RMDs and Strategies to Minimize Taxes

January 27, 2023

Required Minimum Distributions (RMDs) are a minimum amount of money you must withdraw from a tax-deferred retirement plan once you reach a certain age. With the signing of the SECURE 2.0 Act on December 29, 2022 the required minimum distribution age was changed from 72 to 73 starting in 2023, and to 75 starting in 2033. Your first RMD must be taken by April 1st of the year after you turn 73. Subsequent RMDs must be taken by 12/31 of each year. Taking two RMDs in the first year can have important tax implications.[i] This may push you into a higher tax bracket which could mean a larger portion of your Social Security income could be taxed or you may end up paying more for Medicare Part B or D. [ii]

The methodology for calculating your RMD is simple. The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS “Uniform Lifetime Table.” Use a different table if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. [iii] Your distribution period gets shorter every year based on your age.

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan. Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities. [iv]

If an account owner fails to withdraw an RMD; fails to withdraw the full amount of the RMD; or fails to withdraw the RMD by the applicable deadline; the amount not withdrawn is taxed at 25%. The account owner is taxed at his or her income tax rate on the amount of the withdrawn RMD. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is tax free. [v]

Now that we have reviewed the basics, let’s discuss a few strategies to consider when planning for your RMDs. It is worthwhile to consider options and strategies that will help reduce the tax impact.

If you work past age 73

If you are still working past age 73 and don’t own 5% or more of the company you can avoid taking RMDs from your current employer’s 401(k) until you do retire. This would not impact any accounts you may own in a separate 401(k) account or an IRA. A potential workaround would be to rollover your prior employer 401(k) plans into your existing if your employer allows for it.

Rollover to a ROTH Account

Roth IRAs are a tax-advantaged retirement account that do not have a RMD requirement. Before reaching your RMD age of 73, you could take advantage of a Roth conversion. However, you will pay ordinary income tax on the amount distributes from your regular IRA. A Roth IRA conversion may be more attractive to you if you are in the early years of your retirement, prior to attaining age 73.

Make a Qualified Charitable Contribution

If you are charitably inclined, you can transfer assets from your IRA directly to a qualified charitable organization. It counts towards your RMD but is not taxable. There are two important considerations to ensure that the distribution is not taxable to you. The IRA custodian must transfer the funds directly to a 501(c) (3) organization and you cannot claim the QCD as a charitable deduction on your taxes. It is also important to note that transfers to a donor advisor funds are not eligible.

Set up a Charitable Remainder Trust

Charitable remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income for life or for a specific time period. You designate the tax-exempt CRT as the beneficiary of your IRA. (“Tax exempt,” as in the entire IRA goes into the trust without being taxed. And the assets, once inside the trust, continue to grow tax-deferred). After you die, the trust distributes a percentage of the assets annually to your survivors; at their death, the remaining assets go to a designated charity. [vi]

All of these scenarios and strategies have tax-planning and retirement considerations. Every client is unique and their approach to RMD planning should be customized to their specific goals. Accordingly, it is recommended that you review your RMD planning with your financial advisor, accountant and Trust & Estate attorney to determine the best course of action for you and your unique needs.

[i] REQUIRED MINIMUM DISTRIBUTIONS (RMDS). (n.d.). Retrieved from Kiplinger

[ii] Medicare Part B helps pay for your doctors’ services and outpatient care, as well as other medical services. Part D is Medicare prescription drug coverage. For a detailed explanation of monthly Medicare premium costs please visit: SSA.gov – Premiums: Rules for Higher-Income Beneficiaries

[iii] Retirement Topics — Required Minimum Distributions (RMDs). (n.d.). Retrieved from IRS.gov

[iv] RMD Comparison Chart (IRAs vs. Defined Contribution Plans). (n.d.). Retrieved from IRS.gov

[v] Retirement Plan and IRA Required Minimum Distributions FAQs. (n.d.). Retrieved from IRS.gov

[vi] Ruffenach, G. (n.d.). What to Know About RMDs and Retirement Planning. Retrieved from WSJ.com