By Dr. Jim Dahle, WCI FounderI have written before about Required Minimum Distributions (RMDs) and how many investors freak out unnecessarily about them. RMDs used to start at age 70 1/2, but under current law, most of us not already taking them won't have to before age 75. Basically, starting at age 75, an investor has to remove a certain percentage of tax-deferred accounts (about 4% at age 75, but increasing to more than 10% in your 90s) from the account each year and pay taxes on it. Roth, or tax-free accounts, do not require RMDs to be taken.
Some people, typically those with a lot of other income in retirement from pensions or those who have fully depreciated rental properties and those who are super savers, actually do have what I call “an RMD problem.” I define an RMD problem as someone who takes out their RMDs and pays taxes at a higher rate than they saved when they made the initial contribution. If you contributed at 22% and later pulled the money out at 35%, you have an RMD problem. You should have made Roth contributions and/or done Roth conversions at any rate up to 35% (or even slightly higher) in prior years.
Life is unpredictable, and sometimes you don't know what your future tax rate will be. Plus, there were many years when Roth 401(k) contributions were not available to many savers. So, it happens. It can be complicated, too, because it's not just about the tax brackets. It's also about the gradual phaseouts of some deductions and the occasional “cliffs,” such as those associated with IRMAA.
The Other RMD Problem
However, there are some investors who have another RMD problem. Or at least they think it's a problem. The really short-sighted folks just don't like paying taxes and they're mad about it. They just wish they didn't have to take RMDs at all. Occasionally, one of them does something stupid to avoid this “problem” which usually results in paying more taxes. This includes:
- Not making retirement contributions in the first place
- Making a Roth contribution during a peak earnings year when a tax-deferred contribution would have been smarter
- Taking money out of a tax-deferred account before retirement age and investing it in taxable
- Doing Roth conversions at a very high tax rate
These people just need to remember that the goal is to have the most money after-tax, NOT to pay the least amount in tax (much less pay the least amount possible in taxes on RMDs). If you want to pay the least amount in tax, live like that under the aqueduct in a cardboard box. No taxes; not so appealing now. Same thing with lots of the “zero tax” strategies being promoted by misguided advisors and gurus.
Once people get beyond just being mad about paying taxes, lots of them think they have an RMD problem when they don't. The problem they think they're having—the “other RMD problem”—is that they are having to take RMDs they don't actually want. They don't even want the income to spend. That's not an RMD problem; that's a rich person problem. You have more income than you need. You might even be a net saver during what are usually the decumulation years. You're “at risk “of having this “problem” if you find you are getting close to RMD age and have not even thought about touching your retirement accounts.
If you have to take out RMDs that you don't need to spend, you simply take the money out of the tax-deferred account, pay the taxes on it, and reinvest it in your taxable account. A surprising number of retirees do this. It's hard to switch from being a saver to being a spender. It's also hard to get exactly the right amount of retirement assets for your income needs, so some people just end up oversaving. Plus, most retirees spend less as they go through retirement (at least until the last couple of years when medical expenses skyrocket). By the time you get to RMD age, you're already past the “go-go years” and rapidly approaching the “no-go years.”
However, you shouldn't beat yourself up about this. The way to think about this is that you've maxed out the benefits of your tax-deferred accounts and now have to invest in taxable, not that you've somehow done something wrong.
If you live for a long time after age 75, that loss of tax-protected growth can be significant. It could even be enough to cause your overall tax burden to increase, even if you saved the money at a 35% tax rate and took it out at a 25% tax rate. But given the average life expectancy of a 75-year-old, that's probably not an issue. Plus, heirs benefit from that step up in basis on the now taxable assets.
However, if you have this RMD problem, which is the “other RMD problem,” let me give you a few suggestions.
Ways to Deal with the Other RMD Problem (i.e. Being Too Rich)
There are lots of strategies you can employ. Let's go through them.
#1 Spend More Money
Congratulations! Well done! You did a great job saving for retirement. You did such a great job that you have more than you need. You ought to at least give some consideration to actually spending that RMD money. Fly first class or your heirs will. Hey, why not take those heirs on a Caribbean cruise? You're only going to be driving for a few more years, so why not get a really nice luxury car? Stay in five-star hotels instead of three-star hotels. Pay for some help to come in and do whatever needs doing. Renovate your bathroom. Get custom-fitted golf clubs. Get a bigger boat. Go heli-skiing. Go to Michelin three-star restaurants. Do whatever. An entirely reasonable retirement spending strategy for those with all or most of their money in tax-deferred accounts is to simply spend the RMD. Go ahead and do that.
More information here:
A Framework for Thinking About Retirement Income
Fear of the Decumulation Stage in Retirement
#2 Give Money Away
Some people truly can't think of anything they could spend more money on that would make them any happier. Great! But I bet that's not the case for all of your friends, family, and future heirs. You can give away up to $18,000 [2024] to anybody you want every year with no hassle whatsoever. So can your spouse. If you give more than that, you have to fill out a gift tax return and the amount over $18,000 is subtracted from your estate tax exemption amount. You probably still won't owe estate/gift taxes, but the return can be a pain.
#3 Support a Charity
Want to give money AND reduce your tax bill? You can do so if you give to a registered charity. You can take your RMD, pay your taxes, donate the money to charity, and take a charitable deduction for it when you itemize on Schedule A. Tax-deferred accounts are also a great asset to leave to charity. Neither you nor the charity will pay any taxes on that money.
More information here:
Charity — How to Give, Why to Give, and the Tax Benefits You Can Receive
#4 Use Qualified Charitable Distributions
The very best way to give to charity once you get close to RMD age (you can actually start doing this at age 70 1/2 under current law) is to use Qualified Charitable Distributions (QCDs). With a QCD, up to $100,000 per year (indexed to inflation, up to $108,000 for 2025) can go directly from your tax-deferred account to the charity and count toward your RMD for the year. You're getting the same tax break as you would get with that charitable deduction, but you don't have to itemize and you'll get a lower or non-existent taxable RMD. You also don't raise your Adjusted Gross Income (AGI), which can help avoid some deduction phaseouts and the IRMAA cliffs.
#5 Use Qualified Longevity Annuity Contracts
Another option to reduce RMDs is to purchase a special type of Deferred Income Annuity (DIA) called a Qualified Longevity Annuity Contract (QLAC) using the tax-qualified money in your tax-deferred account. With a DIA, you are trading a lump sum now for a future guaranteed income stream that will not start for a number of years. Essentially, it functions as longevity insurance. Just in case you live to 105, you know you won't completely run out of money. You can use up to $200,000 of your IRA money (and $200,000 of your spouse's IRA money) buying QLACs. The amount of money in a QLAC is not used when the calculation of your annual RMD is done.
The problem with this strategy is that if you have so much money that you don't need your RMDs, you probably don't need longevity insurance. And insurance, on average, is a bad deal. You'll probably end up leaving your heirs less than you otherwise would using more traditional investments.
More information here:
I’m Retiring in My Mid-40s; Here’s How I’ll Start Drawing Down My Accounts
#6 Do Roth Conversions
The classic time period to do Roth conversions is between your retirement date and when you start taking Social Security, usually age 70. However, you can do a Roth conversion at any time. Just like money put in a QLAC, money put in a Roth IRA is no longer used to calculate RMDs. If you had a $2 million IRA and converted $500,000 of it one year, your RMD the next year would be calculated on an amount of only $1.5 million.
You have to be careful with this strategy. It doesn't make sense to pay 37% to do Roth conversions to eliminate RMDs when you could withdraw that money at some lower tax rate. But the wealthier you are and the larger your tax-deferred accounts, the more likely Roth conversions done later in life are still going to be beneficial.
This “other RMD problem” is the ultimate in “rich people problems.” You may or may not want to do anything about it. But if you do, these are your options.
What do you think? Do you have the other RMD problem? What are you doing about it?
RMDs don’t have to be taken until someone retires, correct? (If they work past 75)
Owners of traditional IRA, and SEP and SIMPLE IRA accounts must begin taking RMDs once the account holder is age 72 (73 if you reach age 72 after Dec. 31, 2022), even if they’re retired.
Account owners in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.
Thank you. And good point about the 5% owner thing. Thus this isn’t an option for solo 401(k) folks.
Great question. Let’s look it up.
Publication 590B should have the answer for IRAs: https://www.irs.gov/publications/p590b
Nothing about working there as an exception. My recollection is that there is one for 401(k)s though.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
So if your plan allows it and you’re still working, you could skip 401(k) and presumably 403(b) RMDs.
I think SEPs and SIMPLEs are treated the same as IRAs per this: https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans
Your rmd does not apply to the 401k or 457 plan if your still working with the employer sponsored plan but it does apply to other pre tax plans not associated with your current employment.
The Internal Revenue Service reminds individual retirement arrangement (IRA) owners age 70½ and older that they can make up to $105,000 in tax-free charitable donations during 2024 through qualified charitable distributions. That’s up from $100,000 in past years.
I thought about that this morning as I read this post again that I should have mentioned that $100K QCD limit is indexed to inflation.
Thanks for another great column. Maybe it’s too early to speculate about the new tax brackets that will be coming in 2025, don’t think so about Social Security retirement benefits being 100% rather than 15% fed tax exempt, assume still part of MAGI. My traditional IRAs are QCD and long term care insurance funds, and the balance for estate planning. Our effective tax rate will be cut in half if Social Security is tax exempt, and it seems to have a big pull in favor of Roth conversions to leave to grandkids. Maybe more of an issue for other retired folks, hope you all can work that at the appropriate time.
P.S. thank you so much for the my heroes podcasts, I watched on youtube and commend it to everyone. I’m so sorry you, Katie and family had to face that, glad time is now on your side. Is that the north face that is visible out the big window at Jackson Lake Lodge?
Here are the 2025 Tax Brackets: https://www.whitecoatinvestor.com/how-tax-brackets-work/
Roth conversions are great for grandkids, especially if they’re likely to be in a similar bracket to yours. It’s possible Roth conversions could mean leaving less to them though so run the numbers. I keep hearing these rumors about SS possibly becoming 100% tax-exempt in comments like yours but haven’t heard anything serious from Congress or the outgoing or incoming administration about it. Got a link to discussion of that?
Glad you enjoyed the podcast. Jackson Lake is North of the Grand Teton, but not sure if Mt. Owen or Teewinot is in the way from that perspective. Let me find a shot…
Yea, I think most of the North Face is obstructed by Owen/Teewinot from Jackson Lake, just like from Jenny Lake. Not to mention Jackson Lake is a long way from the Grand and gets much better views of Mt. Moran than the Grand. The best view from the road is from the pullout labeled something like Glacier View. I took a shot from there the evening before my fall. Here’s a link:
https://www.whitecoatinvestor.com/wp-content/uploads/2024/11/Glacier-View.jpg
We drove past there quite a ways trying to get a better view and didn’t find one.
Ooh, thank you for the photo
Just a minor correction. Annual Qualified Charitable Contribution limits are now adjusted for inflation. The maximum 2024 QCD is $105,000. The 2015 limit will be $108,000.
You’re correct of course. And I’m doing the best I can not to correct your comment!
It needs correcting. 2025 of course.
Lol. One of the best parts of blogging as opposed to writing books or even podcasting is how quickly my mistakes get corrected by my audience. I can often get a post corrected before half the people even read it.
At beginning of article you stated most people can start rmd”s at 75. Actually, there are many of us who have to start at 73.
If you read what I wrote very carefully, you’ll see it is accurate, even if I could have added another paragraph explaining situations like yours. I just felt like it wouldn’t add much to the article.
I read this post and thought…”RMD problem? I’ll take it.” Thanks for the toolkit should I be one of the very fortunate.
It’s sort of a funny post when you think about the average life expectancy, specifically for the folks with one Y chromosome. It’s about age 77-78 these days, unless you live in the Deep South…in which case the average male is projected to not make it to the new RMD age. No RMD problem there.
It’s my new goal, to have an RMD problem…and spend it away.
life expectancy at birth is 77-78 but life expectancy at age 65 is 82-83 for men, 85-86 for women
True enough. I’m aiming for 85 or so, but I’d have to set a ten generation record to get there. I sure hope I have an “RMD problem”…it’s a lucky group.
My dad had eight siblings. None saw 90. In fact, only my maternal grandmother and great grandmother broke 90…and they both mentioned they were “ready to go” in their late 80’s.
Let’s hope the 80’s are the new 70’s.
I’ve been looking for clear and credible information about my tax deferred account and RMDs. This article is the Best that I’ve read so far that explained that my concern about RMDs is really unfounded; thank you! I know the age is 73, but based on what I already give to charity and recent RMD calculations I’ve made, a QCD will make the most sense for me. In addition, what debt I have left on my house can be decreased with some of my RMDs. Thanks so much for providing bottom line and clear information about this non-problem!!
People who need money before 73 can consider IRA distributions after 59 1/2. Earlier years tax bracket may be lower if they wait until 70 to take social security. RMD drives most decusions, but spending some before your tax braket will go up at 73 is good planning. A new roof is a good example of an IRA taxable distribution when it is needed rather than wait until required to take it.
For sure. Most people will retire before the RMD age of 72-75 and presumably will want to spend some of their tax-deferred money before then. And they can, penalty-free after age 59 1/2.
An RMD doesn’t tell you want to spend your money. It just tells you when you can no longer invest it in an IRA and must invest it in taxable instead.
Thanks for the straightforward article. You don’t mention doing Roth conversions during a market down turn if you have saved cash outside of your equities to pay the tax bill. That is one of my strategies to convert tax deferred accounts to a Roth in retirement. Your thoughts please.
My wife (68) and I (70) have the “other RMD” problem. We have been doing Roth conversions for several years and keeping the conversions low enough to keep us in a lower tax bracket. However, if current rates of return for our accounts stay the same, or are even half of what they are now, my wife’s tax deferred account will make up in returns over the next 5 years, considerably more than the Roth conversions, and put her right back into a higher RMD due to the tax deferred account growth.
We are considering just taking the income from her tax deferred account now, instead of converting to Roth, and paying taxes on the distribution at current tax rates. Hard to decide which option is better.
We already have been doing your suggestions, flying 1st class, upgrades on cruises, nice dinners out, etc., and just having fun. We have no heirs and plan to leave our assets to charity.
You mean just pulling the money out of retirement accounts before you have to and reinvesting it in taxable? That’s almost surely a bad idea for reasons discussed here:
https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/
As I’m sure I said somewhere in the article (but if not have said many times before) the solution to a real RMD problem is Roth conversions, not doing something stupid. Pulling all your money out early is stupid. If you’re going to pay taxes on it but not spend it, you might as well get it into a Roth IRA instead of a taxable account. RMDs don’t apply to either of those, but taxes apply to one of them.
Maybe the Roth conversions you’re doing aren’t as big as they should be.
I’ve thought about how maybe we need to increase the Roth conversions. We just want to be sure we keep total income below the threshold that would trigger higher Medicare premiums. While it wouldn’t be that bad, we prefer not to pay more for that health coverage that necessary.
It’s possible it might be worth paying more in IRMAA to do conversions. Avoiding it might be penny wise and pound foolish, but it’s hard to know. How much and when to do Roth conversions/contributions is one of the most challenging things in personal finance because so much depends on things you can’t know.
Roth conversions, especially in early retirement, often make a lot of sense. Discussed in plenty of other places on this blog like here:
https://www.whitecoatinvestor.com/roth-conversions/
Can’t put everything in every article. Just use the search bar to see the other 3000+ articles.
My wife and I have several 401k plans and a 403b at her current employer. Are RMD’s calculated as a “total” of all of these, or each individually? Maybe just easier to roll them over to one?
Definitely easier to combine all tax-deferred accounts into one and all tax-free accounts into one eventually, especially if you’re already at RMD age. In some states, there’s a little more asset protection to have money in 401(k)s/403(b)s than IRAs, but most people still just have it all in an IRA by RMD age assuming they’re no longer working. RMDs must be taken from each 401(k) and 403(b) I’m pretty sure, but I think if you have multiple IRAs you can take the entire RMD for all of them from just one if you want. Let’s go to the IRS publication on the subject to make sure:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
https://www.irs.gov/publications/p590b
Here it is:
I’m pretty sure that doesn’t apply to 401(k)s/403(b)s but I can’t cite chapter and verse so I could be wrong.
Let me check one more place:
https://www.irs.gov/pub/irs-pdf/p560.pdf
Yup, I was right.
Helpful.
I was shocked as a younger doc that my folks were paying so much for Medicare. Even more shocked to find their annual income as retirees was more than mine (and I’m an orthopedic surgeon!)
When I started (in engineering, not medicine), retirement planning was predicated on being in a lower tax bracket, rather than a higher one at 65. About 5 yrs ago, I realized with faint horror that this will probably not be the case, even before inheriting anything.
Since so much wealth is now being passed generationally and many docs are children of high earners (other docs?) and good investors, many docs will be having this problem. If you have professional and high earning children, they might be dismayed rather than happy to take 6 figure annual RMDs when you have passed. First world problems, indeed.
It’s a good one to have.
But do spare a thought for your 70 yo patient who is still working part time because their $20-40k a year job that they held for the last 45 years just barely paid the bills so no maxing out the IRA and benefitting from the stock market. Maybe they get $1200/mo from SS?
In fact, spare a thought for those folks supporting you in clinic or the hospital still making just $17/hr. Maybe it will help you put paying for the Christmas bonuses in perspective and something to do happily and generously instead of thinking you need to fly 1st class more.
I think you overestimate how many people out there make a lot, save a lot, and invest it wisely. Sure, some will be in a higher bracket, but most will be in a lower bracket.
Anybody who feels “dismayed” to get 6 figure RMDs from an inherited IRA is a fool.
But if you do have a true RMD problem, the solution is Roth contributions and conversions.
This is true. Half of mom’s retirement funds were convert to Roth a few years ago with tax paid then (still need to wait 2 more years before accessible without penalty) and the other half not converted. Dad says, in retrospect, should have converted it all gradually starting earlier.
There are a lot of ifs here, but if you are in your 70s or 80s, have high earning kids and large retirement funds, and might hit the estate tax limit (either this years or the much lower limit once current provisions sunset), convert now (best over several years) and pay the tax. The estate and the kids will thank you! And, note to those who are compulsive savers and good investors – read “die with nothing,” look at estate tax rates. Then start flying first class AND joyfully giving.
If you’re leaving the money to them that is. If you’re leaving it to charity, it’s silly to convert it.
I am 67 years old with retirement accounts approaching 9 million. I am wondering if we should do Roth conversions.
Our current marginal tax rate is 47% due to high federal income tax and high state taxes. I founded and own a successful company and will receive about 4 million annually in gross income. Our current net wealth, excluding the value of my business entity, is approximately 32 million, including tax deferred, taxable, and real estate.
Roth conversions might help us reduce estate taxes after death. Is that worth it?
It shouldn’t help you reduce estate taxes much as long as your heirs know about a particular tax deduction available to them if they inherit your tax-deferred accounts. Who are you leaving the money to and what’s their tax bracket? If like me, you’re planning to leave a lot to charity, you probably shouldn’t convert. Just leave your tax deferred accounts to charity and nobody will ever pay tax on them.
My husband wants me to read your posts because he fears he will predecease me and I will be clueless. Our latest discussion was about QLACs. Based on his analysis (he’s a lawyer, not a financial planner), we really don’t need to buy annuities, but being the children of Great Depression parents, we tend to over save and under spend, and he thinks we might actually spend more and enjoy our lives more if we had a predictable income stream like a pension. We’re in our mid 70’s, retired, and the bulk of our current income from RMDs and dividends an interest from taxable investments. Our much smaller Roths are reserved for LTC if needed, if not for our heirs.