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4 Strategies to Limit RMDs

strategies to limit rmds

Saving for retirement is hard. It takes discipline, intelligence and likely a little bit of luck. You have to put money into your retirement fund consistently, make smart investment choices and hope that none of them end up going sideways. What might be even tougher than saving for retirement, though, is making the right moves in retirement to make that money last. The government throws a wrench into this problem as well in the form of required minimum distributions (RMDs). There are ways, though, that you can lessen the impacts of RMDs — it just takes a bit of planning and know-how.

For more help managing the dispersal phase of your retirement savings, consider working with a financial advisor.

Required Minimum Distributions Basics

Required minimum distributions are exactly what they sound like: a minimum percentage of your tax-deferred retirement savings that you have to take out each year. The government has required minimum distributions to get the tax money that has been deferred all these years. In the case of wealthy individuals, it also prevents money from being stored in a tax-advantaged account and protected from estate tax.

RMDs now kick in at age 72 for most people as a result of recent legislation. You can find the percentage of your total savings you are required to take out using an RMD chart. RMDs apply to most tax-advantaged retirement accounts like 401(k) plans and traditional individual retirement accounts (IRA). They do not apply to Roth retirement accounts, which are funded with pre-tax money.

RMD Limiting Tip One: Keep Plugging Away

strategies to limit rmds

Look, we all want to retire as soon as possible — the siren song of a life free of bosses, deadlines and commutes is a powerful one indeed. Staying in the salt mines just a bit longer, though, could mean some serious savings when it comes to required minimum distributions, which will make life easier when you finally are able to retire

If you participate in a 401(k) plan at work and keep working past age 72, you can delay required minimum distributions for that company’s plan until you retire, so long as you don’t own more than 5% of the company you work for.

Keep in mind that if you have money in a 401(k) from a previous employer or in an individual retirement account, you’ll have to follow all RMD rules on that money. Still, delaying taking out even some of your money allows it to grow longer, giving you more in your account.

RMD Limiting Tip Two: Don’t Wait in Your First Year

Due to the structure of RMD payment deadlines, some people end up having to take two mandatory withdrawals at age 72.

Here’s the deal: whenever you turn 72, you have until April 1 of the following year to take out your first RMD. After that, you have to take out your yearly RMD by December 31 of each year. Let’s say you turn 72 in August and figure you’ll wait until the following year to take your first RMD, figuring you’re retiring at year’s end and your tax bracket could go down. This leads to you having to take two RMDs in one year. Instead, take the first RMD as soon as you turn 72 to spread the withdrawals out.

RMD Limiting Tip Three: Convert to a Roth IRA

As mentioned above, Roth IRA holders don’t have to take out RMDs. This is because the money in a Roth IRA has already been taxed, so the government isn’t concerned with getting their chunk. While you can’t go back in time and change your savings strategy to include a Roth IRA, you can act now to roll over some of your savings into a Roth IRA.

Once you roll a portion of your money from your 401(k) into a Roth IRA, you won’t have to take any out until you want to — and it can keep growing, tax-free, for as long as you want. Keep in mind, though, that you will have to pay taxes on all of the money at once when you perform the rollover. This comes with some sticker shock, but it is still worth considering if you can get past the initial cost.

RMD Limiting Tip Four: Be Charitable

strategies to limit rmds

This last tip doesn’t actually reduce the money you lose, but it might make you feel better. If you have an IRA, you can give a donation of up to $100,000 to a qualified charity and have that count as your RMD. This tip doesn’t work for 401(k) participants.

Again, you still end up paying money, but you get to pick who gets it, rather than having it go into the government’s hands.

The Bottom Line

RMDs kick in at age 72 for most folks and dictate a minimum withdrawal you must take each year from your tax-advantaged retirement accounts. There are things you can do to mitigate them, though, including timing your withdrawals correctly, rolling over to a Roth IRA, continuing to work and giving to charity.

Retirement Planning Tips

  • A financial advisor can help you navigate the dispersal of your retirement savings. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Want to see how much you’ll need in retirement? Use SmartAsset’s retirement calculator to get a sense.

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