6 Legal Ways to Avoid Taxes on RMDs

SAVING & SPENDING - TAXES
Required minimum distributions must begin after age 72, and you could be taxed on withdrawn funds — but there may be ways to avoid a big IRS bill.
Updated April 9, 2024
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If you have money in tax-advantaged retirement accounts, you will be required to start taking required minimum distributions (RMDs) after your 72nd birthday.

That means you must start withdrawing a minimum amount of money from your accounts on a schedule determined by the IRS. 

When you withdraw the money from these accounts, you will have to pay taxes on those distributions at your ordinary income tax rate. This can sometimes lead to a big tax bill.

However, there are ways you can avoid throwing money away on these taxes. Here are six possible options.

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First, what is an RMD?

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When you have a tax-advantaged retirement plan, such as a 401(k) or IRA, the IRS wants to ensure you eventually take money out of the account so it can collect taxes.

To ensure the government gets its piece of your earnings, required minimum distributions start at age 72 for the following types of accounts:

  • Traditional IRAs
  • SIMPLE IRAs
  • SEP IRAs
  • 403(b) plans
  • 401(k) plans
  • 457(b) plans
  • Profit-sharing plans
  • Other defined contribution plans

If you do not take your RMDs when required, you will have to pay a 50% penalty on the money you were required to withdraw from your account. But if you do take them, you'll be taxed at your ordinary rate on the money.

Roll funds over into a Roth IRA

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With traditional IRAs, you can typically deduct your contributions from your income taxes. With Roth IRAs, you contribute after-tax funds so you don’t have to worry about taxes later.

Because RMDs are not required from a Roth IRA, you may be able to avoid having to take these minimum distributions if you move your retirement money from a traditional IRA, 401(k), or another tax-advantaged account.

You can do this with a Roth IRA conversion, which occurs when you roll your money over from your traditional account into a Roth. 

However, when you roll over your money into a Roth, this is a taxable event. You will owe taxes on any pre-tax funds you are converting.

Keep working

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If you have a 401(k), 403(b), or other small business retirement plan, you do not have to take RMDs starting at age 72 if you are still working and don’t own more than 5% of the business.

In these situations, you could wait to take RMDs until April 1 in the calendar year after you retire.

However, this works only for your current employer’s plan. If you have a traditional IRA or a 401(k) from a company you no longer work for, you will still need to take your RMDs at 72.

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Consider a QLAC

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If you don't need the funds from RMDs starting at 72, you can use some of the money in your 401(k) or IRA to purchase a qualified longevity annuity contract, or QLAC.

You are limited to contributing a maximum of $135,000 to a QLAC, and you cannot contribute more than 25% of any particular retirement account to fund your QLAC.

When you fund a QLAC, you can choose to start receiving income from it at a designated start date, which could be as late as 85. Any of the money you have invested in your QLAC will no longer count when RMDs are calculated. This means you don’t have to withdraw as much, which lowers your tax bill.

Marry someone younger

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Oddly, the age of your spouse can affect the amount of required minimum distributions you are mandated to take. The IRS allows you to use different life expectancy tables depending on your unique situation.

The amount of your RMD is based on the balance of your accounts at the end of the previous year and a life expectancy factor based on the ages of you and your spouse.

If your spouse is more than 10 years younger and is the sole beneficiary of your IRA, you'll use the Joint Life and Last Survivor Expectancy Table.

Donate money to charity

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If you don't need the money to supplement your retirement income, you have the option to donate all or part of your required minimum distributions directly to a charitable organization by taking a qualified charitable distribution.

The IRA will send the money directly from your account to the qualified charity of your choosing. You can then exclude the amount of the charitable contribution from your taxable income.

You must be at least 70 1/2 to begin making QCDs, and you can make a maximum of $100,000 in qualified charitable distributions annually. You also must make sure to take the QCD by the deadline for the year's required minimum distribution (for most, the deadline is Dec. 31).


Time your first distributions right

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Rather than the year you retire, you can wait until April 1 of the calendar year after you turn 72 to take your first RMD. Some retirees wait to take their RMD because they think they’ll be in a lower tax bracket that year.

If you wait and take your first distribution the year after you turn 72, you’ll have to take another RMD by Dec. 31 of that year. Taking two RMDs could mean a larger-than-expected tax bill for that year.

Depending on your situation, it might be better to take your first RMD the calendar year you turn 72. A tax or financial advisor can help you decide on the best timing for taking your RMDs.

Bottom line

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If you’re planning for retirement, RMDs can complicate things. You may not want to take money out of your retirement accounts on a set schedule determined by the IRS.

But you must make sure to comply with RMD rules to avoid penalties — and you must be ready to pay taxes on the distributed funds, especially if you're trying to keep growing your wealth.

Tax advisors and software can help you understand your tax obligations and ensure you're paying the least amount of income tax possible.

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Author Details

Christy Rakoczy Christy Rakoczy has a Juris Doctorate from UCLA Law School with a focus in Business Law, and a Certificate in Business Marketing with an English Degree from The University of Rochester. As a full-time personal finance writer, she writes about all things money-related but her special areas of focus are credit cards, personal loans, student loans, mortgages, smart debt payoff strategies, and retirement and Social Security. Her work has been featured by USA Today, MSN Money, CNN Money and more, and you can learn more at her LinkedIn profile.

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