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robwtaz
Level 1

How to minimize or reduce taxes on RMDs

Is there a way or tool to optimize withdrawals from taxable accounts and retirement accounts to minimize taxes on RMDs?

3 Replies
Destiny_Y_JD
Employee Tax Expert

How to minimize or reduce taxes on RMDs

There are a few ways to reduce tax exposure on RMDs. Some of the suggestions though would be very dependent on your age and other investment strategies. For example: converting your savings into a Roth IRS that doesn't require RMD means that your money can stay growing tax free or left to heirs, but this option has to be done before a certain age. 
If you are still working and have a 401K, you could continue to work past 72 and not have to take distributions on the 401k (Again very dependent on your situation). 
One good option is if you have to take RMD you could donate the RMD to a qualified charity under the QCD rule (doesn't apply to 401k). This rule lets you contribute up to $100,000 directly to charity so that you don't have to pay taxes on that amount. It is a good way to give and save on taxes. (Money donated this way can't be deducted on taxes as charitable contribution). 
Really having a comprehensive financial plan could help you to prepare for RMDs. Talking to a good financial planner before you are required to take RMDs would be a great way to develop a strategy that is right for you. 

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robwtaz
Level 1

How to minimize or reduce taxes on RMDs

Thank you for your response and information. For clarification, I am 66 years old, married, retired, and not collecting SS.  It seems like converting to Roth might be the best option. What do you think about QLACs?

Thank you 

macuser_22
Level 15

How to minimize or reduce taxes on RMDs


@robwtaz wrote:

Thank you for your response and information. For clarification, I am 66 years old, married, retired, and not collecting SS.  It seems like converting to Roth might be the best option. What do you think about QLACs?

Thank you 


A Roth conversion is all taxable in the year of the conversion.    Unless you have other funds to pay the tax with, using IRA money to pay the tax is not likely to pay off (break even point) for many years since that money is gone from the IRA and can not longer have earnings and grow.

 

For a QLAC see this article:  https://www.forbes.com/advisor/retirement/qlac-rmds/

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
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