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Ed Slott

Retirement Planning > Spending in Retirement > Required Minimum Distributions

Why Advisors Should Rethink the ‘M’ in RMD

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What You Need to Know

  • Taking withdrawals before they are required could mean tax savings, as rates are set to increase after 2025.
  • Roth conversions are much cheaper before RMDs start.
  • QCDs can be made starting at age 70 ½, while RMDs don't start until 72.

The “M” in RMD stands for “minimum.”

Clients generally focus on what the minimum amount is that they must distribute from their IRAs and other retirement plans. But given our low tax rate environment, expanding even further for 2023, that’s the wrong way to think about required minimum distributions.

Why wait until withdrawals must be taken? Why take only the minimum required?

Change your clients’ “minimum” mindset and think “maximum.” In other words: How much can we withdraw at the lowest tax rates?

Using a “minimum” mindset takes control out of your clients’ hands and turns it over to the government’s schedule. Advise clients that taking control of their IRA distributions can allow them to reap huge tax savings for the rest of their lives, and beyond to their beneficiaries. You can help clients control their tax brackets.

Remember that the tax law now has a finite window of when most retirement funds must be withdrawn. Additionally, under the Setting Every Community Up for Retirement Enhancement (Secure) Act, most beneficiaries will have to fully withdraw these funds within 10 years after death. With these short windows, more retirement assets will be bunched into a higher tax bracket, leaving clients with less.


Although RMDs for most clients will have to begin at age 72, why wait until then?

Talk with clients who may be years away from when RMDs must begin. Encourage them to take pre-RMDs, if they can get some of those funds out at the low 2023, 2024 and 2025 rates, before tax rates increase when the 2017 tax cuts expire.

The strategy may not be for everyone. For example, some clients may be in their highest earnings years and already at the top 37% tax rate.

But even then, their future tax rates in retirement and their beneficiary’s rates during the 10-year payout period could potentially be much higher if more income is pushed into a shorter time span. If clients wait, only take the minimum beginning when they must at age 72, then more will be left to beneficiaries who may be in their own highest earnings years and normally must withdraw all those inherited IRA funds within a decade after death.

The key planning point here is to smooth out (and lower) the overall taxes that will have to be paid on these funds both during life by the account owner and in the 10 years after death by beneficiaries. Under current tax law, there may only be three years left to do that before rates are scheduled to increase.

Yes, clients might not want to withdraw because they either don’t need the funds or don’t want to pay a tax that could otherwise be deferred. However, make sure they understand that, considering our national financial woes with record debt and deficits, it’s likely that taxes will have to increase at some point.

For IRA Beneficiaries Subject to the 10-Year Rule

Beneficiaries subject to the 10-year rule who inherited from someone who died after RMDs had begun must continue RMDs for years 1-9 of the 10-year term. For those beneficiaries, instead of having a gigantic final RMD in year 10, increase distributions in years 1-9 to smooth out the tax bill over the 10-year period.

Beneficiaries subject to the 10-year rule who don’t have annual RMDs in years 1-9 should nonetheless take distributions during those years to avoid a big balloon distribution in year 10.

Roth Conversion Opportunities for 2023

Talk with clients about taking distributions now and converting those funds to Roth IRAs, before RMDs begin. Once RMDs begin, Roth conversions become more expensive since the RMD itself cannot be converted to a Roth IRA. Once the RMD is satisfied for the year, then all or any part of the IRA balance can be converted for the year, but that will cost more since the RMD had to be taken first.

Have clients consider planning a series of smaller annual conversions, taking advantage of the expanded tax brackets, and getting the funds out at relatively low rates, compared to withdrawing them at higher future tax rates.

Roth Conversion Planning Tips

Remind clients that Roth conversions are permanent and work best for those who believe they will be subject to higher marginal tax rates in the future.

Roth conversions are not all or nothing. Consider a series of smaller annual conversions over time to spread out the income tax.

Timing Roth Conversions for Maximum Tax Efficiency

  • Convert before RMDs begin.
  • Help clients avoid the impact of Roth conversions on Medicare IRMAA charges for Parts B and D based on income. Since Medicare has a two-year lookback provision, consider conversions before age 63.

Final Joint Tax Return

If a spouse died during the year, consider a Roth conversion for the surviving spouse since this may be the last year to take advantage of married-joint tax return rates. Include the conversion income on the final joint tax return.

Roth Conversion Benefits for Beneficiaries

IRA beneficiaries cannot convert their inherited IRAs to inherited Roth IRAs (although 401(k) beneficiaries can). By having your clients convert, their beneficiaries will generally not be subject to income tax on distributions from their inherited Roth IRAs.

Yes, most beneficiaries still must withdraw the full balance by the end of the 10-year term, but there will be no RMDs for years 1-9, so the inherited Roth funds can continue to grow income tax free for the full 10-year period. That eliminates the worry about future higher tax rates.

QCDs Before RMDs: Give IRA Assets to Charity

If your clients normally give to charity, they are probably not getting any tax benefit for their gifts because they are taking the standard deduction and no longer itemizing. That will be especially true for 2023 and beyond as the standard deduction amount increases with inflation.

If your clients qualify, have them change the way they give to gain tax benefits by using qualified charitable distributions. A QCD is a direct transfer from the IRA to a qualified charity.

The funds transferred are excluded from income and can satisfy an RMD if done in the right order. QCDs are best done early in the year before any RMD is taken. If the QCD amount equals or exceeds the RMD amount, then the RMD is considered satisfied and does not have to be taken.

This is a great tax planning move since IRA funds are the best assets to give to charity, because they are loaded with taxes.

Using the QCD allows the IRA balance to be reduced at a 0% tax rate, following the planning theme here of withdrawing IRA funds at low tax rates.

Even though the Secure Act raised the RMD age from 70 ½ to 72, the QCD age remains 70 ½. That allows clients to begin QCDs even before RMDs begin.

There are limitations though. Not everyone qualifies for QCDs, so concentrate on clients who do. QCDs are only available for IRA owners and IRA beneficiaries who are 70 ½ or older. QCDs are not available from 401(k) or other workplace plans.

The annual QCD limit is $100,000 per person, not per IRA. Gifts to donor-advised funds, private foundations or from active SEP or SIMPLE IRAs do not qualify for QCDs. And with a QCD, there can be no benefit back to the IRA owner in return for their gift. That would disqualify the QCD.

For more 2023 tax, retirement and estate planning tips from Ed Slott, check out 4 Ways Inflation Can Help Clients Cut Taxes in 2023.

(Photo: Natalie Brasington)

Ed Slott, CPA, America’s IRA expert, is a nationally recognized speaker, television personality and author known for turning advanced tax strategies into understandable, actionable and entertaining advice. He was named “The Best Source for IRA Advice” by The Wall Street Journal.

Slott is a professor of practice at The American College of Financial Services and has been recognized by leading industry organizations for his significant thought leadership and contributions. He is one of the top pledge drivers of all time with his popular public television specials and the creator of Ed Slott’s Elite IRA Advisor Group.

He most recently published the updated book, “The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes and Combat the Latest Threats to Your Retirement Savings” (Penguin Random House, 2021).


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