Smart Strategies for a More Tax-Efficient Retirement

Making the Most of Your RMD

Friday, October 17, 2024

If you’re 73 or older—or approaching that milestone—it’s time to pay close attention to your Required Minimum Distributions (RMDs). These mandatory withdrawals from your tax-deferred retirement accounts (such as IRAs, 401(k)s, and similar plans) can have a big impact on your retirement income, taxes, and long-term wealth strategy. With a little planning, however, RMDs can become a powerful tool rather than a tax burden.

Understanding RMDs

The IRS requires that you begin taking distributions from most tax-deferred retirement accounts by April 1 of the year after you turn 73 (for those born between 1951 and 1959; the age increases to 75 beginning in 2033 under the SECURE 2.0 Act).

• Which accounts are subject? Traditional IRAs, SEP and SIMPLE IRAs, and most employer plans like 401(k)s and 403(b)s.

• Which accounts are not? Roth IRAs (during the owner’s lifetime) and Roth 401(k)s beginning in 2024.

• How are RMDs calculated? The balance of your account on December 31 of the prior year divided by your IRS life-expectancy factor.

  
  

Missing an RMD can be costly: the penalty is 25% of the amount not withdrawn, although timely correction may reduce it to 10%.

RMD Strategy #1: Coordinate Withdrawals Across Accounts

If you have multiple IRAs, you can take your total RMD from one or more of them in any combination you choose. However, if you have multiple 401(k)s, each plan requires its own withdrawal. A financial advisor can help you consolidate or sequence these efficiently to simplify your cash flow and reduce administrative headaches.

RMD Strategy #2: Time Withdrawals for Tax Efficiency

Your RMD counts as ordinary income in the year you take it, which could bump you into a higher tax bracket or increase your Medicare premiums (IRMAA).

• Option 1: Split your RMD into monthly or quarterly payments to spread income throughout the year.

• Option 2: Delay your first RMD until April 1 of the following year—but remember, that means two RMDs in one tax year, which can spike your taxable income.

• Option 3: Coordinate your RMD with other income sources (Social Security, pensions, dividends) to manage your total taxable picture.

If you're age 70 1/2 or older, you can give up to $100,000 per year (indexed for inflation) directly from your IRA to a qualified charity.

RMD Strategy #3: Use Qualified Charitable Distributions (QCDs)

One of the most powerful strategies for charitably inclined retirees is the Qualified Charitable Distribution (QCD). If you’re age 70½ or older, you can give up to $100,000 per year (indexed for inflation) directly from your IRA to a qualified charity.

• The distribution counts toward your RMD but is excluded from your taxable income.

• This can reduce your adjusted gross income (AGI), potentially lowering taxes on Social Security and Medicare premiums.

RMD Strategy #4: Reinvest Strategically

If you don’t need your RMD for living expenses, consider redirecting it toward your long-term goals:

• Taxable brokerage account: Reinvest in tax-efficient ETFs or dividend stocks.

• Roth conversion: Convert part of your IRA (beyond the RMD amount) into a Roth IRA to lock in tax-free future growth.

• Gifting: Use RMDs to fund 529 college plans for grandchildren or make annual exclusion gifts ($18,000 per recipient in 2025).

RMD Strategy #5: Plan Ahead for Future RMDs

Long before RMDs begin, consider “front-loading” your tax strategy:

• Roth conversions in low-income years can shrink future taxable RMDs.

• Asset location strategies (placing bonds in IRAs and equities in taxable accounts) can minimize the long-term tax drag.

• Charitable remainder trusts (CRTs) and donor-advised funds (DAFs) may provide flexible giving options while offsetting RMD income.

Final Thoughts

RMDs are not just a tax obligation—they’re an opportunity to align your withdrawals with your life goals, legacy plans, and tax strategy. Whether your focus is generosity, security, or growth, thoughtful RMD planning can help you keep more of what you’ve earned working toward what matters most.

Have a great weekend!

Jim Pannell, Managing Principal

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.