As you approach retirement, one financial obligation that often catches people by surprise is the Required Minimum Distribution (RMD). Once you reach your Required Beginning Date (RBD)—typically April 1 of the year following the year you turn 73—you’re generally required to start withdrawing a minimum amount from certain retirement accounts, like traditional IRAs or 401(k)s. These withdrawals are taxed as ordinary income, and failing to take them can result in hefty penalties. But is there a way to avoid taking your RMD?
Understanding RMDs: Who’s Subject to Them?
RMDs apply to specific retirement accounts, but not all. Here’s a quick breakdown:
- Employer-Sponsored Defined Contribution Plans (e.g., 401(k), 403(b)): If you have one of these accounts, you may be subject to RMDs, but there’s a potential exception if you’re still working (more on that later).
- Traditional IRAs (and similar accounts): If you have an IRA other than a Roth IRA, RMDs are mandatory once you hit your RBD.
- Roth IRAs and Non-Retirement Accounts: Good news! Roth IRAs and accounts not classified as retirement plans are exempt from RMDs during your lifetime.
If you don’t have any accounts subject to RMDs, you’re off the hook. But for those with traditional IRAs or employer plans, the question becomes: Can you avoid or minimize the impact of RMDs?
Strategies to Potentially Avoid or Manage RMDs
1. Leverage the “Still Working” Exception
If you’re still employed and participating in an employer-sponsored plan like a 401(k), you may be able to delay RMDs from that specific plan—as long as you don’t own more than 5% of the company. This exception doesn’t apply to IRAs, but it’s a powerful way to postpone distributions from your employer plan until you retire. Check with your plan administrator to confirm eligibility.
2. Convert to a Roth IRA
One popular strategy to eliminate future RMDs is converting your traditional IRA or 401(k) funds to a Roth IRA before your RBD. Roth IRAs are not subject to RMDs during your lifetime, offering greater flexibility. However, keep in mind:
- The converted amount is treated as taxable income in the year of conversion, which could push you into a higher tax bracket.
- This strategy works best if you can pay the taxes on the conversion from non-retirement funds.
3. Use Qualified Charitable Distributions (QCDs)
While not a way to avoid RMDs entirely, Qualified Charitable Distributions (QCDs) allow you to satisfy your RMD requirement without increasing your taxable income. With a QCD, you can direct up to $100,000 of your RMD to a qualified charity each year. The amount donated counts toward your RMD but isn’t included in your taxable income, making it a tax-efficient option for charitably inclined retirees.
4. Plan Ahead with Withdrawals
If you don’t need the RMD funds for living expenses, you can reinvest them in a taxable brokerage account or contribute to a grandchild’s 529 plan. While this doesn’t avoid the RMD, it ensures the funds continue working for you or your family. Alternatively, you could gift the funds (within annual gift tax exclusion limits) to loved ones.
Why RMD Planning Matters
RMDs aren’t just a bureaucratic hassle—they can significantly impact your tax bill and retirement strategy. Taking too much (or too little) can disrupt your financial plan, while strategic moves like Roth conversions or QCDs can save you thousands in taxes over time. The key is to start planning before your RBD to maximize your options.
Next Steps: Take Control of Your RMDs
If you’re nearing age 73 or already facing RMDs in 2025, don’t wait to explore your options. Here’s how to get started:
- Assess Your Accounts: Consult with an advisor to confirm which of your accounts are subject to RMDs.
- Explore Delay Strategies: If you’re still working, check if your employer plan qualifies for the “still working” exception.
- Consider Tax-Saving Moves: Talk to a financial planner about Roth conversions or QCDs to reduce your tax burden.
- Reach Out for Help: Contact Greenway Financial Planning or your advisor to tailor a strategy to your unique situation.
RMDs may be mandatory, but with the right planning, you can minimize their impact and keep your retirement goals on track.