6 Strategies to Reduce RMD Taxes

Taking RMDs can potentially be problematic from a tax perspective. If you have large balances in your IRAs or workplace retirement accounts, taking RMDs could inflate your tax bill.

Here are six common ways to potentially shrink your RMDs to minimize taxes:

1. Draw Down Your Account Early

Once you turn 59 ½, you can begin taking money from retirement accounts without a tax penalty. Taking larger distributions in the early years of your retirement can reduce your overall account balance, lowering your RMDs later. This option could make sense if you expect to be in a lower tax bracket when you retire.
Drawing down your retirement accounts before age 73 can offer another benefit. You may be able to delay taking Social Security benefits. The longer you delay benefits beyond your full retirement age, the more your benefit amount increases. If you can wait until age 70, for example, you’ll receive 132% of your benefit amount.

2. Consider a Roth IRA Conversion

Roth IRAs offer the benefit of 100% tax-free qualified withdrawals – and they don’t have RMDs. If you’d like to avoid RMDs, you could convert your traditional retirement funds into a Roth account. You’ll have to pay tax on the conversion in the year it occurs. But it may be worth it to take a one-time tax bill hit to avoid RMDs and withdraw remaining retirement funds tax-free. One strategy is to convert a portion of IRA funds into a ROTH account in consecutive years so as to avoid IRMAA increases.

While converting traditional retirement funds to a Roth account may be an option to consider for avoiding RMDs, it is not guaranteed to be worth it for everyone. Tax implications should be carefully considered and consulted with a tax professional. A financial advisor could help determine if this could be a viable strategy for you.

3. Work Longer

If you have some of your retirement funds in your current employer’s 401(k), you might consider working longer to avoid RMDs. If you’re still working in some capacity, you’re not required to take minimum distributions from a workplace plan where you’re still employed. That exception doesn’t apply to retirement accounts you had with previous employers. You won’t get a pass on IRA RMDs either. But continuing to work could help to reduce the total amount of RMDs you need to take once you turn 73. And again, you can delay Social Security benefits as well.

4. Donate to Charity

One of the most popular RMD strategies for reducing taxes involves donating the amount to charity. The IRS allows you to donate up to $100,000 a year from an IRA without having to pay income tax. The money you withdraw will still count toward your RMD, so you don’t have to worry about a 50% tax penalty for failing to take distributions.

There are a few rules for this strategy:

• You can only donate up to $100,000 to a qualified charity
• Your IRA custodian must arrange for the transfer of funds to an eligible charity
• You’re not allowed to claim the donation as a charitable deduction for your taxes

5. Consider a Qualified Longevity Annuity Contract

A qualified longevity annuity contract (QLAC) is a type of deferred annuity contract. You can use your retirement funds to purchase the annuity, then receive payments back at a later date. Payments are required beginning at age 85 and any money you put into the annuity does not factor into your RMD calculations. However, you can only put so much money into a QLAC – up to $210,000. While you can defer taking payments until age 85, you can’t avoid them indefinitely.

6. Check Your Beneficiaries

• If you’re at least 10 years older than your spouse and name them as the sole beneficiary of your retirement account, you can use the IRS Joint Life and Last Survivor Expectancy Table to calculate RMDs.
• This strategy allows you to use your spouse’s longer life expectancy to determine how much to withdraw, which can lower the amount. Of course, if your spouse is closer to your own age or you have multiple beneficiaries, you wouldn’t be able to use this RMD strategy.

Where to Look for RMD Advice

• Applying RMD strategies can be a simple way to reduce what you owe in taxes during retirement. You can use just one strategy or apply several in order to bring down your tax bill. While these strategies can help reduce RMDs, there’s no way to avoid RMDs indefinitely (unless you have a Roth IRA).
• Consulting a fiduciary financial advisor could help you determine a plan that factors RMD taxes into your overall retirement goals. Fiduciaries are obligated by law to act in your best interest as they manage your assets or money, and any potential conflicts of interest must be disclosed.

Phyllis Klein is a Registered Representative and Investment Adviser Representative of and securities offered through Osaic Wealth, Inc. Member FINRA, SIPC, and an SEC Registered Investment Adviser. Randolph & Klein Financial Solutions is independent of Osaic Wealth, Inc.