4 Strategies for Optimizing RMDs from IRAs


With our current laws, if you’re approaching ages 73 or 75, you’ll likely be facing required minimum distributions (RMDs) soon. If you have any money in an IRA or 401(k), you have to take RMDs from these accounts when you reach those ages. This means you’ll have to pay taxes on those RMDs. If you’ve saved successfully for retirement, you may not want to take the RMDs since they can create additional taxes, increase your Medicare payments, and more. For a lot of our successful retirees, they do not need the money from their RMDs, so taking them can ultimately create more negative than positive impact. In this article, we’ll go over 4 ways to optimize your RMDs to avoid some of these negative tax impacts

1. Taking Your RMDs in Cash or in Kind

The first strategy is to measure how much you have to take in RMDs and decide to take it in cash or in kind. Many people don’t know that they don’t have to take their RMDs in cash. You can actually take your RMDs in the form of your stocks, mutual funds, ETFs, or cash. If you have investment accounts outside of your IRAs and 401(k)s, in many cases you can take those mutual funds in kind (you don’t have to sell them) and transfer them into your brokerage account, as long as the value of those positions meet your RMD amount. This can be an optimal strategy if you have a position you’ve held for a long time or it is an asset you believe will continue to return well over time. When you take your distributions, make sure you’re considering this strategy and being intentional about how you take it. 

2. Consolidation

The second strategy is consolidation. The way the IRS looks at the distribution amount required at the end of the year is based on your account balances and age. The first year’s RMD is around 3.65% of your aggregate amounts. For our clients at REAP Financial, many of them have multiple retirement accounts, like IRAs and 401(k)s. If you have multiple IRAs, you can choose which IRA account to pull your RMD from. This is not true for 401(k) accounts. If you have a 401(k) account, in addition to an IRA, it will be treated as an entirely separate account, and you’ll be required to pull a RMD from the 401(k) account as well. For this reason, many successful retirees roll their 401(k)s into IRA accounts for consolidation, simplification, and make it easier to calculate their RMD amount. 

3. Qualified Charitable Distribution 

If you’re taking an RMD and giving to charity, you may want to consider using your RMD as a qualified charitable donation. Giving directly from your RMD is actually one of the most optimal ways to give charitably. Lots of retirees take their distributions and then contribute to charity. However, unless you itemize this on your taxes, you won’t receive a deduction on your taxes. If you are giving charitably, we suggest your first dollars come directly from your IRA, since any amount of your RMD you give to charity counts towards the total RMD amount you must take in that year. For example, if you have a $20,000 RMD on the year and you gave $10,000 of it directly from your custodian to the charity, you would only have to take the remaining $10,000 for your RMD. This effectively lowers your income, since only the $10,000 remaining to take in your RMD would count towards taxable income. This is more beneficial than just getting a tax deduction for charitable giving, since it removes some income from your bottom line. 

4. Consider Your Future Income

Finally, you’ll want to measure what your income will be not just this year, but in years to come. Many retirees consider taking more than the RMD distribution amount to lower the future RMD amounts. Since the RMD amount is based on your age and your aggregate account balances, taking additional distributions can reduce your RMDs in the future. You may be wondering if you can convert your RMD money from 401(k) and IRAs to a Roth. Unfortunately, you cannot. You have to take the RMD and count it as income; that money can’t go into a Roth, since it would still be considered a contribution. You can still convert money to a Roth in a year that you have an RMD, but the IRS states that you must first take your RMD before any conversion work is done. For example, if you want to convert $100K to a Roth this year, you must take your RMD first (in this case $50,000) and then you can convert an additional $100K from your IRAs to a Roth IRA in that year. 

Plan Your RMDs to Maximize Your Retirement 

When you’re in your working years, taxes are relatively straight-forward. However, when you move into retirement, taxes can get a lot more complicated.

To make sure you’re prepared for success, reach out to REAP Financial, a retirement planner in Austin, Texas, for a copy of our Retirement Income Planning Checklist with 20+ pages of content. Get your free copy by emailing us at retire@reapfinancial.com!


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