10 Tips for Strategically Timing RMDs to Lower Taxes

Required minimum distributions (RMDs) are a fact of life for retirees with tax-deferred retirement accounts, but they don’t have to be a tax burden. You can maximize your after-tax retirement income and significantly reduce your tax liability by carefully timing RMDs to lower taxes. 

In this article, I provide 10 practical tips for maximizing your RMD approach, from understanding the rules and synchronizing with other sources of income to utilizing tax-loss harvesting and consulting a financial advisor. 

1. Understand RMD Rules

My first suggestion for timing RMDs to lower taxes is to fully comprehend RMD rules. The IRS Uniform Lifetime Table is used to establish your life expectancy, and the balance of your retirement funds as of December 31st of the prior year is used to compute your RMD amounts. Accurately determining the amount of withdrawal you need requires a thorough understanding of how these elements interact. 

2. Consider Timing Early Withdrawals

Let’s take a look at the significance of early withdrawals. Withdrawals made early in the year provide you instant access to money and can allow more time to grow if reinvested, but they may also put you in a higher tax bracket, increasing your tax liability. On the other hand, postponing withdrawals until later in the year may allow your investments to grow tax-deferred, but it may also result in a bigger lump-sum withdrawal, which could affect your tax bracket.

3. Synchronize RMDs With Other Income

You can avoid unintentionally pushing yourself into a higher tax bracket by synchronizing RMDs with other sources of taxable income. By carefully allocating RMDs during years with lower incomes or when tax rates are lower, you can reduce your tax burden and keep more of your retirement savings. 

4. Use Qualified Charitable Distributions (QCDs) 

Retirees 70½ and older can use QCDs, an effective tool that allows them to donate up to $100,000 directly from their IRA to a qualifying charity. Using QCDs is another smart strategy for avoiding higher tax brackets and keeping more of your retirement savings.

5. Spread Withdrawals Over the Year

By distributing RMD withdrawals throughout the course of the year in smaller, more frequent distributions, you can level out your retirement income and streamline cash flow management. By avoiding a large, one-time withdrawal that could put you in a higher tax bracket, this strategy can also help with tax planning.

6. Coordinate With Roth Conversions

Especially if you currently have a traditional IRA, coordinating RMDs with Roth conversions can be a powerful tax planning strategy. You can pay taxes on the converted amount at your current tax rate if you convert traditional IRA assets to a Roth IRA in the years before RMD age requirements. This could lessen future RMDs and your total tax obligation in retirement once RMDs begin.

7. Leverage Tax-Loss Harvesting

Tax-loss harvesting—selling investments at a loss to offset taxable profits—is another smart strategy for timing RMDs to lower taxes in retirement. If you schedule RMDs to coincide with tax-loss harvesting tactics, you may be able to offset RMD revenue with capital losses. This would lower your total taxable income and increase your after-tax returns.

8. Plan Around Major Life Events

Major life events like selling a home, receiving an inheritance, or beginning Social Security can have a significant influence on your overall income and tax obligation. Aligning your RMDs with these life events offers the opportunity to reduce your tax liability in years when your income rises, thereby keeping more of your money.

9. Avoid Procrastination

It’s extremely risky to put off RMD withdrawals until December because potential market slumps or administrative hold-ups may make it difficult to satisfy the year-end deadline. Waiting until the last minute raises the possibility of missing the deadline, which could lead to significant IRS fines.

10. Consult a Financial Advisor

Timing RMDs to lower taxes on your own is challenging. That’s why personalized guidance from a professional financial advisor is critical for optimizing your approach. To reduce your tax liability and increase your retirement income, a financial advisor can analyze your income needs, examine possible tax ramifications, and create customized retirement plans.

We’re Here to Help

You don’t have to unravel the complexities of timing RMDs to lower taxes on your own.

The Rosamond Financial Group is a full-service financial planning and investment advisory firm specializing in total asset management. Whether you need investment planning, retirement forecasts, insurance evaluation, tax development plans, or education planning, we can help you travel the road ahead and arrive in excellent condition. 

To get started, call my office at 830-798-9400 or email solutions@rosamondfinancialgroup.com.

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.