RMD Strategies to Help Ease Your Tax Burden

84% of Retirees Are Making Mistakes with their Required Minimum Distribution (RMD)

EXECUTIVE SUMMARY

If you have a Roth plan they traditionally do not require an RMD. This is because you bought into the Roth with after-tax money.

If you have an IRA, 401K, 403b, 457b, SEP-IRA, Simple IRA, TSP, or Profit Sharing Plan you have a requirement to withdraw your RMD. This is because you bought into one of these accounts with pre-tax money. At the pre-determined age, Uncle Sam wants the associated taxes.

In 2024 the RMD distribution has moved to age 73 and will increase again to age 75 in 2033.

The IRS has imposed a penalty of 25% on the amount due should the distribution not be paid – Ouch! The IRS will generally forgive some of the penalty if you remedy the default payment within two years, however, that penalty is 10% and still one that you want to avoid.

How you plan to withdraw for an RMD is a personal decision based on your objectives.

To effectively manage Required Minimum Distributions (RMDs) while preserving investment gains, several strategies can be employed:

## UNDERSTANDING RMD CALCULATIONS

1. **Basic Calculation**: RMDs are calculated by dividing the balance of your retirement account as of December 31 of the previous year by a life expectancy factor determined by the IRS based on your age. This factor decreases as you age, resulting in larger required withdrawals over time. For example, at age 73, the factor is 26.5, meaning you would withdraw approximately $3,650 for every $100,000 in your account [2][4].

An easy way to calculate your RMD is the 2024 RMD calculator located at the URL: https://www.nerdwallet.com/article/investing/social-security/required-minimum-distributions

2. **Multiple Accounts**: If you have multiple IRAs, you can calculate the RMD for each account but are allowed to withdraw the total RMD from just one account or a combination of accounts. However, for 401(k) plans, each account's RMD must be taken separately [1][3].

## STRATEGIES TO PRESERVE GAINS

1. **Delay Withdrawals**: If possible, delay your RMD until later in the year. This allows your investments more time to grow tax-deferred, maximizing potential returns before the withdrawal [1][2].

This is a practice I chose because I am currently an active investor and trader in the market. You can also use your spouse's account to grow wealth. This is effective if they have not met the IRS age requirements - No RMD withdrawal is required.

2. **Withdraw in Installments**: Instead of taking a lump sum, consider withdrawing your RMD in smaller, periodic installments throughout the year. This approach can help manage tax implications and provide more flexibility in financial planning [3][4].

3. **Use RMDs for Tax Payments**: You can ask your IRA custodian to withhold enough from your RMD to cover your tax liabilities, simplifying your tax payments and potentially avoiding underpayment penalties [1][2].

4. **Reinvest RMDs**: If you do not need the RMD for living expenses, consider reinvesting it in a taxable account or using it to fund a Roth IRA conversion. This strategy can help mitigate future tax burdens since Roth IRAs do not have RMD requirements [5][6].

5. **Tax-Efficient Investments**: If you choose to reinvest your RMDs, consider tax-efficient investment options, such as municipal bonds, which can provide tax-free income [1]. Treasury bills are also an option with the greatest stability in the 10-year T-Bill today and are available in a Treasury auction. (T-Bills are free of state taxes)

6. **Consult a Financial Advisor**: Given the complexities of RMDs and their tax implications, consulting with a financial advisor can help tailor a strategy that aligns with your financial goals and minimizes tax liabilities [3][5].

By employing these strategies, retirees can manage their RMDs effectively while maximizing the growth potential of their retirement assets.

This document is for informational purposes only. Consult your CPA for details on your plan.

Citations:
[1] https://memberbenefits.nysut.org/-/media/files/mb-nysut/pdfs/financial-learning-center/required-minimum-distributions.pdf
[2] https://www.schwab.com/learn/story/rmd-strategies-to-help-ease-your-tax-burden
[3] https://smartasset.com/retirement/how-to-calculate-rmd
[4] https://www.investopedia.com/terms/r/requiredminimumdistribution.asp
[5] https://www.thrivent.com/insights/retirement-planning/6-ways-to-use-required-minimum-distributions-in-retirement
[6] https://smartasset.com/retirement/rmd-table
[7] https://www.bankrate.com/retirement/ira-rmd-table/
[8] https://investor.vanguard.com/investor-resources-education/taxes/taxation-of-required-minimum-distributions
Required Minimum Distribution (RMD)
https://www.nerdwallet.com/article/investing/social-security/required-minimum-distributions