When it comes time to start taking required minimum distributions (RMDs), you may discover that it could put you into a higher tax bracket. RMDs can be sizable. If you are retired or getting ready to retire, you must take them when you reach a certain age.
- IRAs (individual retirement accounts)
- SEP (simplified employee pension) IRAs
- SIMPLE (savings incentive match plan for employees) IRAs
- and most other retirement accounts
Penalties for Failure to Take RMDs
Penalties for not taking an RMD when you should can be rather expensive. Failure to make an RMD or not withdrawing the entire amount (you can take more than required), the Internal Revenue Service (IRS) says, will result in a 25 percent penalty of the RMD that you did not withdraw—unless corrected within two years, then it may be reduced to 10 percent. You will also have to pay a tax bill on the amount withdrawn.Continue Working
One way to avoid taking RMDs is to keep working past retirement age. As long as you continue working for an employer for the entire year, you are not required to take RMDs. This exception is invalid if you own more than a five-percent share of the company stock.Make a Roth Conversion
Money in a retirement savings account that requires an RMD can be rolled over into a Roth account. You must pay taxes on any money you put into a Roth IRA or a Roth 401(k). Because of the taxes, you will probably want to make smaller contributions over several years.Donate to a Qualified Charitable Distribution
If you have an IRA, you can make a direct qualified charitable distribution (QCD) to a qualified charity and get a tax deduction for the entire amount. If you are 70½ or older, you can donate up to $105,000 in 2024 or a lesser amount to satisfy the RMD requirement.Reduce the Size of the Account Before Retirement
Retirement accounts can grow to millions of dollars if you started making contributions when you were young. Accounts of this size can put your income into a higher tax bracket when you withdraw an RMD. Instead of waiting until you retire, you can start making withdrawals anytime after you reach 59½.Withdraw enough money each year so that, when you retire, your RMDs and taxes will be smaller. If you do not need the money, reinvest, or put it into a Roth account. If you can, divert some of your contributions into a Roth account early to prevent high taxes later. When you make this conversion, you will pay taxes on the money, but there are no RMDs with a Roth account.
Contribute to an Annuity
Another way to delay RMDs is to purchase a qualified longevity annuity contract (QLAC). SmartAsset says you can use money from a 401(k) or IRA to contribute, which will count toward your required minimum distribution. You can make contributions of up to $135,000 annually. It is not necessary to start collecting the money until you are 85.Inherited Retirement Accounts
People who inherit a retirement account need to follow different rules. Before the SECURE 2.0 Act, beneficiaries receiving an inherited retirement plan could take their remaining lifetime to withdraw the money. After the Act, beneficiaries must withdraw the entire amount within 10 years.Talking to a financial advisor before deciding how to lower your RMD taxes or delay taking them will enable you to make the best choices. They are the experts on the subject and every case is different.