Avoiding the tax traps and timing mistakes that can cost retirees thousands
You spend decades faithfully stashing money in tax-deferred accounts like your 401(k) or traditional IRA. Then one day—ready or not—the IRS comes knocking. Welcome to the world of Required Minimum Distributions (RMDs).
Most retirement savers know that RMDs start at age 73 (or 75 if you were born in 1960 or later). But what no one tells you is just how many costly missteps you can make before and after that birthday. So, let’s talk tactics, timing, and how to keep more of your money in your pocket—not the IRS’s.
What Are RMDs?
In short: The IRS doesn’t let you defer taxes forever. Starting at a certain age, you must withdraw a minimum amount each year from traditional IRAs, 401(k)s, and other tax-deferred accounts. The amount is based on your age, account balance, and a life expectancy factor.
And yes—you pay ordinary income tax on every dollar you withdraw.
Miss a withdrawal? The penalty used to be 50% of the required amount (yes, 5-0). As of 2023, it’s been reduced to 25%—still steep, and potentially 10% if corrected in time.
Gotchas and Oversights That Can Cost You
🔹 You Can’t Rely on Your 401(k) Administrator to Get This Right
Many people assume their financial institution will calculate and automatically distribute the correct RMD. Some do. Others don’t—or they’ll distribute from the wrong account or miss the deadline altogether. You’re the one on the hook for penalties, not them.
Tip: If you have multiple IRAs, you can combine your RMD total and pull from just one. But not for 401(k)s—each 401(k) must satisfy its own RMD separately.
🔹 Your RMD Can Spike Your Tax Bracket
That seemingly harmless RMD can push your income over critical thresholds—triggering:
- Higher Medicare premiums (IRMAA surcharges).
- Higher taxation on Social Security benefits.
- Phasing you out of deductions or credits.
Tip: Consider drawing down traditional accounts strategically before RMD age to smooth out taxes over time.
🔹 Inherited IRAs? Different Rules Apply
If you’ve inherited an IRA (especially post-SECURE Act), you may face an entirely different RMD schedule. Non-spouse beneficiaries often have a 10-year window to deplete the account—without clear annual requirements but with massive potential for tax landmines in Year 10.
🔹 RMDs Don’t Stop If You Don’t Need the Money
Many retirees say, “But I don’t need that money!” The IRS doesn’t care. If it’s in a tax-deferred account, you must take it—and pay up. Even if it pushes you into tax territory you’ve never seen before.
Planning Tactics to Avoid the RMD Tax Bomb
✅ Roth Conversions in Your 60s
Convert chunks of your traditional IRA into a Roth IRA while you’re still in a lower tax bracket. Yes, you’ll pay taxes now—but Roths have no RMDs, and withdrawals are tax-free later.
Caution: Don’t convert too much at once and accidentally leap into a higher bracket. Work with a CPA or use tax projection software.
✅ Qualified Charitable Distributions (QCDs)
If you’re charitably inclined and over 70½, you can donate up to $100,000/year directly from your IRA to a qualified charity. This counts toward your RMD and keeps that amount out of your taxable income.
Pro tip: QCDs are especially valuable if you don’t itemize deductions, because you get the tax benefit either way.
✅ Delay Retirement Plan Withdrawals—If You’re Still Working
Still working at 73+ and don’t own more than 5% of the company? You may be able to delay RMDs from your 401(k) at that job. IRAs? Not so lucky—you’ll still have to take RMDs from those.
✅ Use RMDs to Fund a Tax-Efficient Income Strategy
Rather than reinvesting RMDs into a taxable brokerage randomly, use them to fill out your cash bucket, pay insurance premiums, or fund a gifting strategy that supports your goals.
Final Thoughts
RMDs aren’t just a tax formality—they’re a critical inflection point in your retirement plan. The stakes are higher than most people realize: If you plan ahead, you can manage or even minimize the impact. If you ignore them, they can punch a massive hole in your income strategy.
So don’t wait until you get the dreaded “RMD Reminder” letter in the mail. Start strategizing now—before the IRS gets the first cut of your hard-earned savings.
By Admin –
