Once you hit the age of 73, the IRS will require you to take distributions from your tax-advantaged retirement accounts, whether you are retired or not. However, strategies like reducing or delaying your RMDs can help manage these disbursements effectively. These disbursements can increase your income, raise your tax bracket, and may result in a hefty tax bill. 

While taking these Required Minimum Distributions (RMDs) is not 100% avoidable, you can implement a few strategies to help delay retirement savings withdrawals and limit the tax bill associated with the income. 

RMD Basics

Forcing you to take required minimum distributions (RMDs) allows the IRS to finally collect tax money on your tax-deferred retirement accounts. Accounts subject to RMDs include:

• Traditional IRAs

• SEP IRAs

• SIMPLE IRAs

• 401(k) plans

• 403(b) plans

• 457(b) plans

• Profit-sharing plans

Once you reach age 73, you’ll need to withdraw a set amount from your accounts based on your estimated lifespan. Each year, the RMD value will change, so you’ll need to calculate the value accurately and ensure you are withdrawing enough from your accounts. 

Your RMD is considered income, and you will be taxed accordingly. If you have other sources of income, including Social Security retirement benefits, this may substantially increase your tax bracket. 

Tips for Limiting Your RMD

Watching 20% or more of your RMDs go to taxes can be discouraging. However, maybe the tax bill doesn’t have to be so high. Below are eight strategies you can use to delay your RMDs or limit the tax burden. 

1. Keep Working

The easiest way to avoid taking an RMD once you hit 73 is to keep working. For employer-sponsored retirement savings accounts, you may be able to defer RMDs until after you retire. Plus, there are no hourly requirements, so you can move to part-time and still be exempted from taking an RMD. 

However, there are three caveats to this rule

• Your plan provider has to allow the deferment of RMDs

• You can’t own 5% or more of the company sponsoring the plan

• You must be employed, not an independent contractor

It's also worth noting that this RMD exemption only applies to your current employer. If you have other retirement plans from previous employers, you’ll still need to take RMDs on those accounts. 

2. Take Early Disbursements

You can start taking penalty-free disbursements from your tax-deferred retirement accounts beginning at age 59 ½. By drawing money early, you’ll reduce the account balance, decreasing your future RMDs. While generally speaking it's better to let your investments grow, there are a few scenarios where this move could be worthwhile. 

Let’s say you have a mix of traditional and Roth retirement accounts. By withdrawing from your tax-deferred accounts first, your Roth accounts can continue to grow in value. Or, if you retire early, disbursements can help cover your expenses, letting you postpone drawing on Social Security until you’ve maxed out the benefit. 

3. Consider a Roth Conversion

If you are still a ways off from retirement and trying to plan ahead for managing RMDs, converting part or all of your retirement savings to a Roth account has several key advantages, including:

• Avoiding taxes in retirement - withdrawals are not taxable.

• Maxing out Social Security benefits - Roth disbursements are not considered income, so they won’t affect the taxability of your Social Security benefits.

• Pass on your savings tax-free - your beneficiaries will not have to pay taxes on disbursements after your death.

The downside of a Roth conversion is that taxes are due immediately. This conversion strategy often works best when you have multiple retirement accounts or expect to be in a higher tax bracket when you retire. You should check with your financial advisor first to see if a Roth conversion makes sense.

4. Make Charitable Donations

Regardless of whether or not you need the income, you have to take your RMD each year. And doing so will result in a tax bill unless you donate your entire RMD. This is a key step in reducing or delaying your RMDs.

The IRS allows you to make a qualified charitable deduction (QCD) of up to $105,000 each year tax-free. So long as the charity meets the IRS qualifications, any amount of your RMD you choose to donate will be excluded from your income. This not only exempts you from paying taxes on your RMD but can also help you stay in a lower tax bracket. 

It’s important to note that the money must be disbursed from your IRA directly to the charity to avoid the tax bill.  

Additional Tips for Limiting Your RMD

5. Purchase a QLAC

Another key step regarding reducing or delaying your RMDs is converting some of your retirement funds to a Qualified Longevity Annuity Contract (QLAC) is a unique option the IRS provides for deferring part of your RMDs. You can purchase this annuity from an insurance company with up to $200,000 of your retirement funds. And you can delay annuity payments until age 85. 

Once purchased, from age 73 to 85 the money you used for the QLAC will be exempt from RMD calculations. The added benefit of a QLAC is that it ensures you have a dependable income once you hit 85, which can help prevent you from outliving your retirement savings. 

6. Spousal Age Gap = Reduced RMD

Generally, RMDs are calculated using the IRS Uniform Lifetime Table. This sets your RMD based on the dollar total of your savings and how long you are expected to live. For instance, at age 73, the IRS estimates your distribution period to be 26.5 years. 

However, if there is a significant age gap between you and your spouse, you can use the Joint Life and Last Survivor Expectancy table instead. This lets you reduce your annual RMDs based on your and your spouse’s estimated lifespans. For instance, at age 73, if your spouse is 53, your estimated distribution period is 34.2 years. Using this value will significantly lower your RMD. 

The two requirements for using this RMD calculation method are: 

• Your spouse must be younger than you by 10 or more years

• Your spouse must be the sole beneficiary on your retirement accounts

7. Balancing Multiple Retirement Accounts

When calculating your RMD, you’ll need to make separate calculations for each tax-advantaged retirement account you hold. However, depending on the account type, you may be able to withdraw your entire RMD from one account. 

For instance, if you have multiple IRAs, you can withdraw the RMD value from a single IRA, leaving the others untouched. This gives you more options for managing the growth of your portfolio during retirement. The same rule can be used for 403(b) accounts. 

Unfortunately, this single-withdrawal option does not apply to 401(k)s and 457(b)s. For these types of accounts, you’ll need to make separate RMD withdrawals for each account. 

8. Delaying Your First RMD

The year you turn 73, you have some flexibility in when you need to take your RMD. The IRS lets you delay taking your first RMD until April of the following year. Each subsequent RMD has to be taken by the end of the year (December 31st).  

The Aligned Perspective: Planning for Your Next RMD

You can’t entirely avoid reducing or delaying your RMDs unless you want to get hit with hefty IRS penalties. But there are steps you can take to reduce or limit your RMDs and their tax implications. From working a little bit longer to being selective in which retirement accounts you withdraw from, by choosing a strategy now you can be well prepared for facing your next RMD.