Actionable Strategies and Money-Saving Tips
Simply knowing the RMD rules is just the first step. The real power comes from strategically managing your distributions to minimize taxes and make the process work for you. This is a key part of tax-efficient planning in retirement.
1. Consolidate Your Accounts for Simplicity
If you have multiple traditional IRAs, you must calculate the RMD for each one separately. However, you don’t have to take a withdrawal from each account. You can add up the total RMD amount required from all your IRAs and take that single, combined amount from just one of the IRA accounts. This simplifies paperwork and makes it easier to track.
Important Note: This rule applies to IRAs. For 401(k)s and other workplace retirement plans, the RMD must be calculated and taken from each plan separately. If you have an old 401(k) from a previous employer, you might consider rolling it over into a traditional IRA to simplify your RMD process.
2. Plan for the Tax Bite
Your RMD is taxable income. For many seniors on a fixed income, a large RMD can significantly increase their annual tax bill and even affect their Medicare premiums. You have two primary ways to handle the taxes:
- Have Taxes Withheld: You can ask your financial institution to automatically withhold a percentage of your RMD for federal (and state, if applicable) taxes, just like a paycheck. You might choose to withhold 10%, 20%, or another amount based on your estimated tax bracket. This is a simple, set-it-and-forget-it approach.
- Make Estimated Tax Payments: If you prefer to receive the full RMD amount, you can pay the taxes yourself through quarterly estimated payments to the IRS. This requires more active management but gives you more control over your cash flow during the year.
3. Use a Qualified Charitable Distribution (QCD)
If you are charitably inclined and are age 70.5 or older, the Qualified Charitable Distribution is one of the most powerful tax-efficient planning tools available. A QCD allows you to donate up to $105,000 (for 2024, and this amount is indexed for inflation) directly from your IRA to a qualified charity.
Here’s why it’s so beneficial: The amount you donate via a QCD counts toward your RMD for the year, but it is excluded from your taxable income. This is much better than taking the RMD, paying taxes on it, and then donating the after-tax amount.
Example: Let’s go back to Robert, whose RMD is $16,260. If Robert donates $10,000 directly from his IRA to his favorite charity, that $10,000 is not counted as income for him. He would then only need to withdraw the remaining $6,260 to satisfy his RMD, and only that smaller amount would be taxed. The QCD lowered his taxable income by $10,000.
4. Don’t Wait Until the Last Minute
The deadline for most RMDs is December 31, but waiting until the last week of the year is a risky strategy. Financial institutions are swamped, markets can be volatile, and a simple mistake could cause you to miss the deadline. A missed deadline comes with a steep penalty—25% of the amount you failed to withdraw (which can be reduced to 10% if you correct the mistake in a timely manner). It’s far better to plan your RMD withdrawal earlier in the year or set up an automatic withdrawal plan with your brokerage firm.
5. Consider a Roth Conversion Before RMD Age
This is a more advanced strategy that must be done before you reach RMD age, but it’s worth knowing about. A Roth conversion involves moving money from a traditional IRA to a Roth IRA. You have to pay income taxes on the amount you convert in the year you do it. While this means a tax bill today, the money in the Roth IRA then grows tax-free forever and is not subject to RMDs during your lifetime. For those who expect to be in a similar or higher tax bracket in the future, converting some funds to a Roth in their 60s can reduce the balance of their traditional retirement accounts, thereby lowering their future RMDs and overall tax burden in their 70s and 80s.
