4 Strategies to Minimize Taxes on Your RMDs

Required minimum distributions (RMDs) are withdrawals that must be taken from tax-deferred retirement accounts starting at age 73. These distributions, which are required for accounts like 401(k)s and traditional IRAs, are taxed as ordinary income.

Not meeting RMD deadlines can result in a hefty 25% IRS penalty. However, this can potentially be reduced to 10% if corrected within two years.

Strategies to Reduce the Tax Impact of RMDs

Here are some strategies to potentially minimize the taxes on your RMDs:

Work Longer: By continuing to work past age 73 and contributing to your current employer’s 401(k), you can delay RMDs from that account. Note that this doesn’t apply to 401(k)s from past employers or traditional IRAs.

Charitable Contributions: With qualified charitable distributions (QCDs), you can transfer IRA funds directly to charity. With this, you can avoid taxes on the distributions while also counting it toward your RMDs. For 2024, QCDs are capped at $105,000 but cannot be made from 401(k)s.

Roth Conversions: Since Roth accounts aren’t subject to RMDs, converting a pre-tax account into a Roth IRA can eliminate or reduce future RMDs and their associated taxes. However, this may not be a worthwhile option for those closer to retirement or who don’t want to increase their taxable income significantly, so consider this option carefully.

Annuity Option: Investing in a qualified longevity annuity contract (QLAC) allows you to use funds from a 401(k) or traditional IRA to purchase an annuity, excluding that amount from RMD calculations until age 85. In other words, this option won’t let you skip RMDs entirely but will let you push the back quite a bit.

Retirement Planning With a Purpose

Each of these strategies has its own set of considerations, as well as potential downsides and benefits. Whether it’s working longer, making charitable contributions, doing a Roth conversion, or purchasing a QLAC, it can be crucial to weigh these options within the context of your overall retirement plans. Considering your options for RMDs? Let’s discuss strategies. Click here to get started.