3 Ways to Reduce Taxes on RMDs in Retirement
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—these forced withdrawals 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).
Smart RMD Tax Strategies to Consider With Your CFP®
The good news? By implementing proactive RMD tax strategies, you can significantly reduce this burden and keep more of your hard-earned wealth. 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.
Managing your distributions doesn’t have to be a DIY project. These RMD tax strategies work best when tailored to your specific goals. Working with a CERTIFIED FINANCIAL PLANNER™ can help ensure your retirement income plan minimizes taxes and maximizes your financial security.
Brendon Handy is a CERTIFIED FINANCIAL PLANNER™ at Korhorn Financial Group. He also holds his Chartered Financial Consultant (ChFC®) and Enrolled Agent (EA) designations.
