Ask an Advisor: I'm Over Age 73. How Do I Avoid the RMD Tax Bite?

I’m over age 73. What can I do about avoiding the required minimum distribution (RMD) tax bite? I have a steady stream of other income.

-Bernie

Tax-deferred accounts, such as 401(k)s and traditional individual retirement accounts (IRAs), are potentially great vehicles to save for retirement. But they come with strings attached.

By deferring taxes in these accounts, you are forming a partnership with the IRS. That’s like taking a mortgage from a bank to buy a house – except the IRS won’t commit to what the “interest rate” is going to be and abruptly runs out of patience when you turn 73.

Under current tax law, 73 is when required minimum distributions (RMDs) begin. That means account holders must begin distributing and paying taxes on the balance of their accounts.

As a result, the question of avoiding the tax bite on RMDs is common. Read on for strategies you can take to ease RMD tax repercussions.

A financial advisor may help you understand how to manage the tax repercussions of your RMDs.

Take RMDs Correctly

No matter your age, there are proactive steps you can take to prepare for the RMD tax bite.

The first step is to make sure there is a plan for distributing the required amount each year. It’s worth emphasizing this point because the penalties for missing RMDs are as high as 50% of the amount not withdrawn.

Before you worry about avoiding the income tax bite, it’s crucial to ensure you aren’t adding insult to injury by incurring penalties.

Determine How Much to Withdraw in RMDs

The two most important questions to answer each year for RMDs are:

Which accounts require an RMD?
How much is required from each account?

People are seldom surprised by the second question. But the first question is often neglected. Tax-deferred accounts are individual accounts, and RMDs cannot be covered for one spouse by taking a distribution from another spouse’s account.

Anyone with multiple tax-deferred accounts must be confident about where the distributions come from.

To complicate matters, if an individual has multiple IRAs, they can calculate a total RMD across all the accounts and then take that distribution from a single account to satisfy the requirement for the year. But if that same individual has multiple 401(k) accounts, the money must be separately distributed from each account. There is no aggregation.

Make sure you’re taking the right amount by starting your own RMD calculation:

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

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RMD Amount for 401(k) #1

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RMD Amount for 401(k) #2

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

If you only have a single IRA or 401(k), you can focus on the amount to distribute. But it may be worth asking more questions before acting if there are multiple accounts involved.

The amount to distribute is based on the IRS’s life expectancy and calculated using the December 31 balance of the accounts subject to RMDs.

Once that date has passed, the distributed amount is set, and the focus turns to minimizing the tax that will be due on the withdrawal.

Consider Qualified Charitable Distributions

The most effective way to reduce that tax is through making a qualified charitable distribution, also known as a QCD. This provision of the tax code allows account holders to distribute funds directly from their IRAs to a qualified charity, removing the distribution from taxable income.

Distributions must flow directly to the charity. If the funds hit the taxpayer’s bank account first, the distribution is fully taxable and the potential benefit is lost.

A bonus to using this strategy is that it also removes the distribution from a taxpayer’s adjusted gross income (AGI), which is a key number in determining how expensive Medicare premiums are for the taxpayer.

You’re over age 73, so this next bit won’t apply. But for readers who haven’t reached that age, it’s important to note an additional benefit of QCDs. These distributions can be made beginning at age 70 1/2 and will reduce the total balance used to calculate RMDs. As a result, they will reduce the amount of RMDs in future years and the related taxes.

Account for Your Stream of Additional Income

For QCDs to become a viable option, the taxpayer needs other sources of income or cash flow to support his or her lifestyle. If a QCD is not made or only covers a portion of the RMD (the QCD does not have to be the same amount as the RMD), the other option for reducing the taxes due is to reduce other taxable income during the year.

The U.S. tax system is progressive, meaning the higher your taxable income, the more tax you pay on each dollar of income.

Opportunities in retirement to reduce taxable income may be limited but are worth considering. Specifically, capital gains and other discretionary types of income may present opportunities for accelerating or delaying income in otherwise high tax years to reduce the amount that will be due from the RMD.

While you’ve crossed the 73 age threshold, younger folks may benefit from strategically converting traditional IRA dollars to Roth before age 73. This can significantly reduce the amount of taxes paid once RMDs begin.

Bottom Line

Regardless of whether the tax-reducing strategies discussed here are applicable or appealing to you, it is imperative to have a plan to meet your RMDs once you turn 73 to avoid penalties. Consider tax-savvy moves such as making qualified charitable distributions, known as QCDs.

Tips on Saving for Retirement

If you have questions about required minimum distributions, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re planning for retirement on your own, it pays to be in the know. SmartAsset has you covered with tons of free online resources to help. For example, check out our free retirement calculator and get started today.