5 Ways to Decrease RMDs

How to Reduce Future RMDs: 

5 Tax-Efficient Strategies for Retirees 

Decrease your Traditional IRA Balance and Decrease your RMDs

Large IRAs can be burdensome when it comes to taxes, especially if you do not need the current income. Traditional IRAs and other tax-deferred retirement accounts have an IOU attached payable to Uncle Sam. The government is eager to get these tax dollars and there are only a few ways to minimize what you owe.  

The RMD on a $1,000,000 IRA is $37,736 the year the taxpayer turns 73.  It goes up each year as we age. At age 83 the RMD on a $1,000,000 IRA balance is $56,497. The RMD is added to your ordinary income in the year received.   The tax you pay is ordinary income tax. If you die owning an IRA your heirs will have to pay income tax in any year when distributions are received.  

It takes careful planning in the years leading up to your 73rd birthday to reduce the amount of your RMD and the erosion caused by income taxes.  

Click to hear more about managing large RMDs.

     1. Use Partial Roth Conversions to Reduce Future RMDs

A Roth conversion is when a taxpayer transfers traditional IRA money into a Roth IRA to grow tax-free income and avoid future RMDs. The transferred amount is taxable in the year completed.   

A series of Roth conversions spread out annually over several years leading up to age 73 will reduce the size of your Traditional IRA and reduce future RMDs. This is a year-by-year analysis to strategically determine the optimum conversion amount. Choose years when your income is low so you pay the lowest tax on the converted balance.  Over several years, a retiree can make a big difference in the size of her IRA with carefully planned Roth conversions. Strategically planning Roth conversions in low income years can pay off in lowering lifetime income tax liability.

It is not a solution for everyone, but it is definitely worth the analysis to see if it works for you. Roth conversions are no longer reversible, so it is important to seek professional tax advice before proceeding.  

For more information see this article.

Call us for a Roth Conversion analysis.  540-772-4545 info@guelichcapital.com.

      2. Use Qualified Longevity Annuity Contracts (QLACS) to Lower RMD Calculations

A QLAC is a deferred income annuity purchased with traditional tax-deferred IRA money. It protects retirement funds from Required Minimum Distributions while addressing the uncertainty around longevity.  

The money you transfer to a QLAC is not included in the calculation of your annual RMD.  That is one of the big benefits of a QLAC to taxpayers. The money is set aside in the annuity contract and no RMDs are required.

When you invest in a deferred income annuity you are purchasing a future stream of payments to begin no later than age 85. The insurer guarantees a benefit based on the length of the deferral period and the age when payments begin. The longer the deferral period the higher the income payment. Payments are guaranteed for the life of the annuitant.

Because a QLAC is irrevocable, it is very important to understand the benefits and the limitations and be sure it is a good fit for you.  Consult a retirement income specialist before purchasing a QLAC.  

In addition to reducing your RMDs, a guaranteed stream of payments that you cannot outlive addresses the challenge of longevity.  There is peace of mind knowing you have a benefit that will last as long as you live.   By deferring this benefit until age 80 or 85 it is available in the later retirement years when healthcare costs may become more burdensome.  QLAC benefits can be used to supplement long term care expenses and medical care later in life.  

     3. Reduce Taxable Income with Qualified Charitable Distributions (QCDs)

After age 70.5 taxpayers can donate up to $111,000 per taxpayer in 2026 directly from your IRA to qualified charities.  The amount you donate counts toward your RMD and it is not included in your taxable income when properly reported on your income tax return.  The maximum allowable is adjusted annually for inflation.

Beginning at age 73 QCDs will count towards your annual RMD.  When properly reported on your income tax return, QCDs are not taxable income.   You work with your advisor or the custodian of your IRA to send charitable donations directly to a qualified charity.  This strategy is one of the best ways for those with charitable interests who are 73 or older to reduce the tax on their RMDs.  

     4. Use Voluntary IRA income withdrawals before age 73 

If you retire in your early to mid 60’s you may have some lower income tax years before RMDs and Social Security benefits must begin. IRA distributions can be made after age 59.5 without penalty, so this allows flexibility to take withdrawals in the early years of retirement if you are in a lower tax bracket.   You should pay tax on IRA distributions in the lowest tax bracket you can.  

By spreading IRA distributions over more years, you could prevent a large RMD from pushing you into a higher tax bracket later in retirement.

     5. Coordinate Distributions from your IRA with other Income Sources

The best practice is to coordinate all income sources in a year-by-year retirement income plan for maximum tax efficiency.  Studies show you may extend the length of time your resources will last by two or three years with careful planning.

One strategy is to delay Social Security benefits until age 70 when the maximum benefit is reached. Take IRA distributions before RMD’s begin to replace your Social Security benefit. This strategy is a win-win.  You maximize your Social Security benefit and you reduce your future RMDs.  

When you delay the inception of Social Security benefits past your full retirement age (generally age 67), the benefit grows at approximately 8% per year.  You should start receiving Social Security benefits by your 70th birthday because that is the maximum benefit calculation.

It is wise to let your Roth IRA grow as long as possible to maximize tax-free growth. Plan to draw down your traditional IRAs in the earlier years and use Roth IRA for income later in retirement. With this as a general rule, Roth IRA distributions can be used for tax diversification any time in retirement when needed.   

Let’s consider a client who retires at age 65.  

1. She chooses to maximize her Social Security benefits by delaying the start date to age 70. This decision gives her five more years before SS benefits add to her taxable income.  
2. She built multiple tax buckets during her working life.  She has a taxable investment account providing dividends, interest and gains for income in the early years of retirement so she does not need her IRA for current income.  
3. Her RMDs will not begin for 8 more years. With no earned income, she has an opportunity to pay tax on Roth conversions in a low tax bracket while reducing the size of her IRA.
4. When Social Security benefits start at age 70 she will offset the distributions from her taxable account accordingly.
5. When RMDs begin at age 73 she no longer needs to draw from her taxable account.
6. Her Roth IRA is growing nicely.  She can draw on this resource for tax-free income when the need for more income arises.

Many retirees in the Roanoke Valley and Southwest Virginia are surprised to learn how much flexibility exists before RMDs begin. Strategies such as Roth conversions, Social Security timing, and charitable giving can significantly impact taxes in retirement over the long term.

Which strategy is best depends on your IRA balance, tax bracket, retirement income needs, and estate planning goals. Most retirees benefit from evaluating several strategies and coordinating them for maximum tax efficiency rather than relying on a single approach.  The goal is to generate income for a lifetime while minimizing the tax bite.  

If you would like to discuss a tax-efficient retirement income plan, give us a call.   540-772-4545 or info@guelichcapital.com.  

This article is for educational purposes only.  It should not be considered tax, investment or legal advice.  Consult a qualified professional regarding your own specific situation.  

Written by Connie C. Guelich, CFP® this article represents our views at the time written, and it is subject to change.