Planning for Required Minimum Distributions

In our September 21 commentary, we explained the basics of Required Minimum Distributions (RMDs), which you can find by clicking here.

Taxpayers sometimes come to regret having accumulated large retirement account balances because the required minimum distributions later in life can increase their taxable income.  Higher taxable income created by RMDs may not only put you into a higher tax bracket, it can also cause more of your Social Security to be taxed, put you into a higher long-term capital gains bracket and even limit certain tax breaks like the recently increased $40,000 state and local income tax (SALT) deduction.

Increased income caused by RMDs can also trigger additional surcharges, known as the income-related Medicare adjustment (IRMAA), to be applied to a Medicare beneficiary’s Part B and Part D monthly premiums.

The base monthly Part B premium of $185 for 2025, for example, can be as high as $628.90 per month per person for taxpayers with higher income.  That’s a 240% increase.

For many surviving spouses who inherited their spouse’s IRA, RMDs will typically continue based on their own life expectancy, but will now be taxed in the tax brackets for single-filers.

This is sometimes referred to as the ‘widow’s penalty’ because the tax brackets for single-filers are more compressed and result in higher income tax brackets being applied to the same amount of RMD income.  The widow’s penalty can also trigger an exacerbate all of the other ripple effects mentioned above.

Planning ahead to make these potential issues less painful is something that your ACM Wealth advisor is already thinking about and you should to.  With that in mind, here are a few options to consider

Still Working?

You get to choose whether or not to contribute part of your pay to any employer-sponsored or individual retirement accounts.

In order to lower future RMDs while you are still working and building retirement assets, consider contributing some of the funds you’ve targeted to save for retirement into Roth accounts or a taxable brokerage account instead.  These accounts won’t be subject to RMDs later on in life.

Starting in 2026, all “catch-up contributions” (additional contributions to retirement plans like (401(k)s) for those who are age 50 or older) for higher earners must be made on an after-tax (Roth basis).  This applies to anyone whose income in 2025 exceeded $145,000.  Many plans now offer Roth and after-tax contributions.  If, however, your employer’s plan does not offer a Roth 401(k) option, then high-earners subject to this rule will not be able to make catch-up contributions at all.

Reduce Your Retirement Account Balance Before RMDs Begin

If you’re in a year when your income is lower (after you’ve stopped working, but before you begin claiming Social Security, for example), then you could take withdrawals from your retirement accounts in the interim to satisfy your need for cash.  Taking retirement account withdrawals earlier may help to reduce your retirement account balance and limit your RMDs later on in life.

If you are at least 70.5 years old, then you could consider making a Qualified Charitable Distribution (QCD) from your retirement account to the causes you like to support (a qualified charity) which may similarly serve to reduce your retirement account balance prior to RMDs kicking in.

You can learn more about QCDs by clicking here.

Legacy Planning and Roth IRA Conversions

I like to remind clients that when it comes to retirement accounts, someone ultimately needs withdraw the funds and pay the income taxes.  It could be you by doing it today.  It could be you by doing it overtime as a result of RMDs.  Or it will ultimately be whoever inherits the balance from you or your spouse and the inheritor(s) may only have 10-years to completely withdraw the balance and pay all of the income tax.

The goal for your family should be to have the taxed paid by whoever is in the lowest tax bracket. That won’t be your spouse due to the widow’s penalty and it may not be your kids because of the 10-year rule and/or if they already have high income.

In some cases, the best option could be for you to do it today, particularly if you are in a lower income year.  And if you don’t actually need the retirement funds now, then a Roth conversion will allow you to transfer retirement account balances that are subject to RMDs into a Roth IRA that is not subject to RMDs.

Your Roth IRAs can continue to grow tax-deferred like your current retirement accounts and they can be passed on to the next generation and the inheritor(s) won’t have to pay income taxes on any Roth IRA withdrawals.  In short, Roth IRAs may not only help with your own tax planning, but they are also a much better asset to inherit when compared to regular retirement accounts.

Mapping out when and calculating how much to convert, along with whether or not it even makes sense for you, is typically done most effectively with your wealth advisor and/or tax planner.  Your ACM Wealth Advisor is well-versed in this planning so reach out if you have questions.

Consider the Source

RMDs are required on your total, combined retirement account balance, however, you don’t have to take pro-rata withdrawals across each of your retirement accounts.  If you have three IRAs, for example, then you could satisfy the RMDs on all three by withdrawing funds from only one IRA account.

This could come in handy for rebalancing purposes.  For example, if you have bonds in one IRA and tech stocks that have done well in another IRA and you’re now concerned that the tech stocks may be overvalued, then you could take your RMD for both of your IRAs from only your tech stock IRA.  This may help to rebalance your overall IRA portfolio.

You can also choose whether or not to withhold federal and state income taxes from your IRA withdrawals and how much.  In some cases, withholding more from certain IRAs can help with your estimated tax payments.  Click here for more info on estimated tax payments.

Take the Money and Run

You can use the funds withdrawn from your retirement accounts as you wish.   In the event that you don’t actually need the money that needs to be withdrawn as a result of your RMD, then you can simply reinvest it in a taxable brokerage account for a rainy day.  Or you could make gifts to family or friends as you choose.

If your subject to RMDs and still working, then my first comment is, “God Bless!”.  My second comment is that you can contribute any withdrawn funds back to a Roth IRA up to the annual contribution limits, if your income eligible, and let these funds continue to grow tax-free.

Or as mentioned above, you could also withhold up to the entire amount of an RMD for estimated tax purposes and then use other taxable funds for spending on something else.

Final Thoughts

Again, the income taxes on retirement accounts ultimately need to be paid by someone.  Planning ahead is important to determine who should be doing this and when may be best.  There is no one-size-fits-all solution and more than one planning strategy may apply over the course of your financial life.  Your ACM Wealth Advisor considers these issues on a daily basis and is prepared to assist when you are ready to discuss.

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