Once you reach age 73, it is required to begin taking minimum withdrawals from your tax-deferred retirement accounts every year. This includes your traditional IRA, SEP IRA, SIMPLE IRA, and employer-sponsored retirement plans.
Withdrawals count as taxable income, which can unintentionally push you into a higher tax bracket. Whether you take an RMD is not up for discussion after age 73, but you can decide whether to spend it, invest it, or give it away. Regardless of if you’re reliant on the income from your RMDs, a bit of proactive planning can turn required distributions from a necessary task into a strategic tool for building wealth.
Here are 10 ways to make RMDs work in your favor:
- Begin taking them early. At age 59-½, you can begin withdrawing funds from tax-deferred accounts without incurring a penalty. This can prevent accumulating too much in tax-deferred accounts, which could move you into a high tax bracket when combined with Social Security benefits and other income during retirement.
- Convert to a Roth account before age 73. Roth accounts are exempt from RMDs, and although you’ll pay ordinary income tax on converted funds, Roth assets are then tax-free for future withdrawals. Converting funds to a Roth IRA is often wise if you expect a higher income from retirement benefits and aren’t reliant on funds from your tax-deferred IRA for immediate expenses.
- Optimize the accounts from which RMDs are withdrawn. Look at the aggregated value of retirement assets across all accounts and how market fluctuations might have affected them differently. Take your RMD from the account—or combination of accounts—that is the most tax-efficient or has lost the least value. Be sure to consider your target asset allocation and long-term diversification goals.
- Establish automatic annual withdrawals. This not only ensures you never miss an RMD deadline but also allows you to better anticipate cash flow throughout the year and avoid the extra work of making manual distributions at year-end.
- Leverage dividends and interest income. Dividends and the interest they accumulate act as cash inside an IRA, which can then be withdrawn to satisfy your annual RMD. ‘Turning on’ this source provides the steady income you need or distribution required without altering the core account balance each year.
- Make charitable contributions directly from IRAs. If you don’t need your RMD as income during retirement, assets can be transferred directly to qualified charities. Qualified charitable distributions count toward the RMD but are excluded from your taxable income.
- Reinvest the distribution. Again, if you aren’t reliant on RMD cash for living expenses, reinvesting the distribution in a brokerage account maximizes your exposure to potential continued growth.
- Take ‘shares in-kind' distributions. If you don't hold cash or cash-equivalent securities in your IRA, you can sell stock to satisfy your RMD or make in-kind distributions. By transferring assets from tax-deferred retirement accounts to taxable accounts instead of selling them first, you can remain invested while satisfying your RMD obligation. Keep in mind, however, that you will owe income tax on the fair market value of the assets as the time of distribution.
- Leverage new qualified annuity income rules. Thanks to the SECURE 2.0 Act, annuity payments more than the RMD amount for an annuity can now be used to satisfy the RMD for other accounts. This could keep your retirement portfolio invested longer and allow potential for greater tax-deferred growth.
- Strategically time distributions with other income sources. Determining when to take withdrawals and when income from other sources hits can affect your tax bracket. RMDs can be withdrawn monthly, quarterly, or in a lump sum as long as you satisfy the minimum amount by year end. By coordinating the timing, purpose, and methods of distributions, you can lower your overall taxable income.
There are many ways to satisfy your annual RMD obligation, but the best way to make them work to your advantage is to talk with a tax-intelligent financial advisor about retirement income planning.
Sources:
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
https://www.schwab.com/learn/story/rmd-strategies-to-help-ease-your-tax-burden
https://www.fidelity.com/learning-center/wealth-management-insights/what-to-do-with-RMDs
https://www.fidelity.com/learning-center/personal-finance/retirement/rmd-strategies-down-markets
https://www.fidelity.com/learning-center/personal-finance/secure-act-2-qualified-annuities-rmd