By Dr. Jim Dahle, WCI FounderRequired Minimum Distributions (RMDs) for tax-deferred accounts start at age 72-75. Lots of people think they're the “worst thing since sliced bread” because they are additional taxable income. Funny how none of those people thought their paychecks back when they were working were so terrible. It's essentially the same thing. You didn't pay tax on that money years ago, and now it's time to pay the piper. But that's neither here nor there.
Even though big Required Minimum Distributions might be the best rich-person problem there is, you still have to decide what to do with them. Here are your choices.
#1 Spend the RMD
This is the obvious answer and, frankly, what most people should do with their RMDs. However, there are plenty of people who don't spend their RMD. They basically oversaved and can live off their Social Security, pensions, and the income from rental properties or mutual funds in a taxable account. Maybe they just need to up their spending game. More cruises. Fly first class. Upgrade the kitchen. Get a new car or RV. Spend it on your heirs while you're still alive. Whatever.
More information here:
#2 Give the Required Minimum Distributions to Charity
You can donate an RMD directly to a charity (although your IRA custodian may send you the check made out to the charity for you to deliver). This is called a Qualified Charitable Distribution (QCD) and is the very best way to give to charity once you are of RMD age. In fact, you could do QCDs even before you get to RMD age as the QCD age is currently 70 1/2.
Starting in 2024, the QCD maximum was indexed to inflation. While it used to be a flat $100,000 per year, it is now $108,000 [2025], and it will continue to rise with inflation. QCDs are better than taking the RMD, paying the taxes, and then donating the money to charity. With a QCD, you can still take the full standard deduction, and you still get to make the entire charitable contribution with pre-tax dollars. One downside of a QCD is that it cannot go to a Donor Advised Fund or a non-operating private charitable foundation—only directly to a charity.
#3 Reinvest the RMD
RMD regulations only require you to remove the money from the tax-deferred account and pay any tax due on the income. They really don't specify what you do with the money. There is absolutely nothing keeping you from just reinvesting it right back into the same investment from where you just took it. You can sell $50,000 of the Total Stock Market Index Fund in your IRA and buy $50,000 of the Total Stock Market Index Fund in your taxable account on the same day. Note that if you reinvest it all, you'll need to find the money to pay the tax bill on the RMD from somewhere else—some people have some of it (20%?) withheld for the tax bill. But it's not an imperative.
#4 Use the RMD to Pay Taxes
Here's a slick trick. Instead of just having 20% of the RMD withheld for the IRS, you can have the entire RMD withheld for the IRS. If you don't take that RMD until the end of the year, that means your money was working for YOU for an extra 365 days rather than the IRS. Money withheld by an employer or an IRA custodian is all treated the same by the IRS, but the IRS treats quarterly estimated tax payments differently. If you've been making quarterly estimated taxes on your investment income—or even if you're just having money withheld from your Social Security or pension income throughout the year—you could stop doing all of that and just pay your taxes with your RMD at the end of the year.
Obviously, the RMD needs to be at least as big as your tax bill, but that is the case for lots of people. This can both simplify your financial life and allow you to benefit from the use of your money for a few more months of the year. That could be the difference of a few hundred or even a few thousand dollars a year. You have to pay the IRS every dollar you owe, but you don't have to leave them a tip in the form of a 1-12 month interest-free loan.
More information here:
How to Think About the ‘Other RMD Problem’
Understanding Required Minimum Distributions
1 Thing You Can't Do with a Required Minimum Distribution
Some people wonder if they can use their RMD for a Roth conversion. The answer is no. Unlike a QCD, a Roth conversion does not take the place of an RMD.
A Roth conversion can, however, reduce the size of future RMDs. For example, if you're 75 years old and had a $500,000 IRA at the beginning of the year, your RMD will be $20,325. If you do a $100,000 Roth conversion this year (and, for simplicity's sake, the IRA earns nothing), your RMD next year will be only $16,878 instead of $21,097. However, your RMD this year will not be any lower than if you had not done the Roth conversion. It is based solely on your age and the IRA balance at the end of the previous year.
RMDs are wonderful things. Forty percent of American retirees are living ONLY on Social Security. They'd love to have an RMD but don't have an IRA or another retirement account. Congratulations to you if you “have to” take RMDs. Make sure you understand your options for using them.
What do you think? What do you do with your RMDs? If you're not RMD age yet, how will you use yours?
I believe the IRS permits a taxpayer to do a QCD once he/she is age 70 1/2 or older, regardless of their RMD Required Beginning Date, not age 72 as stated in this Post.
The QCD must be done AFTER the taxpayer has reached (or attained) age 70 1/2, as opposed to anytime during the year in which they turn age 70 1/2.
Big RMDs are a nice ‘problem’ to have.
Taxpayers can do a QCD once they are 70 1/2 or older, but it doesn’t count toward their RMD until they are 73. https://www.irs.gov/newsroom/give-more-tax-free-eligible-ira-owners-can-donate-up-to-105000-to-charity-in-2024
Thank for the correction. You’re right of course. QCDs can be done at 70 1/2, even if they don’t start taking the place of an RMD until RMDs become required.
Remember, when RMDs are coming, if you are married and they might really increase your taxable income, it may be an even bigger tax bill if one of you is widowed (with perhaps double the RMD if you have similar IRA /401K balances). We accelerated our Roth conversions once retired and with lower total income up to the top of our tax bracket, and I will only quit converting once I am down to about all I expect to be happy to use as QCDs once I hit 75. Spouse and I are both advised to be certain to max out the conversion to the top of the tax bracket if possible the year one of us dies in case the following year the widow will be in the 32% not 24% bracket. (Think we’re lower bracket super savers- that’s due to good old govt pensions while they last anyway.)
While it’s uncertain that one’s kids/ heirs will have a lower or higher tax rate should they need to pay the taxes over the 5-10 years following the inheritance, one friend with irresponsible kids is Roth converting as quickly as possible to keep those kids out of tax jail since they barely pay their current taxes now with her guidance.
I haven’t bothered teaching my kids about RMDs but our estate documents (which I hope they’ll read carefully) remind them if they don’t spread out the withdrawals they might pay more in taxes by moving up a bracket. Also to leave the Roth IRA until the last required year to empty it if they don’t need the money. (And those heirs whose kids might get financial aid for college may have their parental contribution affected by the withdrawals.)
When I finally heard about IRMAA I fussed about whether my Roth converting will raise that but like most WCI followers we’ll already be paying that before the Roth converting, though might lower it some once we’re done? Let alone all the ads (now we’re retired) promising a way to avoid taxes on social security via Roth conversions, rarely a possibility for WCI readers!
Not sure it’s the right move to avoid all or nearly all taxable income by doing Roth conversions in substantial brackets. Read this first:
https://www.whitecoatinvestor.com/roth-contribution-or-conversion/
Can you please clarify your statement about using the RMD to pay taxes:
“If you’ve been making quarterly estimated taxes on your investment income—or even if you’re just having money withheld from your Social Security or pension income throughout the year—you could stop doing all of that and just pay your taxes with your RMD at the end of the year.“
I thought quarterly estimated tax payments were due by their quarterly due date, lest one incur IRS wrath and a penalty.
Are you saying that if you pay your entire tax bill by Dec 31 (with your RMD, or ostensibly with any funds), you can skip paying your quarterly estimated taxes and just wait until year end?
That is exactly what he’s saying, if you use your RMD to pay the taxes. “When RMD money is used to pay estimated taxes, the IRS has a special rule favorable to taxpayers. Instead of considering the payment made when the money is sent to the IRS, the payment may be made at the end of the year but is treated by the IRS as being paid evenly during the year at the required times.”
https://ssbllc.com/three-tax-advantaged-ways-to-use-required-minimum-distributions-rmds/
When you take your RMD (or any withdrawal from your traditional ira or 401k), you have the option for the brokerage processing the withdrawal to withhold the money for taxes. The money that is wittheld for taxes is treated as distributed evenly throughout the year, the same as the withholding from your paycheck. I don’t think you can just pay your estimated taxes with money you call “RMD” money and get special treatment.
https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds/603438/rmd-solution-for-estimated-taxes
They are.
Not exactly, but close.
I’m saying the IRS considers money withheld from a paycheck, conversion, or RMD exactly the same if it is with held on January 10th or December 10th. It all goes into the “withheld” pot. Quarterly estimated payments have four separate pots. Withholding only has one. See the strategy?
Another great one, especially the perspective. One question, is it possible to give a QCD to benefit an employee? For example, can a QCD be made to XYZ Medicine (assume it is a compliant 501c3) to be used toward a payment on a health care worker employee’s student loans? Thanks.
This is only an opinion, but I would suggest having a tax lawyer look things over before going down this road. Depending on the 501 (c) (3) ownership structure, your relationship to XYZ medical and who receives the scholarship, this could amount to an IRA prohibited transaction. The fact that it is indirect, via a QCD, will not change the nature of the transaction. The penalty is painful, per the IRS: When an IRA owner or beneficiary is involved in a transaction that is prohibited under IRC Sec. 4975, the IRA loses its tax-exempt status and the IRA owner (or beneficiary) is deemed to have received a distribution on the first day of the tax year in which the prohibited transaction occurred (IRC Sec. 408(e)). The distribution amount that the IRA owner is deemed to have received is equal to the IRA’s fair market value as of the first day of such tax year (January 1 for most taxpayers), and is considered taxable income to the IRA owner.
No. That’s not a charitable contribution if you get to say what the charity does with it.
Regarding #3, if you are looking to retain the exact same investment, it is not necessary to sell the investment, wait for the settlement, transfer the cash and then re-purchase the investment. You can transfer the shares to your taxable account. This is easier if your IRA trustee/custodian is also your brokerage firm, as it can be easily done online and is nearly instantaneous. If you require withholding, simply sell enough to cover the withholding and perform two transactions. The first a share transfer and the second a withdrawal, withholding 100%. Although settlement time frames are significantly shorter now, there is some risk in holding cash, even for such a short timeframe.
I’m not sure all trustees/custodians offer that option and my impression is that few people go that route. But it’s certainly fine if it is desired and allowed.
Vanguard won’t let me online automated make a distribution/RMD from my IRA directly to buy a fund in “brokerage” (won’t withhold tax) but I figured out that I can flip out the distribution to my Credit Union account while withholding up to 99% for tax and immediately buy back from the Credit Union account to buy fund in the taxable brokerage account.
I think the transaction “floats” through the settlement fund in the brokerage account. Even if “bank transfer” is selected. There is a tricky hidden way in the webpage online account to get into changing a “W4- P” or something to specify a percentage to withhold.
That’s weird. Vanguard lets me move my parents RMDs directly for an IRA to their taxable account. The withholding isn’t tricky either. I’m not sure you’re doing it right. Keep looking at it and I bet you figure it out. Maybe move it to the settlement fund in the taxable account instead of directly into a fund.
Nice, succinct post, thanks! Loved the perspective that the RMD is some of your paycheck that you get once you retire.
Our pleasure. I would be more succinct more often if I had more time. 🙂
LOL, that sounds like one of Yogi Berra’s famous quotes.
Did he say that, or something very similar?
Haha, if it’s an original, and you can come up with another one hundred or so of them, maybe someday you can be famous like Yogi is! 😄
I think a lot of people said something similar, including Pascal and Twain.
This kind of post is why I appreciate this site. I’m retired, I’ve read (or skimmed at least ) Wade Pfau’s retirement guidebook and I thought I had everything figured out.
Number 4 is indeed a slick trick and I plan to use it. Plus I appreciate the adjustment of perspective of being grateful for having “rich person” problems…
Glad you liked it. Thanks for your kind words.
In your example in the 1 thing you can’t do with an RMD: I would add that the $20,325 RMD must be COMPLETELY taken BEFORE doing the $100,000 conversion.
That’s a good reminder. It isn’t just that the RMD has to be calculated before a Roth conversion. It actually has to be done.
Nowhere close to needing this but logistically how does #4 work? What if your RMD exceeds/is more than your tax bill? If you elect to withhold all your RMD to pay your taxes in December, the taxes are paid and then does the remaining get automatically distributed? How? How do you determine which say 20% of the IRA pot gets withheld (stock vs bond) …. What if you elect to do the withhold and markets tank during the year?
Then don’t withhold all of it. If you owe $100K in taxes and have a $120K RMD, just have $100K withheld.
You would choose what asset you want to sell, then choose how much of that should be withheld. It is then instantly sent to the IRS. It doesn’t matter what markets do after that because the IRA no longer owns that asset. It was sold to pay taxes/give you your RMD.
If you choose to have more withheld than you owe in taxes, you’d get a refund at tax return time. That refund should be taxable at ordinary income tax rates. I’m not sure how the IRS realizes that, probably from the 1099-R issued by Vanguard or Fidelity or whatever.
To add to this list, I would say that probably the most important thing is to not have any RMDs at all! Many docs are in a great position to convert the entire pre-tax portfolio to Roth, and chances are, they are going to be much better off if they convert their entire portfolio prior to age 73-75. The math is not exactly easy to visualize, but for some docs waiting for RMDs is simply waiting to pay back all of the tax savings they’ve made over their lifetimes. If your portfolio is at least $3M-$5M at retirement, and especially if you retire earlier than 65, you may be better off just converting everything over 5-10 year period. If you have a longer period to convert over, that’s even better in some cases (especially when someone retires early). There is not a one size fits all math, so I would recommend playing with a calculator that allows you to compare Roth to RMD scenarios (Wealthtrace is one such calculator, but there may be others that can do the job).
Totally disagree with that take Kon. Converting everything is rarely going to be the right move for someone. What are you going to fill the lower brackets with besides Social Security? Why convert at 37% if you could later withdraw at 0%, 10%, 12%, 22% etc? More details here:
https://www.whitecoatinvestor.com/roth-contribution-or-conversion/
If you’ve got $3-5 million at retirement, you’re probably going to be better off with $1-2 million in tax-deferred than converting it all.
It’s not really about agreeing or disagreeing but about math working out:
https://www.whitecoatinvestor.com/mega-backdoor-roth-with-erisa-401k-plans/
I’ve been working on this math for a while, and I’m not the only one who recommends Roth conversion in retirement. The other side is a lot worse, that’s for sure, and it is not difficult to convince yourself of that. Not only will you save millions in taxes vs. RMDs, you will also save the children millions on unnecessary taxes.
There is a breakeven point, that’s for sure, and the more money you have ($5M or more) the bigger the benefit of the conversion vs. someone with just $3M. But that’s why there are different conversion schedules (longer for those with $3M, shorter for those with $5M). As I mentioned above, the math is not exactly intuitive, but once done correctly, the benefit is huge. It is multiple millions in tax savings for those with $5M or larger portfolios. And the end result is an average tax rate of 10% or lower in retirement due to the massive conversion done over a short period of time.
The brackets strategy works for those with smaller portfolios. Once you break $5M, the math is radically different because you will be paying back most of the tax savings via RMDs, especially if you have decades for this money to grow. In short, try it, you will see exactly what I’m talking about. Conventional wisdom is wrong on this one – it only applies to low balance accounts. Very few people will have $5M+ accounts, but of those who do, many will be docs with businesses and/or 401k + profit sharing + Cash Balance plans.
Splitting will work in some cases, and these scenarios can be modeled via Wealthtrace or equivalent. I just can’t find any reasons to keep any pre-tax money given the massive benefit of conversion. Lack of stretch IRA pretty much sealed the deal for making conversions more preferable to keeping any pre-tax assets. The only limitation is having to pay taxes out of taxable rather than out of assets that are converted to maximize the benefit, and as long as someone has enough taxable to do that, then they can convert everything. In fact, doing a 5 or a 10 year conversion for larger portfolios did not appreciably change the result. However, lower portfolio amounts (under $3M) do benefit from longer conversion periods. So it is a spectrum, not a blanket one size fits all strategy. On the lower end, what you are recommending is exactly the right solution. On the higher end, it simply does not work.
It’s easy to come up with scenarios where Roth contribution/conversion doesn’t make sense, even for very wealthy people. Here’s an easy one from my own life (using made up numbers).
Let’s say someone has $10 million, $6 million in taxable, $2 million in Roth, and $2 million in tax-deferred. That person plans to leave at least $5 million to charity. Should that person do a Roth conversion at 37%? No way. The charity’s tax rate is 0%. So contribution at 37% and withdrawal at 0%. Easy choice.
Now let’s imagine instead of a charity it’ll be inherited by someone in the 12% bracket. You’re going to end up not converting again.
Or let’s say the person will be spending it themselves, but their only other taxable income (at ordinary income tax rates) in retirement is $50K in Social Security. Should they convert at 37%? No way. The RMD at 75 on $2 million is only $80K. That’s not going to get them anywhere near 37%.
How about this one? A wealthy person is going to move from California to Nevada at age 70, before RMDs become due. Should they convert at a state tax rate of 10.3-12.3% money that they can later withdraw at a state tax rate of 0%? Probably not.
Always and never are dangerous words. I think this is more complicated than you think. I think you’d benefit from reading that post I linked above. Here it is again:
https://www.whitecoatinvestor.com/roth-contribution-or-conversion/
I read your article, no disagreement there at all! In fact, I never used ‘always’ or ‘never’, and I literally said this: “So it is a spectrum, not a blanket one size fits all strategy.”
This is why individualized detailed planning has to be done in each case and that’s why I always caution from blanket statements or strategies. This is exactly why generic approach does not work given such a wide spectrum of cases.
However, for a typical doc with a $5M+ portfolio, the math is fairly straightforward if we assume nothing else. There are circumstances that make it less profitable (retiring at 75), or having a high earning spouse that does not retire, etc., but for the sake of my analysis I assumed someone retiring at 65 and converting up until 75. Those who retire earlier will benefit a lot more, that’s for sure.
That’s why the other planning assumptions have to be layered on top of this to make actual sense. That’s why distribution phase has to be treated like a system with multiple interconnected components, and it has to be broken down into components that can each be treated separately and then combined for the final result. My article addressed just one such component (well, two, if we include basic estate planning).
I would also argue that majority of docs will benefit from conversion one way or another, and maybe partial conversion would be a solution for some. I’m not convinced foregoing conversion in your last example is correct, and someone will have to do the math on that, everything depends on the details of when one retires, how much money they have, etc.
I would caution from trying to use several examples to disprove the whole conversion concept though. The math is complex, that is true, that’s why I use software like Wealthtrace to do the math rather than try to guess what the math would be. It is impossible to do back of the envelope when multiple decades of compounding is involved, so a full blown planning software has to be used to run the numbers, and this software has to have the Roth conversion built into the calculations. That’s why I always encourage docs to do the math themselves for their specific situation rather than rely on rules of thumb which are often not going to apply to them.
You say “if we assume nothing else”, but you HAVE to assume something else. You have to assume who is going to spend the money. It’s the most important assumption in any calculation. And too often the assumption is that the contributor is the person who is going to spend it. It is extraordinarily rare that they will be the only one that spends it. Almost always at least some of it is left behind for someone else.
Don’t get me wrong. In general I”m a fan of a Roth conversion strategy. But I’ve come to realize over time that there are so many exceptions to the Roth conversion/contribution rules of thumb that they’re nearly useless.
But yes, just about everyone ought to at least consider Roth conversions, especially in the years between retiring and starting to take Social Security.
For the RMD vs. conversion calculations I assumed that the owner of the account will pay for the conversion. However, the cost vs. benefit for RMD vs. Roth conversion assumes that all of the comparison is done during the lifetime of the account owner, so this does not play into the calculation. This is basically just gravy/extra money for the children, and that’s on top of the already high benefit that the account owner will get during their lifetime (otherwise, that’s the point?). There is also the lifetime of the remaining spouse, which for the sake of the calculation I assumed to be about the same, however, if they are around for longer, this may add even more benefit to the conversion side.
The frustrating thing is that this is so complex and so few software packages are able to handle the math adequately, so individual docs are going to be extremely confused by all of the variables. So what I tried to do in my article was to give them a very simple blueprint to understand when this would be beneficial. If we add all of the variables, at that point they have to hire a financial planner to figure it out. And it does not work as a single engagement – they have to constantly adjust this plan over their lifetimes. Not to mention that there are few if any planners capable of modeling the entire distribution phase with Roth conversions. So I tried to give some ideas to the DIY docs on when Roth conversion will work when conventional wisdom and rules of thumb was/were often wrong. I hope that eventually we’ll have better software that can make the planning easier, but until then we just need to rely on presenting complex strategies in simple terms so that docs can at least begin to incorporate this in their planning.
I’m not sure what numbers you’re referring to by bringing RMDs into this. All an RMD is is the movement of investments from a tax protected account to a taxable one while giving the government their share of the money that you denied them decades before. If you invest the taxable account tax-efficiently, returns are only a little lower, especially if you never spend the money and pay capital gains taxes. Besides, RMDs are only 4% of the portfolio at 75. If all that is coming out is the RMDs, we’re only talking about a relatively small % of the portfolio over the years from 75 to death. On average, that’s less than a decade. And with growth…that’s probably less than 20% of the portfolio value at death plus all RMDs that is ever taken out as RMDs.
And any calculator or calculation that assumes one is going to spend their entire nest egg during their life is frankly stupid. You don’t have to talk to very many retirees to reach that conclusion. Take my parents for example. Every year they move their RMD to taxable and reinvest it. It’s been a decade now since RMDs started and 15 years since retirement started. They’re not getting any poorer. And they’re far from the $5M+ folks you’re talking about. Most wealthy retirees aren’t even spending 4% + inflation of the original portfolio, and on average even if they did they’d have 2.7X the original amount after 30 years on average historically.
No, any calculation has to spend a lot of time on getting the main assumption as right as possible: Who will spend the money and what tax bracket will they be in when the money comes out of the retirement account? Since that is often unknown or only vaguely known, so is the right answer no matter how many digits after the decimal point the calculator spits out.
And a financial planner isn’t any better at this calculation than you or I. Many of them are much worse. But I do agree with your point that not only does this calculation need to be repeated frequently, but it has to be done for every dollar contributed/converted. A Roth conversion at 32% might have made sense a year ago when you thought your wife was going to outlive you for a decade and be in the 37% bracket, but since she died this year and now your money is going to your kid in the 12% bracket and your favorite charity it no longer makes sense to do any more, or even the one you already did.
It’s almost enough to throw your hands up in the air and not do any calculations at all. I still think it’s worth trying to do some, but I also think there is a lot of wisdom in just splitting the difference with contributions and doing some conversions and calling it good.
Just to clarify, I don’t mean *spending* everything. I mean converting everything to Roth vs. waiting to take RMDs. Spending is not part of the calculation (I believe I may have assumed something like $100k-$200k a year spending on average). While it starts at 4%, it goes up a lot, and if you take a large portfolio, over time you’ll pay more in taxes than you’ve saved. That’s the main problem I found with large portfolios.
It is impossible to get all assumptions right because everyone’s situation will be different, so when I ran many hundreds of scenarios in Wealthtrace, I mostly was looking at the conversion amount vs. conversion period, inflation, rates of return, etc, simple things that can be easily understood and explained. There are dozens of variables that makes this complex enough without introducing any more. This is just to gain a good understanding of what happens in a generic situation. All planning has to be done individually. My goal was to simply get a feel for what happens with large portfolios ($5M-$10M), which is the range for those with a 401k + Cash Balance plan, as conventional wisdom about what to do basically does not apply here, as you correctly noted in your article and examples. I have tried a few splitting examples, but they were less than ideal because if you leave a bit, you might as well just convert it, and if you leave more than half, with large portfolios it snowballs, so my conclusion was, convert it all, the larger – the better (the more money you save on RMD taxes).
I may publish a more detailed study some day, it is just that Wealthtrace is such a cumbersome software where I can’t really do an optimal calculation (Monte Carlo). So I have to manually run hundreds of scenarios just to see how changing the variables affects the results. Takes lots of time and data is very difficult to analyze/present due to this. But it is easy to use for those who are not too savvy, that’s why I recommend this as the first cut to just a few scenarios. Very instructive, and not very intuitive, that’s for sure.