4 Ways to Reduce Your RMD Tax Bite
As the market continues to grow, so do many retirement accounts. This seems like good news, and in many ways it is. But for those with traditional IRAs and pre-tax 401(k) plans, higher balances mean more taxable income once required minimum distributions (RMDs) begin. These distributions are mandatory, and they often result in a tax bill that retirees would rather avoid—especially if they don't actually need the money to cover living expenses. Fortunately, there are proven strategies that can help reduce the tax impact of RMDs.
When you save in a traditional retirement account, you benefit from tax deferral. You get a deduction for contributions and avoid paying taxes on investment gains while the money grows. But eventually, Uncle Sam wants his cut. Starting at age 73 under current law, you must begin withdrawing a portion of your account each year. These withdrawals are taxed as ordinary income. If your account balance has grown significantly, your RMD—and your resulting tax bill—can be substantial.
If you're looking for ways to minimize the taxes you pay on RMDs, consider a few approaches that may offer relief.
Give to Charity Directly from Your IRA
If charitable giving is already part of your financial life, a qualified charitable distribution (QCD) can be a smart move. This strategy allows individuals age 70½ or older to transfer funds directly from an IRA to a qualified charity. For 2024, the maximum allowable amount is $105,000 per person, per year.
The key advantage of a QCD is that the amount transferred does not count as taxable income. If you are subject to RMDs, a properly timed QCD can satisfy your distribution requirement for the year—without triggering a tax bill. This approach benefits both you and the charitable organization. It also helps prevent your adjusted gross income from rising, which can affect Medicare premiums and the taxation of Social Security benefits.
Keep in mind that QCDs are only available from IRAs. Employer-sponsored plans like 401(k)s do not qualify. However, if you're over the age limit and no longer contributing to the plan, you may consider consolidating your accounts to take advantage of this provision.
Delay RMDs If You're Still Working
Another option to reduce your RMD tax impact is the still-working exception. If you are employed past age 73 and you do not own more than five percent of the company you work for, you may be able to delay RMDs from your current employer’s retirement plan until April 1 following the year you retire.
This rule applies only to employer-sponsored plans—not IRAs. However, in some cases, you can roll traditional IRA funds into your workplace plan to postpone RMDs, assuming the plan allows roll-ins and uses the still-working exception.
Timing matters here. If you have already reached RMD age and must take a distribution from your IRA, you must complete that withdrawal before rolling over the remaining balance to your employer plan. Missing that requirement could lead to penalties or a rejected rollover. Consulting a tax professional or plan administrator is essential before making this move.
Defer RMDs with a Longevity Annuity
For retirees who want to delay income deeper into retirement, a Qualified Longevity Annuity Contract (QLAC) may offer a helpful solution. A QLAC is a type of deferred annuity purchased with funds from a traditional IRA or eligible retirement plan. The primary benefit is that money invested in a QLAC does not count toward your RMD calculation until you turn 85.
This strategy works well for those who do not need immediate income and are concerned about longevity risk. By excluding the QLAC value from your RMD formula, you reduce the size of your mandatory withdrawals—and your tax bill—during your 70s and early 80s.
Thanks to SECURE Act 2.0, the rules for QLACs have improved. The previous restriction that capped QLAC contributions to a percentage of your retirement account has been removed. Now, the maximum limit is a flat $200,000 per person, giving you more flexibility and control.
Before buying a QLAC, it's important to understand how the product works, what income it will provide, and how it fits into your overall retirement strategy.
Convert to a Roth IRA
One of the most powerful long-term strategies for reducing RMD-related taxes is to convert traditional IRA or pre-tax 401(k) funds into a Roth account. Unlike traditional accounts, Roth IRAs do not have required minimum distributions during the original owner's lifetime. This gives you full control over when and how to take money out—and it all comes out tax-free if certain requirements are met.
Roth conversions are taxable events, meaning you will owe income tax on the amount you convert in the year the conversion occurs. However, by spreading conversions over several years and managing the amount to stay within a preferred tax bracket, you can reduce your lifetime tax burden significantly.
If you are already of RMD age, you must take your full RMD for the year before doing a Roth conversion. The RMD itself cannot be converted. However, once that requirement is met, any additional funds can be moved into a Roth IRA. After the conversion, you no longer need to worry about future RMDs on that portion of your retirement savings.
FAQs: Reduce RMD Tax
What is an RMD?
A required minimum distribution is the minimum amount the IRS requires you to withdraw from traditional retirement accounts each year once you reach age 73.
Are RMDs taxable?
Yes. RMDs are taxed as ordinary income, and they can push you into a higher tax bracket or increase your Medicare premiums.
Can I give my RMD to charity to avoid taxes?
Yes, using a Qualified Charitable Distribution, you can transfer up to $105,000 directly from your IRA to a qualified charity without including the amount in your income.
What is the still-working exception?
If you are still working at age 73 and do not own more than five percent of your company, you may be able to delay RMDs from your employer-sponsored retirement plan.
Do Roth IRAs have RMDs?
No. Roth IRAs do not have required minimum distributions during the account owner’s lifetime, making them a strategic tool for tax-efficient retirement planning.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.