4 Major Ways to Reduce Your Required Minimum Distributions (RMD)

Did you know you can end up paying thousands more in taxes every year because of how and when you take money out of your IRA? This surprises a lot of retirees, and it usually comes down to required minimum distribution, or RMDs. RMDs are mandatory withdrawals from tax-deferred retirement accounts such as traditional IRAs and 401(k)s. 

Under current law, RMDs begin:

• At age 73, if you were born between 1951 and 1959
• At age 75, if you were born in 1960 or later

If you are already taking RMDs, you may be familiar with how they work. The amount you must withdraw each year is based on your account balance as of December 31 of the prior year and is calculated using the IRS Uniform Lifetime Table, which factors in life expectancy. Below are three strategies, plus one major exception, that can help manage or reduce required minimum distributions.

3 Key Strategies

• Take early withdrawals to lower future taxes
• Use Roth conversions wisely
• Give smarter with QCDs

Strategy 1: Withdraw Early From Your IRA

One of the most overlooked planning tools is simply withdrawing funds from your IRA earlier than required. Growing research and practical tax modeling indicate that taking IRA withdrawals before RMD age can lead to better long-term tax outcomes for some people, especially if you expect tax rates to rise.

You can begin taking penalty-free withdrawals from your IRA after age 59½. If you are in a relatively low tax bracket during your early retirement years, you may benefit from taking small, intentional distributions each year. These withdrawals can reduce your future RMDs and smooth out your taxable income over time.

Example

Let’s say you plan to spend $100,000 per year in retirement. Some of that income comes from Social Security, some from your spouse’s Social Security, some from taxable investment accounts, and the rest from your retirement accounts.

At age 73, RMDs begin. Here is where the issue appears. Once your RMDs start, you may end up with more taxable income than you actually need to live on. That extra income can push you into a higher tax bracket and increase how much of your Social Security becomes taxable, depending on your total income. That is why it may be smart to take distributions from your IRA earlier than required. Doing so allows you to manage your tax bracket more intentionally and avoid unpleasant surprises later in retirement.

Strategy 2: Roth Conversions

Another strategy to reduce required minimum distributions is to convert money from a traditional IRA into a Roth IRA. If you do not need the money to live on right now, Roth conversions allow you to move funds from a traditional IRA into a Roth IRA, where future growth is tax-free.

You pay taxes on the amount you convert, but once the money is inside the Roth:

• There are no RMDs
• Withdrawals in retirement are tax-free

Example

Consider a couple with the following situation:

Annual goals

• $100,000 for basic living expenses
• $10,000 for healthcare (Medicare)
• $10,000 for travel
• $5,000 per year to each of their three children

Assets

• $2 million in an IRA
• $650,000 in a joint taxable account

When we model their retirement income, Social Security and RMDs eventually grow beyond what they need to live on. Their income sources exceed their spending goals. That excess income represents money they do not need but will still be taxed on.

To address this, the couple plans to delay Social Security until age 70 so they can keep their income lower for several years and perform Roth conversions during that window. One spouse turns 71 in 2028, and the other turns 70 in 2029. This creates a three-year period during which they can convert funds while remaining in a targeted tax bracket.

During those three years, they convert:

• $400,000 in year one
• $374,000 in year two
• Approximately $300,000 in year three

Before this strategy, their first RMD would have been about $109,000. After the conversions, their first RMD drops to about $56,000 and remains significantly lower moving forward. The estimated lifetime tax savings in this illustration is approximately $362,000.

Just as important, their future income remains closer to what they need to live on, rather than being pushed higher by required minimum distributions.

Trade-Off

When making Roth conversions, it is usually best to pay the taxes from a taxable account rather than withholding them from the conversion.

For example, if you convert $100,000 and withhold 15% for taxes, only $85,000 ends up in the Roth. If you convert $100,000 and pay the $15,000 tax from a taxable account, the full $100,000 goes into the Roth. However, this strategy requires having sufficient taxable assets. If your taxable account is small compared to your IRA, using it to pay conversion taxes can reduce your flexibility later in retirement. In those situations, taking early IRA withdrawals, before RMD age, may be a better option.

Rules

• Roth conversions cannot be counted toward your RMD
  
• Starting in 2025, you must take your full RMD first before doing any Roth conversions in that year

SEE ALSO: The 6 RMD Mistakes Wealthy Retirees Can’t Afford to Make

Strategy 3: Qualified Charitable Distributions (QCDs)

If you are already taking RMDs and do not need the income, qualified charitable distributions (QCDs) can be a powerful tax-management tool. A QCD allows you to give up to $111,000 per year (2026 limit) directly from your IRA to a qualified 501(c)(3) charity. That amount satisfies your RMD and does not count as taxable income. 

How This Can Change Your Taxes

Using the same example above, the couple’s RMD at age 73 is about $109,000. If they give half of their RMD to charity each year using QCDs, their taxable RMD drops to roughly $54,500. Their estimated lifetime tax savings is about $391,000. This strategy makes sense only if you are already charitable. If not, it may be better to pay the taxes and keep the money for personal use or inheritance.

More About QCDs

If you give regularly—for example, $500 each week to a church or nonprofit—you can request a checkbook from your custodian. Firms such as Charles Schwab and Fidelity allow clients to write checks directly from their IRA for charitable purposes. It is important to keep records. The custodian will report the distribution on your 1099-R just like any other IRA withdrawal. You or your CPA must properly report it as a QCD when filing taxes.

Tips:

• QCDs cannot be used to fund donor-advised funds
  
• You do not need to itemize deductions to benefit
  
• This is especially helpful if you normally take the standard deduction

If you give $5,000 per year to charity and do not itemize, you typically receive no tax benefit for that gift. Using a QCD allows you to exclude that income entirely, creating a tax benefit you otherwise would not receive.

SEE ALSO: Charitable Gifting 3 Ways

Exception: Delaying RMDs If You Are Still Working

There is one scenario where you might reduce required minimum distributions by delaying them altogether. If you are still working and contributing to your current employer’s retirement plan, and you do not own more than 5% of the company, you may be able to delay RMDs from that employer’s plan until you retire.

This applies only to your current employer’s plan. It does not apply to IRAs or Old 401(k)s from previous employers. In some cases, a “reverse rollover” may be possible. This involves rolling IRA funds into your current employer’s 401(k) plan, which may allow you to defer RMDs on those assets as well.

RMDs are unavoidable. Overpaying taxes on them often is. With proper planning, it may be possible to:

• Reduce future RMD amounts
  
• Lower lifetime tax exposure
  
• Avoid unnecessary income spikes
  
• Maintain greater flexibility throughout retirement
  

Ready to Plan Your RMD Strategy?

Reducing minimum distributions can impact your taxes, income, and long-term retirement plan. The right approach depends on your age, account types, income sources, and personal goals. A financial advisor in Atlanta can help you see how these strategies could apply to your situation. If you’d like help planning your financial future, contact Paces Ferry Wealth Advisors to schedule a call. 

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.