Managing RMD

Managing RMDs: Limiting Your Distributions and Your Tax Impact

Utilizing Different Account Types Before Retirement
Continuing to Work
Converting to a Roth IRA
Donating to a Great Cause (Charitable Giving)

Saving for retirement in a 401(k) at work or a traditional individual retirement account (IRA) can help you build wealth for the long term while enjoying some tax advantages. Starting at age 72, you’re required to take minimum distributions (RMDs) from those accounts, meaning you no longer will be able to defer paying taxes on earnings. For wealthy retirees, mandatory distributions from retirement accounts can cause taxes to increase sharply. As with all financial planning, to get the best results you’ll want to start early. For workers with $1M+ in tax-deferred retirement accounts and other sources of income, these mandatory taxable distributions may be problematic without a tax strategy for RMDs.

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We’ve included a few strategies designed to minimize the tax impact on required minimum distributions.

Utilizing Different Account Types Before Retirement

There is a lot to be said for the benefits of tax-deferred growth on investments. However, for investors who are able, it may be wise to diversify retirement assets. It is worth noting that not everyone will feel negative tax consequences of required minimum distributions. Depending on your tax projections for the future, it may not make sense to forgo tax-deferred growth.

Continuing to Work

One of the simplest ways to defer required minimum distributions and the associated taxes on those withdrawals is to continue working. If you’re still working at age 72 or beyond and contributing to an employer’s 401(k), the IRS allows you to delay taking RMDs from those accounts. This only works for your 401(k) at your current employer, however. If you have a 401(k) from a previous employer, then the RMD rule would still apply. The same is true for any traditional IRAs you contribute money to. Whether it makes sense to continue working to delay RMD taxes depends on a variety of factors, including your health, retirement goals and overall financial situation. If you enjoy your job and have no serious health issues that prevent you from doing it, delaying retirement might make sense for you.

Converting to a Roth IRA

Roth IRAs can be an attractive option for saving for retirement if you want to minimize taxes. Qualified distributions from Roth IRAs are 100% tax-free and there are no required minimum distributions at all. If you have assets in a tax-deferred account, you could avoid RMDs and their associated taxes by rolling the balance into a Roth IRA. This is done through a Roth conversion in which you essentially turn tax-deferred assets into tax-free ones.

Donating to a Great Cause (Charitable Giving)

Many retirees don’t realize they can donate all, or a portion of, their required minimum distribution (RMD) directly to charity, through a qualified charitable distribution. A qualified charitable distribution (QCD) can be made directly from your IRA starting at age 70.5. Even if you don’t have to start required minimum distributions until age 72, you can still begin donating money from your IRA to charity at 70.5.

Each retirement account owner can donate up to $100,000 each year using a qualified charitable distribution, even if it exceeds your RMD. There’s a 2-year lookback for Medicare premiums, meaning 2022 premiums are calculated using the 2020 tax return. Donations must also go directly to the qualified public charity. Careful tax and financial planning is advised when considering a planned giving strategy.