Personal Finance
What Strategies Can Help Reduce My RMD Tax Burden After Age 73?
RMDs can trigger hefty tax bills, but with careful planning, you may be able to reduce the burden & keep more of your hard-earned wealth.
Turning 73 can be considered a key milestone for retirement planning: It’s the year required minimum distributions (RMDs) go into effect for most.
This means you’ll need to start drawing down your balances from tax-deferred retirement accounts like 401(k)s and IRAs.
Since RMDs count as taxable income, they have the potential to trigger significant tax bills. But with thoughtful strategies, you may be able to reduce the RMD tax burden and help preserve more of your hard-earned wealth.
Consulting a fiduciary financial advisor can be a great first step to factoring RMDs, and the potential tax repercussions, into your retirement plan.
A 2023 Northwestern Mutual study found that 66% of U.S. adults admit their financial planning needs improvement. However, only 37% of Americans work with a financial advisor.¹
In fact, SmartAsset’s latest proprietary model reveals that working with a financial advisor could potentially add from 36% to 212% more dollar value to investors’ portfolios over a lifetime, depending on multiple unique, individual factors.²
Interested in finding a financial advisor? SmartAsset's no-cost tool can help you find and compare vetted fiduciary advisors in just a few minutes.
The fiduciary financial advisors you match with serve your area and are legally bound to work in your best interest. You may even be able to instantly connect with an advisor for a free introductory call. Advisors are screened through our proprietary due diligence process.
5 Ways to Reduce RMD Taxes After Age 73
Here are five actionable strategies to consider to help manage RMD-related taxes effectively:
1. Convert Traditional IRA Funds to a Roth IRA
Roth IRAs are not subject to RMDs, making them a potentially powerful tool for reducing your taxable income in retirement.
By converting portions of your traditional IRA to a Roth IRA over time, you may be able to lower the overall balance of accounts subject to RMDs.
For example, at age 73, you might consider converting a portion of your IRA during a year when your other income is limited, such as after completing a major home sale or other large expense.
Keep in mind that Roth conversions are taxable in the year they occur, so it can be important to calculate the potential tax impact ahead of time.
A fiduciary financial advisor may be able to help with this. You can get matched with advisors at no cost by clicking here and taking a short survey.
2. Make Qualified Charitable Distributions (QCDs)
If you’re feeling generous, qualified charitable distributions (QCDs) may help offer a dual benefit: supporting causes you care about while reducing your taxable income.
A QCD allows you to transfer up to $100,000 per year directly from your IRA to a qualified charity.
For example, a 74-year-old who has already fulfilled their personal financial needs might use a QCD to donate part or all of their RMD to a favorite charity, which could help ensure it doesn’t potentially increase their taxable income.
This strategy has the potential to be particularly effective for reducing taxes without increasing your adjusted gross income (AGI), which can impact other tax factors like Medicare premiums.
3. Strategically Withdraw to Manage Future RMDs
For individuals already past 73, strategically withdrawing more from tax-deferred accounts may be able to help manage future RMDs by reducing their size and potential tax impact.
This approach involves taking distributions to stay within lower tax brackets, preventing larger RMDs in later years.
For example, a 74-year-old might withdraw extra funds to cover anticipated expenses or reinvest in a taxable account, maintaining control over their taxable income.
Proactive planning can potentially help you avoid unnecessary tax spikes while meeting your financial needs. A fiduciary financial advisor could help you determine if this is a smart strategy for you. Click here to take SmartAsset’s quick, free quiz to get matched with advisors who serve your area.
4. Adjust Your Investment Allocation
The mix of assets in your retirement accounts could potentially influence the growth of your balances and impact the size of your RMDs.
Shifting to investments that generate lower returns in tax-deferred accounts and higher returns in taxable or tax-free accounts may help manage the potential growth of RMD-triggering accounts.
For example, a 73-year-old might prioritize holding income-generating bonds in their IRA while keeping growth-focused stocks in their Roth IRA, potentially keeping the traditional IRA from growing to a point that it inflates future RMDs.
Always consider your overall financial goals and risk tolerance before making changes to your portfolio. This is another area where a financial advisor may be able to help.
5. Use RMDs to Pay for Qualified Expenses
At age 73 and beyond, leveraging RMD funds strategically for essential expenses could potentially help reduce the need to dip into other taxable accounts.
For example, you could use RMD funds to pay for qualified medical expenses, home modifications, or even long-term care premiums. If these costs exceed a certain percentage of your AGI, they may also provide potential tax deductions.
This approach could allow your RMDs to be used effectively while potentially offsetting their tax impact.
How to Get Help Planning for RMDs
While required minimum distributions are unavoidable, you have options to mitigate their tax impact. By taking proactive steps like Roth conversions, charitable giving, or strategic withdrawals, you may position yourself for a more tax-efficient retirement.
If you're unsure about handling your RMDs, that’s where a fiduciary financial advisor can be invaluable.
Fiduciaries may be able to help you understand your options when it comes to planning for RMDs and minimizing your tax liability. Additionally, any conflicts of interest must be disclosed, and fiduciaries are obligated to work in your best interest.
Finding a fiduciary shouldn't be that hard. Thankfully, now it isn't.
SmartAsset’s free matching quiz can match you with fiduciary advisors who serve your area. From there, you can compare and decide which advisor to work with. All advisors on the matching platform have been vetted through our proprietary due diligence process.
The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.
Click Here to Get Matched With Vetted Financial Advisors
—--------------
The information contained in this article is general and not specific to any individual's situation. The SmartAsset quiz matches you with up to 3 financial advisors to which you can compare and decide which to work with.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
SmartAsset Advisors, LLC ("SmartAsset"), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset’s services are limited to referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset receives compensation from Advisers for our services. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any user’s account by an Adviser or provide advice regarding specific investments. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
SmartAsset.com is not intended to provide legal advice, tax advice, accounting advice or financial advice (Other than referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). SmartAsset is not a financial planner, broker or tax adviser. The Service is intended only to assist you in your understanding of financial organization and decision-making and is broad in scope. Your personal financial situation is unique, and any information and investing strategies obtained through SmartAsset.com may not be appropriate for your situation. Accordingly, before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisers who are fully aware of your individual circumstances.
Sources:
