I turned 73 years old. What strategies can help reduce my RMD taxes?

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The IRS allows workers to put pre-tax earnings into traditional individual retirement accounts, 401(k) and similar workplace accounts, and to grow all the money — tax-deferred — to give you cash for retirement. But the National Tax Collector only waits so long to collect, and once you turn 73, the law forces retirees to take minimum distributions and start paying taxes.

These distributions—RMDs, for short—often aren’t a problem for people who already have withdrawals to cover their living expenses. But if you’ve gotten by without tapping into retirement accounts, coughing up tax money is something you’ll want to avoid — or at least delay as long as you can.

Talk to a financial advisor about the best way to organize your retirement accounts.

Your RMD amount is based on your account balance at the end of the previous year and the IRS’s life expectancy tables. The tables are designed to hold back all of your account assets until the expected end of your life. If you turn 73 in 2024, your life expectancy will be 26.5 years. If you had an IRA with a balance of $500,000 on December 31st, you would divide the balance by your life expectancy and find that your RMD for the year was $18,868, which would be added to your ordinary income for the year, and taxed accordingly.

There are a few tactics you can use to eliminate or reduce RMDs.

By delaying the start of any pension or Social Security payments until early retirement, you can reduce account balances that will later be subject to RMDs. This allows you to maximize your Social Security benefits, which increase by 8% each year until your full retirement age and when you turn 70.

RMDs are required in the aggregate of all your tax-deferred accounts but, in the case of IRAs, can be paid from any individual account. RMDs for 401(k)s and similar plans must be calculated and paid from each account, which encourages many retirees to combine them all into a rollover IRA. But if you have a younger spouse, don’t include their account balance in the RMD account. Otherwise, you’ll be taking RMDs and paying taxes on those accounts sooner.

Remember: The “I” in IRA stands for “individual,” so each individual must manage RMDs in their own accounts separately from their spouse’s accounts.

A financial advisor can guide you through the best ways to organize your retirement income.

If you don’t need RMD cash for living expenses, you can donate some or all of the money to an eligible charity. Under a qualified charitable distribution, the money goes directly from the IRA custodian to the charity and you don’t pay income tax on the donated money. Just be aware that you can’t withdraw cash and donate it yourself: once the money comes to you, it’s taxable. You cannot deduct qualified charitable distributions as a charitable deduction. Finally, make sure the charity you choose is considered eligible by the IRS, or you’ll still end up paying taxes.

You can convert tax-deferred IRAs partially or fully to Roth IRAs, pay taxes on the distribution now and never pay taxes on the money you withdraw from the Roth—even your investment gains. You can manage this conversion over time, adjust your other income and then withdraw enough from the tax-deferred account to avoid moving into a higher tax bracket. An added bonus is that as long as the Roth is open for at least five years, your heirs will pay no tax on the inherited Roth account.

To help reduce taxes on your retirement income, talk to a financial advisor today.

It’s a little mental trick that won’t necessarily reduce your tax bill, but it will make it easier and help ensure that you don’t pay estimated or overpaid taxes on other income. If you receive pension payments or other income, you must deduct a portion for taxes or pay yourself quarterly estimated taxes. However, distributions from IRAs are “deductible” – paid out evenly throughout the year – no matter when they are paid. As long as your estimated and withheld tax payments equal 90% of your tax bill or 100% of your last year’s tax, you don’t face an underpayment penalty. This allows you to collect all of your income during the year, make an exact total in December, then take an RMD that covers all the taxes and the entire amount of the RMD is withheld for taxes.

Remember, failure to take an RMD within the required time period carries a hefty penalty – up to 50% of the missing RMD amount. For more help with RMDs, consider aligning with a financial advisor.

How to manage your RMDs—and all the other many tax questions that can arise in retirement—can be complicated. Before you start withdrawing from pensions, Social Security and retirement accounts, take the time to estimate your retirement taxes.

Balancing taxes and retirement income—and how to minimize taxes in retirement—is an important issue. A knowledgeable financial advisor can help you decide how to organize and coordinate these payments during your retirement.
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