As you approach retirement, Required Minimum Distributions (RMDs) can become a major tax concern. If you’ve saved diligently in pre-tax retirement accounts—like a 401(k), 403(b), or traditional IRA—RMDs can push you into a higher tax bracket, increase taxes on your Social Security benefits, and even raise your Medicare Part B and Part D premiums through the Income Related Monthly Adjustment Amount (IRMAA).
The good news? With proactive tax planning, you can limit or reduce the tax burden of RMDs. There are several strategies you should work with your CFP® to explore, but here are a few of our favorites:
- Fund Roth Accounts Early — Contributing to a Roth IRA or Roth 401(k) during your career, or converting pre-tax dollars through a Roth conversion, can significantly reduce future RMDs. Roth IRAs are not subject to RMDs, and qualified withdrawals are tax-free.
- Max Out Your HSA — Maxing out your Health Savings Account (HSA) can help reduce RMDs by allowing you to cover medical expenses with tax-free withdrawals instead of tapping into taxable retirement accounts. HSAs have no RMDs, meaning your funds can grow indefinitely. With triple tax advantages—tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses—an HSA helps lower taxable income and reduce future RMD-related taxes.
- Use Charitable Giving to Offset RMDs — If you’re charitably inclined, a Qualified Charitable Distribution (QCD) allows you to donate directly from your IRA to a qualified charity, having the amount donated count towards your RMD. However, unlike a regular RMD withdrawal, a QCD is excluded from taxable income, providing significant tax benefits.
These are just a few strategies to manage RMDs effectively. Working with a CERTIFIED FINANCIAL PLANNER™ can help ensure your retirement income plan minimizes taxes and maximizes your financial security.
