Lower Your RMD Tax Burden With These Tips

There are several ways to minimize your RMD tax burden. Hadayeva Sviatlana/Shutterstock

If you have pre-tax retirement accounts, you'll eventually need to take required minimum distributions (RMDs). RMDs must begin when you reach a certain age (currently 73 or 75, depending on your birth year) and continue annually until your account is depleted or you pass away.

Because contributions to the retirement account were not taxed, you now owe taxes. If the RMD is big enough, it may force you into a higher income tax bracket. This means a higher tax liability. There are, however, some ways to diminish an RMD’s impact.

At What Age Do You Take RMDs?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 changed the eligibility age for taking RMDs. According to Thrivent, the new ages are:

• 72 if you were born in 1950 or earlier
• 73 if you were born between 1951 and 1959
• 75 if you were born in 1960 or later

However, you can take voluntary distributions at age 59 1/2.

How Are RMDs Taxed?

Your RMDs will be taxed as ordinary income in the year you take them. If you have a lower income, this may not be a problem. But if you are already in a high-income tax bracket or fear you’ll be pushed to a higher one, there are some opportunities to eliminate or defer your tax liability.

Shrink Your Money for RMDs

You can shrink the money in your tax-deferred accounts before you have an RMD. You can do this by converting your tax-deferred dollars to a Roth. You must be at least 59 1/2 and have had the Roth for at least five years. But once rolled into the Roth, it can grow tax-free. Don’t do this before age 59 1/2 or you’ll incur an additional 10 percent early withdrawal tax, according to the IRS.