By Stephen W. Bedikian, Associate Wealth Advisor
Key Takeaways
- RMDs can create a significant tax liability in retirement, but there are strategies that may help reduce their overall tax impact.
- Roth accounts can provide greater flexibility around future distributions, making Roth contributions a potential strategy for people who are still working and planning ahead.
- Qualified charitable distributions (QCDs) can count toward an RMD while potentially reducing taxable income when funds are transferred directly to eligible charities.
- You generally can’t change the required RMD amount, but you may be able to manage your overall taxable income by considering other sources of income and available deductions and credits.
- RMD tax planning is most effective when considered before distributions begin, giving investors more opportunities to evaluate Roth strategies, charitable giving, and the broader tax picture.
What Are Required Minimum Distributions?
The government is calling and they want their taxes now. Retirement plans like 401(k) plans and individual retirement accounts (IRAs) were created by the federal government as an incentive for citizens to save money for retirement. If you put money into your company’s retirement plan or an IRA, that income is shielded from taxes that would otherwise have been payable in that tax year.
But it’s more accurate to say you get to defer taxes on those contributions until you reach a specific age when you have to start taking required minimum distributions (RMDs). RMDs are the government’s way of forcing you to withdraw money from retirement accounts and pay ordinary income tax on those distributions.
Tax-efficient strategies for RMD withdrawals
RMDs start at slightly different ages based on your birth year: age 72 if you were born in 1950 or earlier; age 73 for those born between 1951 and 1959; and age 75 for those born in 1960 or later. The amount changes annually and is based on a percentage of your retirement account value on December 31st of the previous year, divided by your remaining life expectancy. But don’t worry about the calculation. Your account’s custodian typically calculates the amount for you. Just keep in mind that the annual distribution percentage increases as you age.
So how can you aim to reduce taxes on those required distributions from your 401(k) or IRA? Depending on your age and employment status, there are several RMD withdrawal strategies available to you:
Use Qualified Charitable Distributions to Satisfy RMDs
If you’re over the age of 70.5, you can take a Qualified Charitable Distribution (QCD), which counts toward your RMD amount. Basically, you transfer funds from your retirement account directly to a charitable organization.
Since it’s a charitable donation, the tax liability is eliminated, though you don’t also get to take a charitable deduction since that would be double-dipping. A QCD also has the benefit of lowering your adjusted gross income (AGI), which can potentially lower your overall tax rate. The maximum QCD amount in 2026 is $111,000 per spouse.
Manage Your Taxable Income to Help Reduce RMD Taxes
You can’t reduce the amount of your RMDs; they’re a function of your life expectancy and the value of your account. But you can potentially reduce your total taxable income, and thus your tax rate, by managing the other components of your income.
Your federal tax rate is calculated based on your total taxable income, which includes IRA distributions, pension income, Social Security benefits, and investment income such as capital gains, dividends, and taxable interest income – less deductions and credits.
Here’s an example of how you can seek to minimize your tax bill:
The top of the 12% federal tax bracket for married filers is $100,800 in 2026. If your RMD amount is $25,000, then you’ll want to try to keep your other taxable income low enough so that after deductions and credits, your total taxable income stays below that threshold. The point is to avoid paying the 22% tax rate on income above that amount. One way to help reduce your income is to invest in municipal bonds that generally generate tax-free income.
There are other important thresholds to consider that could reduce the taxes you pay on RMDs, such as the Enhanced Senior Deduction of $6,000 per spouse. It has a phaseout range between $150,000 – $250,000 for married filers, so keeping your AGI below that level allows you to fully claim that deduction, potentially lowering your overall tax rate.
Thinking ahead: Making Roth contributions
There are no RMDs associated with a Roth 401(k) or Roth IRA, because you already paid income taxes when you contributed those funds. If you’re still working, you could choose to contribute to a Roth account instead of a traditional retirement account and thus avoid RMDs in the future.
A Roth account gives you maximum flexibility as to when or if you take distributions once you reach the age of 59 ½ and have held the account for at least five years. (Roth withdrawal rules can be tricky if you don’t meet these criteria: Ask us if you need more details.) But if you’re still working, choosing to contribute to a Roth today as a forward-thinking strategy to avoid RMD taxes in the future has one major catch: Your tax rate could be higher while you’re working than it might be when you’re retired.
Work With a Financial Advisor on RMD Tax Planning
That’s why it’s important to consult with your Halbert Hargrove advisor, whether you’re planning for retirement – or already retired and facing the tax implications of RMDs. We can help you with tax planning in an effort to minimize taxes on your RMDs and lower your total tax liability. We can also advise you on tax-efficient strategies designed to preserve your wealth over the long run.
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