Strategies to Lessen the Pain of Required Minimum Distributions

The government’s rules on RMDs require individuals to start accessing and paying taxes on those accounts that have provided tax-deferred growth. The rule applies to traditional pre-tax IRAs, SEP-IRAs, Simple IRAs, 401(k)s, and similar plans. For seniors, adding these distributions to social security and other sources of income could put some individuals in an unexpectedly higher tax bracket.

In addition to tax implications, the required withdrawals are coming this year during a down market. Owners of retirement accounts are reluctant to reduce their balances further right now, and lessen potential returns when the market recovers. But there are some actions you can take now to reduce the impact.

Convert your IRA to a Roth IRA

If you have a large income after retirement and don’t need your IRA savings for living expenses, then this is an attractive approach. This strategy allows you to convert holdings in your traditional IRA to a Roth IRA, which is exempt from RMDs. Here are some other situations in which a Roth conversion makes sense:

• There is a possibility that you'll be in a higher tax bracket when you withdraw the money. A Roth IRA is a tool to help manage or reduce distributions as well as the associated taxes.

• You want to leave your heirs an income-tax-free asset, as Roth withdrawals aren't subject to income tax, assuming you've held the account for at least five years. Note: inherited IRAs also have required distributions, but with different rules including a 10-year distribution period for heirs of accounts whose owners died after 2019.

Make a qualified charitable distribution

If you are 70 ½ or older and plan to make charitable gifts this year, then there is a strategy that can help reduce or entirely satisfy your RMD by making your donations directly from your IRA to a qualified charitable organization. It is called the qualified charitable distribution (QCD) and provides a tax break for donations as large as $100,000 a year. The QCD counts toward the RMD but doesn’t count as income. A QCD comes with several important rules:

• Your IRA custodian must transfer the funds directly—and only to a 501(c)(3) organization (donor-advised funds aren't eligible).

• You can't claim the QCD as a charitable deduction, though the distribution does not count as taxable income.
  If charitable giving is already a part of your financial plan, then a QCD can be a good option. You can still help your favorite worthy cause while also covering a portion or all of your RMD.

Set up monthly withdrawals

IRA owners can set up monthly or quarterly distributions from their accounts, with the distributions going directly to a brokerage or checking account. Amid a down market, it is possible that you could realize less of a loss than if you were to take a lump sum withdrawal today. Other benefits to a monthly or quarterly approach can include:

• Cash flow management: Making monthly withdrawals allows you to treat this as a regular income. Many retirees prefer this style of cash flow over a lump sum format, as it helps with personal finance and budgeting.

• Estimated taxes: If you pay quarterly taxes based on other income, then having your required minimum distribution arrive in regular segments could make estimated tax calculations easier (and more accurate).

• Tax payment budgeting: If you make monthly withdrawals, then it may be easier for your portfolio manager to automatically deduct any applicable income taxes. This way, you don’t have to worry about setting the money aside.

Conclusion

Ultimately, any RMD strategy comes down to the choice that’s best for your finances. Remember that withdrawals don’t always need to be in cash. In addition to the above strategies, there are several options that you should discuss with your trusted tax professional and financial advisor. This year’s market downturn may provide an upside in that it can allow you to move more money out of pretax retirement accounts at depressed values. It also allows you to take advantage of today’s historically low tax rates that are scheduled to climb in 2026.

Thanks for reading.