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Retirement Planning > Spending in Retirement > Required Minimum Distributions

To Maximize the Value of IRAs, Take Action When Client Is 69

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Almost any IRA owner will tell you that the year in which he or she turns 70 ½ is the most critical year of the IRA lifecycle—the required minimum distribution (RMD) rules kick in, shifting the focus from accumulation to distribution of assets. What many of these clients don’t realize, however, is that the actions taken in the year prior to age 70 ½ can actually prove to be much more important when it comes to maximizing the value of those IRA funds. 

Both contribution and distribution rules change in the year the account owner turns 70 ½ so, in reality, it is the year prior to this year that becomes most important in the IRA lifecycle—as the last year clients can take steps to reduce their RMDs and the associated tax liability that they generate.    

Minimizing Distributions

The RMD rules essentially require clients to begin withdrawing funds from IRAs when they reach age 70½. The minimum amounts that must be withdrawn are calculated based on the account value and the client’s life expectancy, determined using IRS actuarial data.  Despite this, there are ways that clients can minimize their RMDs in the year prior to 70 ½ if they will have no immediate need for the funds at that time.

Perhaps the most obvious method for reducing RMDs is the Roth conversion. Roth IRAs have no minimum distribution requirements, so converting traditional IRA funds to Roth accounts will reduce the owner’s RMDs. Unfortunately, if the client is still working, he or she may still be in a high enough income tax bracket that the taxes generated by the rollover can be substantial (all amounts rolled over from a traditional IRA to a Roth IRA are taxed at the owner’s ordinary income tax rate).

If the client is still working, he or she can also consider rolling the funds into a qualified plan (such as a profit-sharing or 401(k) plan) where distributions are not required until the later of the year the client turns 70 ½ or the year that he or she retires.  In this case, it’s important that the client learn the rules of the qualified plan before making the rollover. Some plans don’t accept rollovers, and others require that distributions begin at 70 ½ regardless of the option to postpone until retirement.

Importantly, both of these rollover moves must be made before the client’s RMDs kick in—otherwise the client will have to pay both the taxes associated with the RMD (which cannot be rolled over) and those generated by the rollover itself.

The client can also reduce RMDs by purchasing a qualified longevity annuity contract (QLAC)—which is a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the client reaches old age. The value of the QLAC is excluded from the account value when calculating the client’s RMDs, though the client is limited to purchasing a QLAC with an annuity premium value equal to the lesser of 25% of the account value, or $125,000.

Maximizing Contributions

Once a client turns 70 ½, he or she is no longer eligible to make contributions to a traditional IRA.  As a result, if the client is still concerned with accumulation before his or her RMDs begin, any traditional contributions must be made in the year prior to turning 70 ½.  Otherwise, funding the traditional IRA becomes much more complicated.

Rollover contributions are still permitted, so the client can contribute to another type of account (such as a 401(k)) and roll those funds into the IRA.  Roth IRA contributions are also permitted after the client turns 70 ½.


Once the client reaches age 70 ½, there is less that can be done to reduce RMDs (and the associated tax liability). As the rules change, it’s important that your clients be prepared to take whatever steps necessary to facilitate their goals during the distribution phase of the IRA—whether those require minimizing the account value for RMD purposes or maximizing it through final contributions to the IRA.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.   

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