Don't Let RMDs Wreck Your Retirement: 2 Strategies for Minimizing the Pain
Key Points
Required minimum distributions (RMDs) can be frustrating when you'd rather leave your savings alone.
There are strategies you can take to reduce or even avoid RMDs.
There's also a way to satisfy your RMD without increasing your tax bill.
- The $23,760 Social Security bonus most retirees completely overlook ›
Saving for retirement in a traditional IRA or 401(k) can seem like a good idea at the time you're doing it. And if you're a higher earner in a higher tax bracket, it's helpful to fund a retirement account that allows your contributions to go in on a pre-tax basis.
The problem with traditional IRAs and 401(k)s is that eventually, the IRS gets to impose mandatory withdrawals known as required minimum distributions, or RMDs. Not only might RMDs force you to take money out of your savings before you're ready to, but they could also create a huge tax headache.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
That's the bad news. The good news is that with careful planning, you can reduce the sting of RMDs during retirement. Here are two effective strategies to employ.
1. Roth conversions
With a Roth conversion, you move money from a traditional retirement plan into a Roth account. When you do that conversion, the sum you move over counts as taxable income. So Roth conversions can hurt a bit in the near term.
In the long run, though, Roth conversions could be a very good idea. If you're able to reduce your traditional IRA or 401(k) balance, you reduce your RMDs in turn. And if you're able to move your savings out of a traditional retirement account completely, RMDs won't be something to worry about later on.
Having your money in a Roth account also has other benefits. Since Roth withdrawals don't count as taxable income, they also don't count for the purpose of determining whether you have to pay taxes on your Social Security benefits or fork over extra money for Medicare.
2. Qualified charitable distributions
If doing a Roth conversion ahead of retirement isn't feasible, you may be stuck having to take RMDs. But that doesn't mean you have to get stuck paying taxes on them.
Qualified charitable distributions, or QCDs, allow you to donate money from a traditional IRA directly to a charitable organization. In doing so, you avoid taxes on that money while satisfying your RMD. And while QCDs are only available in IRAs, not 401(k)s, you can roll funds from a workplace retirement plan into an IRA if QCDs are a strategy you want to employ.
There's no question that RMDs can be a huge pain in retirement. But with the right strategy, you can ease that burden by reducing your RMDs, eliminating them altogether, or getting rid of the tax obligation that comes with taking them.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
Recommended Articles
