Don't Let RMDs Wreck Your Retirement: 2 Strategies for Minimizing the Pain

Saving for retirement in a traditional IRA or 401(k) can seem like a good idea at the time you’re doing it. And if you’re a higher earner in a higher tax bracket, it’s helpful to fund a retirement account that allows your contributions to go in on a pre-tax basis.

The problem with traditional IRAs and 401(k)s is that eventually, the IRS gets to impose mandatory withdrawals known as required minimum distributions, or RMDs. Not only might RMDs force you to take money out of your savings before you’re ready to, but they could also create a huge tax headache.

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That’s the bad news. The good news is that with careful planning, you can reduce the sting of RMDs during retirement. Here are two effective strategies to employ.

1. Roth conversions

With a Roth conversion, you move money from a traditional retirement plan into a Roth account. When you do that conversion, the sum you move over counts as taxable income. So Roth conversions can hurt a bit in the near term.

In the long run, though, Roth conversions could be a very good idea. If you’re able to reduce your traditional IRA or 401(k) balance, you reduce your RMDs in turn. And if you’re able to move your savings out of a traditional retirement account completely, RMDs won’t be something to worry about later on.

Having your money in a Roth account also has other benefits. Since Roth withdrawals don’t count as taxable income, they also don’t count for the purpose of determining whether you have to pay taxes on your Social Security benefits or fork over extra money for Medicare.

2. Qualified charitable distributions

If doing a Roth conversion ahead of retirement isn’t feasible, you may be stuck having to take RMDs. But that doesn’t mean you have to get stuck paying taxes on them.

Qualified charitable distributions, or QCDs, allow you to donate money from a traditional IRA directly to a charitable organization. In doing so, you avoid taxes on that money while satisfying your RMD. And while QCDs are only available in IRAs, not 401(k)s, you can roll funds from a workplace retirement plan into an IRA if QCDs are a strategy you want to employ.

There’s no question that RMDs can be a huge pain in retirement. But with the right strategy, you can ease that burden by reducing your RMDs, eliminating them altogether, or getting rid of the tax obligation that comes with taking them.