Important points
- While many opt to take their required minimum distributions (RMDs) at the year’s end, those engaging in qualified charitable distributions might find it beneficial to do it differently.
- First-time RMD takers can wait until April 1 of the following year, but delaying beyond that could lead to having to take two distributions in one year.
- Once you’re required to take RMDs, converting them isn’t an option, making it more costly to do so.
- Though there are no income limits for traditional IRA contributions, Roth IRAs do have such restrictions. However, options like a backdoor Roth exist if you surpass those limits, particularly if you’re still actively employed.
- I maintain that the aim should be to minimize taxes over your lifetime. It’s wise to pay taxes at the lowest rate, even if that means paying taxes on amounts higher than your RMD.
Christine Benz: Hello, I’m Christine Benz from Morningstar. Investors have until December 31 to take their required minimum distributions for 2025. Tax expert Ed Slott is here to tackle some common questions around RMDs. Ed, thanks for joining me.
Ed Slott: Thanks for having me, Christine. Always good to be here.
Should retirees wait to take RMDs?
Benz: It’s great to have you back. Let’s dive into RMDs and cover some frequent concerns. Should investors take their RMDs early in the year or wait? Any guidance on that?
Slott: That really depends on individual circumstances. Most people prefer to take their RMDs at year-end, but if you’re doing other things like qualified charitable distributions, you might do better taking it later. For instance, if you withdraw from your IRA for a QCD, you can offset income against your RMDs. If you complete a QCD first, you might not need to take your RMD at all. It’s all about personal choice in the end. Some people like to get it done in January to avoid any stress, while others prefer to wait until the end of the year, feeling more comfortable deferring taxes as long as possible. Then there are those who try to time the market—something that rarely pans out.
Why first-time RMD takers shouldn’t wait until April
Benz: For individuals taking RMDs for the first time, there’s the option to delay until April 1 of the year after turning 73. Is that advisable? What do you see as the pros and cons?
Slott: Generally, you shouldn’t wait. If you do, you’ll have to take two distributions in the next year, which could complicate things. If you turn 73 in 2025, it’s better to take the first distribution this year instead of postponing it, even if it’s technically due by April 1 of the following year. That said, if you expect a lower income next year or significant deductions, it might work out better to wait for that reason. But typically, it’s more advantageous to take your distributions consistently each year to smooth out your tax bill.
How retirees can reduce their RMDs
Benz: A common question is how to decrease RMDs. We’ve talked before about contributing to a Roth and converting traditional IRA assets. Once someone starts taking RMDs, say at 73, what options do they have? Is a qualified charity the main tool available, or are there other considerations?
Slott: Aside from specific losses or business deductions, not much changes. Once you’re in the RMD phase, you can’t convert those amounts—and often, conversions become pricier. I get that question a lot, especially since many people think logically, but tax regulations often don’t follow a logical path. For instance, after taking an RMD and paying taxes, your funds become ordinary money, free to use as you wish. However, converting RMDs isn’t allowed.
Benz: That makes sense.
Slott: It’s a frustrating concept; people want to apply logic to tax law, but it doesn’t work that way. You need to take your RMD and pay taxes on it, and if you have multiple IRAs, it adds more complexity. You can only convert remaining balances after satisfying RMDs. When you do your RMDs, it often means paying higher taxes since you can’t convert those funds. That’s why it’s crucial to plan conversions before RMDs kick in.
Can I reinvest RMDs into a Roth IRA?
Benz: Just to clarify, while I can’t convert an RMD, can I convert an amount if I or my spouse has earned income? What if I don’t need the RMD—can I still convert it to a Roth IRA?
Slott: Yes, that’s a viable strategy. After you take the RMD and pay taxes on it, that’s your money to use as you wish. You could then use part of it to contribute to a Roth or to manage taxes for converting a portion of your balance.
How can older investors with income contribute to IRAs?
Benz: For individuals like me who want to invest in an IRA at age 73—although it seems rare—are there still contribution limits that apply?
Slott: There are no income restrictions for contributing to traditional IRAs. However, Roth IRAs do have income limits. If you go over those, consider a backdoor Roth strategy. If you’re still working, you can convert nondeductible contributions from a traditional IRA to a Roth without restriction.
Should retirees accelerate their RMDs?
Benz: This leads to a somewhat paradoxical idea you have: not waiting to take RMDs, meaning you shouldn’t let your IRA sit untouched until you’re 73. Sometimes, it might even be essential to accelerate RMDs. Can you elaborate on that?
Slott: It’s a bit of a contrarian view, rooted in mathematics. Given the national debt levels, I genuinely feel we’ll face higher taxes down the road. Though Congress keeps pushing, we can’t ignore that rates are currently low. Waiting to maximize your tax brackets can lead to regrets. If your RMD only leaves you in the 12% bracket, when you could easily utilize higher brackets, that’s potentially wasted opportunity. It’s better to strategically distribute your assets before the tax climate potentially shifts. The bigger your IRA balance, the more likely you’ll hand that on, and under the SAFETY Act, those funds must be distributed within ten years of death. It can lead to significant tax hits later on if all you do is take the minimum in RMDs. So, planning meticulously over your lifetime, and even considering future generations, can help minimize tax burdens.
My mantra is to always aim for the lowest taxes throughout life, even if it means paying some taxes when it seems unnecessary. Take an example: someone who is just 60 now. If they wait until 75 to make financial moves, that’s a lost opportunity to benefit from lower tax rates. Better to start considering Roth conversions now, even if RMDs aren’t relevant yet. Always keep the long-term view in mind, especially if your IRA is compounding.
Benz: These required minimum distributions raise many interesting points. Thank you for sharing your insights.
Slott: Thank you, Christine.
Benz: It’s been a pleasure. I’m Christine Benz from Morningstar.
