Disclaimer: This content is provided for general educational purposes and does not constitute individualized tax advice. Tax planning strategies should be evaluated based on your specific circumstances in consultation with a qualified tax professional.
Key Takeaways
- RMDs are mandatory withdrawals from most tax-deferred retirement accounts once you reach age 73 (or 75 for those born in 1960+).
- They are generally taxed at your ordinary income rate.
- You can reduce or delay taxes using strategies like working longer, making qualified charitable distributions (QCDs), doing Roth conversions, or purchasing a QLAC.
- Missing an RMD triggers penalties, but newer rules allow for reduced penalties if corrected quickly.
You’ve watched your retirement accounts grow over the years, knowing that one day you’d tap into them. Now that “one day” is getting closer, it’s normal to feel uncertain about what that means for your taxes.
The good news is that there are legitimate, IRS-approved strategies that may help reduce the tax impact of required minimum distributions (RMDs). These are ones we share with our San Antonio & Texas Hill Country clients regularly. Let’s go over a few of the most common ones…
How do required minimum distributions (RMDs) work?
RMDs are the IRS’s way of eventually taxing the retirement dollars you’ve been growing tax-deferred for decades. When you hit age 73 (or 75, depending on birth year), you must begin withdrawing a calculated percentage from most tax-advantaged retirement accounts.
The calculation is based on your year-end account balance, your age, and IRS life-expectancy tables.
Those withdrawals get added to your taxable income for the year. And skipping an RMD can trigger a penalty of up to 25% of the amount you should’ve withdrawn (reducible to 10% if you correct it within 2 years).
Can I delay RMDs by continuing to work?
In some cases, yes. If you’re still working past age 73 and contributing to your current employer’s 401(k), the IRS allows you to delay RMDs from that specific plan until you retire.
A few important caveats:
- This applies only to your current employer’s plan.
- Old 401(k)s still require RMDs on schedule unless rolled over.
- Traditional IRAs are never eligible for the “still-working” exception.
- This exception does not apply if you own more than 5% of the company.
One practical question to consider: Is delaying worth it for you?
That depends on your health, your income needs, and how working fits into your life right now. For some, one extra year of tax deferral is meaningful. For others, the lifestyle trade-off isn’t worth it.
Can donating to charity reduce my required minimum distribution taxes?
Absolutely. A Qualified Charitable Distribution (QCD) lets you transfer funds directly from your IRA (not a 401(k)) to a qualified charity. The donated amount counts toward your RMD and is excluded from your taxable income.
You can donate up to $100,000 per year, indexed for inflation (projected to be approximately $108,000 in 2025 and $115,000 in 2026, per person).
Just a few caveats to note here: The money must move directly from the IRA custodian to the nonprofit. Also, you can’t double-dip by also claiming the donation as an itemized charitable deduction.
Would a Roth conversion help me avoid RMDs altogether?
Potentially yes. A Roth conversion involves moving money from a tax-deferred account (like a traditional IRA) into a Roth IRA, which has no RMDs and allows tax-free withdrawals in retirement.
But there’s a trade-off: you must pay ordinary income tax on the amount converted in the year of conversion.
For some people, it can still be worth considering. A Roth conversion creates a source of tax-free retirement income and may help reduce future Social Security taxation or Medicare IRMAA surcharges.
The Roth conversion strategy might make sense for you if:
- You have some years with lower income before RMD age,
- You can pay the conversion tax from outside funds,
- You’re thinking about long-term tax planning (including what you might leave to heirs).
How do annuities factor into RMD planning?
A Qualified Longevity Annuity Contract (QLAC) is an annuity you purchase with funds from your IRA or 401(k). The amount you invest in the QLAC is excluded from your RMD calculation up to the IRS limit (approximately $210,000, indexed for inflation, or 25% of your retirement account – whichever is less).
You can delay taking income from a QLAC until as late as age 85.
Some retirees use QLACs because they meaningfully reduce RMDs during your 70s and provide a guaranteed income later in life (longevity insurance).
At the same time, others avoid them because once purchased, the funds are illiquid, the income from the annuity will eventually be taxed, and choosing the wrong annuity provider can expose you to unnecessary risk.
Final thoughts
Let me re-establish here that this information is for educational purposes only and should be discussed with a qualified Texas Hill Country tax professional to determine how it may apply to your specific situation. (If helpful, I’m happy to talk through these concepts with you. Just grab a time on my calendar below.)
What’s important is that you approach required minimum distribution taxes with a plan. The timing, strategy, and order in which you draw from your accounts can drastically change how much tax you may pay over your retirement.
And if you’re nearing RMD age and aren’t sure how to manage the potential tax impact, please don’t feel like you need to figure this out alone. We can help explain the rules and planning considerations involved:
FAQs
“What happens if I forget to take an RMD?”
The IRS can assess a 25% penalty, but if you correct it within two years, the penalty can drop to 10%. The sooner you address it, the better.
“Do Roth IRAs ever require RMDs?”
No. That’s one reason Roth conversions are such a popular planning tool.
“Are inherited IRA RMD rules different?”
Yes — significantly. Depending on when the original owner passed away, beneficiaries may need to withdraw the entire account within 10 years. It’s a separate set of rules altogether.
“Can I combine my RMDs from multiple accounts?”
You can aggregate RMDs from IRAs together, but not across account types. For example, if you have multiple 401(k)s, each must be satisfied separately.
“Will RMDs push up my Medicare premiums?”
They can. Higher taxable income may trigger IRMAA surcharges, which is why tax planning these withdrawals matters.
“Should I take my first RMD in the year I turn 73 or wait until April 1 of the next year?”
You’re allowed to delay the first one until April 1. But that can cause two RMDs in one tax year, which might increase your tax bracket. Not always ideal.