Fact checked by Ryan Eichler
For investors age 73 or older with a traditional (non-Roth) 401(k) or individual retirement account (IRA), required minimum distributions (RMDs) are a part of life. This can be daunting, as the extra income comes with its own tax implications. Not taking RMDs—or not taking the right amount—can result in substantial penalties. But there are ways to manage RMDs when you don’t need the money.
Key Takeaways
- There are a number of ways to reduce—or even get around—the tax exposure that comes with required minimum distributions (RMDs), which are required starting at age 73 for those with 401(k)s or individual retirement accounts (IRAs).
- Strategies include delaying retirement, converting to a Roth IRA, and limiting the number of initial distributions.
- Traditional, non-Roth IRA account holders can also donate their RMD to a qualified charity.
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1. Keep Working
If you have a 401(k) and don’t own 5% or more of the company where you work, you can delay distributions from the 401(k) at your workplace until you retire.
Important
This exemption only applies to your 401(k) at the company where you currently work.
If you have an IRA or a 401(k) from a previous employer, you will have to follow the RMD rule, and start taking RMDs at age 73. Not taking a distribution means you’ll face the excess accumulation penalty, which is 25% of the required distribution. So not taking a $2,000 RMD would result in a penalty of $500.
2. Convert to a Roth IRA
Another strategy is to roll over some of your savings into a Roth IRA. Unlike a traditional IRA, which requires RMDs, a Roth IRA doesn’t require any distributions at all. That means the money can stay—and grow tax-free—in the Roth IRA for as long as you want, or it can be left to heirs.
Contributing to a Roth IRA won’t lower your taxable income (as contributing to a traditional IRA does). The upside is you don’t have to pay taxes on withdrawals if you’re over 59½ and you’ve had the account open for five years or more.
Be aware, though, that moving pre-tax money from a traditional retirement account into a Roth IRA means you have to pay taxes all at once on those funds. Roth conversions can be expensive, whether you’re moving money from a 401(k) or a traditional IRA. Investigate your options in detail with your tax advisor.
3. Limit Distributions in the First Year
A big knock against RMDs is the taxes investors have to pay as a result of drawing down some of their retirement savings. This can potentially push a retiree into a higher tax bracket, which means more money going to Uncle Sam. Retirees who turn 73 have until April 1 of the calendar year after they reach that age to take their first distribution. After that, they must take it by Dec. 31 on an annual basis.
Many retirees opt to hold off on taking their first RMD because they figure they will be in a lower tax bracket when they retire. While holding off makes sense for many, it also means you will have to take two distributions in one year, which results in more income that the IRS will tax. This could also push you back into a higher tax bracket, creating an even larger tax event.
Here’s another option: Take your first distribution as soon as you turn 73 (unless you expect to end up in a significantly lower tax bracket) to prevent having to draw down twice in the first year.
4. Donate Distributions to a Qualified Charity
Some savers would rather see their money go to a good cause than give some of it to the government. Traditional IRA account holders can donate their RMD to a qualified charity. This is known as the qualified charitable distribution (QCD) rule. It does not apply to 401(k)s.
If the contribution is $100,000 or less (or $200,000 or less if you’re married and file jointly)—and is rolled out of the IRA and directly to the charity—you won’t have to pay taxes on the RMD. In order to get the tax break, the charity has to be deemed qualified by the IRS. This is a good way to save on paying taxes, as you are donating to a charity that would otherwise have gotten a donation from your regular savings. You may even feel you can give a bit more if you do it this way.
Important
Required minimum distributions (RMDs) that you donate to a worthy cause or group—that is, qualified charitable distributions (QCDs)—cannot be deducted from your taxes as a charitable contribution.
What Age Do I Need to Start Taking Required Minimum Distributions (RMDs)?
You need to take your first required minimum distribution (RMD) by the April after you turn 73. For years, the age threshold was 70½, but it was raised to 72 following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The RMD age was increased again at the end of 2022 to 73 as part of SECURE 2.0.
Can I Withhold 100% of my RMD?
Yes, taxpayers can elect to have 100% of their RMD withheld for federal tax reasons. You can opt to have these taxes attributed to quarterly estimated tax obligations and remit directly to the Internal Revenue Service (IRS).
Do RMDs Impact Social Security Benefits?
Yes. Required minimum distributions (RMDs) are taxable and can impact your income. Higher taxable income may negatively impact Social Security benefits.
With RMDs, Can I Withdraw More than the Required Minimum Amount?
Yes, retirees who are eligible to make withdrawals from their retirement accounts can withdraw more than the RMD amount. Your withdrawal will likely be subject to income tax unless the withdrawal is taken from a tax- advantaged retirement account. In addition, certain qualified distributions from designated Roth accounts may be received tax-free.
The Bottom Line
Many people rely on required minimum distributions (RMDs) to fund their retirement years. However, for those who don’t need the money, limiting the tax exposure from RMDs is the name of the game. Delaying retirement, converting to a Roth IRA, limiting the number of initial distributions, and making a qualified charitable distribution (QCD) are four strategies that can help reduce the tax exposure that comes with RMDs.