Smart RMD Strategies to Minimize Taxes in Retirement

IRAs help you build lots of wealth—if you know how to use them. But you do need to think about one potential hitch in the plan: RMDs, or required minimum distributions. These refer to the distributions you have to take from specific retirement accounts in the same year you turn 73. While a Self-Directed IRA can be a great way to build wealth, RMDs can potentially surprise you with a hiccup in your plan if you’re not careful. With that in mind, let’s explore some common strategies people use to reduce RMD taxes in retirement.

Strategy #1: Start Withdrawals Sooner, Not Later

Once you’re past 59½, you have more flexibility with taking withdrawals from your retirement accounts without triggering early withdrawal penalties. And that flexibility opens an interesting strategy. Instead of letting your account balance grow untouched until RMDs kick in, you might benefit from gradually drawing it down earlier in retirement.

This can be especially useful if you’re in a lower tax bracket during those early retirement years. Taking distributions during that window—before both RMDs and Social Security benefits begin—can reduce the size of your account. And with a smaller account balance later, your required withdrawals shrink too, keeping your taxable income more manageable down the road.

Strategy #2: Use Roth Conversions

Roth IRAs come with a major advantage when it comes to RMDs. Okay, it’s more than an advantage: they don’t have them. That means money you’ve moved into a Roth can stay put for as long as you want, growing tax-free and untouched by mandatory withdrawals.

Converting traditional IRA funds to a Roth isn’t something to do on a whim, though. You’ll pay taxes on the amount you convert in the year you make the switch. But if you plan carefully—and convert portions of your account over time—you might end up with more control over your taxable income in retirement. Some retirees spread conversions across several years to avoid bumping themselves into a higher bracket.

This strategy isn’t right for everyone. But if you anticipate being in a higher tax bracket later or want to leave tax-free assets to your heirs, it’s worth exploring. Talk it over with a qualified financial planner to see if it fits your position.

Strategy #3: Consider Giving Instead of Withdrawing

Another way to sidestep the tax impact of RMDs is to donate the required amount directly to charity. The IRS allows qualified charitable distributions (QCDs) from IRAs, which means you can transfer funds straight to a nonprofit and have it count toward your RMD.

The best part? That amount won’t be included in your taxable income. It’s a tax-smart move for charitably inclined retirees who don’t need their full distribution to cover living expenses. You can give up to $100,000 per year this way. While it doesn’t result in a charitable deduction, the reduced taxable income can still make a meaningful difference come tax time.

These aren’t the only strategies you can use. You may find that financial planners will offer other tips:

• Working longer, for example, can work if you’re still employed at the company and have a workplace plan—but it won’t apply to retirement accounts you held with previous employers.
• A qualified longevity annuity contract (QLAC) is a kind of deferred annuity contract that lets you use retirement funds to purchase the annuity while receiving payments at a later date. There are some limits here, like the fact that you can only put up to $200,000 into a QLAC.

Want more information about how Self-Directed IRAs can help you build a retirement nest egg, or ready to start one of your own? Reach out to us here at American IRA by dialing our number at 866-7500-IRA.

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