the regular budget, and anything catastrophic and uncertain, which belongs to insurance or the reserve. Long-term care sits in that last group; we come back to it below.

A dated list of costs for the next five to ten years, with a running cash balance beside it. Here is one for a hypothetical couple. Richard is 72 and Ellen is 69. They have $2.6 million: $1.7 million in traditional IRAs, $620,000 in a taxable brokerage account, $180,000 in Roth IRAs and $100,000 in cash. Social Security and Richard’s small pension bring in $82,000 a year, and their house is paid off. With their planned IRA withdrawals and dividends, their modified adjusted gross income (MAGI) runs about $180,000 in a normal year.

They listed their irregular costs in today’s dollars:

Two patterns stand out. First, the averaged costs add up to about $76,000 a year, which is more than most people guess when they think about irregular spending. Second, the two biggest items are close. The roof is next year, so there is no time to save for it; it has to come from cash they already hold. The car is four years out, which is exactly the window in which a sinking fund does its best work.

Their plan: take the roof money from the existing $100,000 of cash and restore the reserve over two years. Accrue the car at about $9,600 a year, net of tax. Pay property tax, insurance and gifts from a monthly transfer into the cash bucket, as part of the regular withdrawal. Budget travel year by year. The rest of this guide is about where each of those dollars should come from.

Because a traditional IRA withdrawal is income in the year you take it, and two costs rise in steps as income rises: your federal bracket and your Medicare premium. For 2026, the standard Part B premium is $202.90 a month (CMS, 2026). Joint filers whose MAGI from two years earlier exceeds $218,000 pay the income-related monthly adjustment amount, IRMAA, on both Part B and Part D (Medicare.gov, 2026). The first tier adds $81.20 to Part B and $14.50 to Part D, $95.70 a month for each spouse on Medicare.

IRMAA is a cliff, not a slope. One dollar over the line triggers the whole tier. That is what makes a single large withdrawal expensive in a way that the same money spread over several years is not.

The lump-sum way

Suppose Richard and Ellen skip the sinking fund and buy the car in 2030 with one IRA withdrawal. To net $48,000 at a 22% federal rate they need to withdraw about $61,500. Their MAGI for 2030 jumps from $180,000 to $241,500, over the $218,000 line. Two years later, in 2032, both pay the first IRMAA tier for the year: $95.70 × 2 × 12 = $2,296.80. (We use 2026 thresholds for illustration; they are indexed for inflation.)

Their federal bracket does not change, because the 22% bracket for joint filers runs to $211,400 of taxable income in 2026, and their taxable income after the car is below that. But the extra income also shrinks the new senior deduction, which phases out as joint MAGI rises above $150,000 and applies through 2028, and in many states it adds state income tax at the same time.

The sinking-fund way

Instead, they withdraw an extra $12,300 a year from the IRA in 2026 through 2030, have 22% withheld, and move the $9,600 or so that is left into the car fund. Their MAGI each year is about $192,300, comfortably under $218,000. Over five years the federal tax on those withdrawals is about the same as on the lump sum. The difference is the $2,296.80 in surcharges they never pay, and a car bought from cash with no scramble.

The same logic runs in reverse in a low-income year. If one year your income dips, perhaps before Social Security starts or in a year of large deductions, withdraw more than you need and pre-fund the next few years of irregular costs at a low rate. That is the same bracket-filling idea behind Roth conversions before RMDs, and the two compete for the same room under each threshold, so plan them together. Your required minimum distribution, which starts at 73, or 75 if you were born in 1960 or later, counts toward MAGI too; our RMD calculator shows how large it will be.

When the spike can’t be avoided

Some lumpy income is not a withdrawal you control. Selling a home with a gain above the exclusion, $250,000 for a single filer or $500,000 on a joint return if you meet the ownership and use tests (IRS), or selling a concentrated stock position, can put you several IRMAA tiers up for one year. In that case, add the surcharge to the sinking-fund schedule for two years later and pay it from cash. A one-time spike like that is not a life-changing event, so Form SSA-44 generally won’t reduce it; retirement and the death of a spouse are, and for those you can ask Social Security to use your current income (SSA). Our Medicare and IRMAA guide lists every tier. If you are weighing a move, the downsizing guide covers the tax side of the sale.

Refill late in the year, and withhold

The best time to refill a sinking fund from an IRA is usually November or December, when you know the year’s income and how much room is left under your bracket and the IRMAA line. Two tax rules make that practical. The default federal withholding on an IRA distribution you request is 10%, and you can choose any rate from 0% to 100% on Form W-4R (IRS Form W-4R). And for the estimated-tax penalty, withholding is treated as paid in equal parts on each quarterly due date unless you show otherwise (IRS Form 2210 instructions). A December withdrawal with generous withholding can therefore cover tax owed on income received all year. You avoid the penalty if total payments reach 90% of this year’s tax or 100% of last year’s, 110% if last year’s AGI was over $150,000.

The one that keeps this year’s taxable income where you want it. A retiree with money in all three tax buckets has real choices, and each bucket affects MAGI differently.

For most couples the default order is: refill the bucket steadily from the IRA up to a chosen ceiling, use taxable-account sales with high cost basis when you need more without much income, and treat the Roth as the last resort for lumpy costs, since it is also the most valuable money to leave to heirs. Our guide to retirement withdrawal order works through the trade-offs, and qualified charitable distributions explains how to move the giving category out of your taxable income entirely.

Gifts deserve one more note. If the grandchildren’s 529 contributions and the down-payment help come from the sinking fund, you have already paid tax on that money. That is fine, but if you are also giving to charity, the tax-efficient split is usually QCDs for charity and cash for family. The guide to gifting to children and grandchildren covers the rules on the family side.

Somewhere it cannot fall in value before you need it. Money you will spend in the next three years has no business in stocks, and it does not need to sit idle either. Match the vehicle to the date.

• •Next 12 months: an FDIC-insured high-yield savings or money market deposit account. FDIC insurance covers $250,000 per depositor, per insured bank, for each ownership category, so a large bucket may need more than one bank or a joint account in addition to individual ones (FDIC).
• •One to three years out: Treasury bills and notes, or CDs, laddered so one matures shortly before each large bill. Interest on Treasury bills, notes and bonds is taxed federally but exempt from state and local income tax (IRS), which is worth real money in a high-tax state.
• •Beyond three years: leave it invested in the portfolio and plan the withdrawals that will move it into the bucket, as Richard and Ellen did with the car.

Tracking can be as simple as a spreadsheet with one row per cost and a running balance, or named sub-accounts at a bank that allows them. Whatever you use, review it once a year, alongside the tax projection, and move each cost’s date and amount forward. Inflation matters over a decade: a $48,000 car in today’s dollars will not cost $48,000 in 2034. Our inflation calculator gives a quick estimate.

It is too large and too uncertain for a sinking fund. The CareScout Cost of Care Survey 2025 puts the national median for assisted living at $6,200 a month and for a semi-private nursing home room at $315 a day, about $115,000 a year (CareScout, 2025). You cannot schedule that the way you schedule a roof, and you may never need it.

What a sinking fund can do is cover the smaller, likelier costs that come first: grab bars and a walk-in shower, a stair lift, a few months of in-home help after a surgery, or the premiums on a long-term-care policy if you have one. The large risk belongs to insurance, a dedicated reserve, or home equity, and our long-term care planning guide compares those options. The healthcare cost estimator helps with the rest of the medical budget.