How to Cut Down Your RMD Payments and Save on Taxes

As retirees approach the age of 73, they must start taking Required Minimum Distributions (RMDs) from their retirement accounts. These distributions can significantly impact your taxable income and potentially push you into a higher tax bracket. However, there are strategies you can employ to cut down your RMD payments and save on taxes. Let's explore some options to help you manage your RMDs more effectively.



1. Roth Conversions: Converting a portion of your traditional IRA to a Roth IRA can help reduce your future RMDs and lower your taxable income. When you convert assets to a Roth IRA, you pay taxes on the converted amount in the year of conversion. However, future qualified withdrawals from the Roth IRA are tax-free. This strategy can be particularly beneficial if you expect to be in a lower tax bracket in retirement. For example, if you're in the 35% tax bracket and convert $500,000, you'll pay $175,000 in taxes that year. However, you'll avoid paying taxes on that amount in the future, potentially saving you money if your tax rate is lower in retirement.



2. Qualified Longevity Annuity Contracts (QLACs): QLACs allow you to transfer up to $200,000 of your qualified retirement plan assets to an annuity without incurring any tax consequences. By doing so, you reduce the amount of your plan assets subject to RMDs, resulting in smaller RMDs and less tax liability each year. For example, if you have $2 million in your retirement account and transfer $200,000 to a QLAC, your RMDs will be calculated on the remaining $1.8 million, reducing your annual tax burden. Additionally, QLACs generate a stream of guaranteed income for the rest of your life, which can be delayed until age 85, potentially placing you in a lower tax bracket when you begin receiving payments.



3. Strategic Withdrawals: Timing your RMD withdrawals strategically can help optimize your tax situation. Instead of waiting until the following year to take your first RMD, consider taking it in the year you turn 73. This can help prevent being bumped into a higher tax bracket due to two withdrawals in the same calendar year. Additionally, automating your RMD withdrawals through your online brokerage can help ensure you don't miss the deadline and incur a 25% penalty. Other strategies, such as using Qualified Charitable Distributions (QCDs) or taking RMDs in kind, can also help you manage your RMDs more effectively.



4. Tax-Loss Harvesting: This strategy involves selling investments with unrealized losses and applying those losses against capital gains that have been previously realized to lower taxes owed. Retirees can use this approach to lower their taxes after taking their RMD. For example, if you have a stock you bought five years ago for $5,000 and sell it this year for $10,000, you'll have a capital gain of $5,000. If you also have a stock you bought five years ago for $10,000 that has declined in value by 50%, you can sell it at a loss of $5,000 and use that loss to offset your capital gain.



In conclusion, retirees have several options to cut down their RMD payments and save on taxes. By leveraging Roth conversions, QLACs, strategic withdrawals, and tax-loss harvesting, you can manage your RMDs more effectively and potentially lower your taxable income in retirement. However, it's essential to consult with a financial advisor to determine the best strategy for your individual situation and goals.