Can You Control Required Minimum Distributions?

For a lot of retiree households, required minimum distributions are a nonissue. People need to pull money from their retirement accounts for living expenses, and they don’t need the government to prompt them to do so. Their spending is what it is.

For affluent retiree households, however, RMDs can be a pain in the neck. The early years of retirement are often low tax years, as income from work has stopped and retirees have a lot of control over how much they take from their portfolios and, in turn, their tax bills. But once RMDs commence at age 73, retirees’ taxable income is largely out of their hands and their tax bills often drift higher. Required minimum distributions can also bring knock-on effects like the income-related Medicare adjustment amount, an additional charge that Medicare-covered individuals pay if their incomes go above certain levels. The annoyances of RMDs are particularly acute for people who began investing for retirement in the 1980s and 1990s, when pretax contributions were the norm. (Roth IRAs didn’t become an option until 1997.)

The question is, once you hit RMD age, how much control do you have over those distributions—the timing, the amount, and source? Let’s examine each of the levers.

Timing

Control Level: Minimal

Retirees exert a wee bit of control over the start of RMDs via their required beginning date, which is April 1 following the year in which they turn 73. Say Candace turns 73 this month. She’ll have until April 1, 2025, to take her first RMD. Deferring that tax bill by close to a year might seem like a win, but the rub is that she’ll have to take an additional RMD by year-end 2025. That means that delaying the first RMD isn’t often advisable, but there may be extenuating circumstances that make it a good strategy. (Get some tax advice.)

People over age 73 who are still working and covered by a retirement plan can also delay RMDs from that plan, assuming they don’t own more than 5% of the business where they’re working. But if they have an IRA separate from the plan, RMDs are still due from the IRA. Some 401(k) plans allow participants to “roll in” external assets into the plan, helping those assets avoid RMDs, too, but RMDs will commence once work ends.

Once RMDs are up and running, retirees can take their RMDs any time in a given year that they wish. Some take them early so they don’t forget, while others delay them until year-end to coincide with other year-end tax planning and charitable giving. Late-year RMD takers also benefit from a tiny bit of additional tax-deferred compounding, but that benefit is unlikely to be meaningful enough to sway the timing decision one way or another.

One common misconception about RMDs is that you could reduce the tax bill by being tactical about the timing and, in turn, the amount, by taking the distribution when the market is down in a given year and, in turn, your account balance is low. In reality, the amount of your RMD is effectively “cooked” by the end of the previous year. For example, your 2024 RMD amount is based on your account balance as of year-end 2023. Even if the market swooned from here, you wouldn’t be able to lower your RMD by taking it after the downdraft. So there’s no opportunity to be tactical on the timing of RMD-taking.

In serious market drops, Congress has suspended RMD requirements. It did so at the beginning of the pandemic in 2020, for example, and in 2009. That helps protect the retiree from having to take a withdrawal when their portfolio—and the market—is at a low ebb, thereby locking in a loss. Such RMD suspensions have been pretty rare, however.

The Amount

Control Level: Moderate

Investors have a bit more control over the amount of their RMDs, though the opportunity to lower them and, in turn, the taxes due is greatest in the pre-RMD years. Making contributions to Roth accounts rather than traditional tax-deferred vehicles is a key lever, obviously. The postretirement, pre-RMD years are also an excellent time to convert traditional IRA balances to Roth at a life stage when people usually have a lot of control over taxable income. Accelerating withdrawals from RMD-subject accounts can also make sense in those postwork, pre-RMD years, enabling investors to lower their RMD-subject balances when their tax rate is low relative to what it might be later on. This is a good spot to get some tax advice to help determine whether these actions are warranted; a financial or tax advisor can help you figure out how much of your tax-deferred balance to convert or withdraw without bumping yourself into a higher tax bracket.

Once RMDs start, charitable giving stands out as the best way to lower taxes on RMDs. Making a qualified charitable distribution from an IRA is an option once people reach age 70.5. By directing a portion of your IRA to charity, up to $105,000 in 2024, you can skirt the taxes that would normally be due if you took the RMD and spent it. In addition, the QCD amount satisfies all or a portion of your RMD, and it also lowers your RMD-subject balance. For charitably inclined older adults, using the QCD will usually be the better move, taxwise, than withdrawing the funds from an IRA and writing a check to charity.

The Source

Control Level: Significant

Here’s an area where retirees actually do have a fair amount of control and may not be using it—determining which accounts or holdings to take RMDs from. This sort of strategic RMD-taking won’t lower the taxes due on the distribution, but it can help take risk out of the portfolio or achieve other investment aims.

For example, let’s say I have 10 holdings in my IRA, a combination of US and non-US stocks, bonds, and cash. As long as I pull the right amount from the IRA for my RMD in a given year, I can apply some investment strategy to determine where I go for that withdrawal. Following 2023′s great equity market rally, for example, I may wish to pull all of my RMD from US equities—or better yet, large-growth US equities—to rebalance and reduce risk in my portfolio. In 2022, when both my stock and bond holdings were down, I could pull my entire RMD from cash. Such an approach would work well for retirees using a Bucket strategy for organizing their portfolios.

Retirees with multiple IRA accounts can also concentrate their RMD-taking in specific accounts. For example, let’s say I have two separate IRA accounts—one holding index mutual funds and a smaller IRA with individual stock holdings. If my goal were to simplify my portfolio, I could take all of my 2024 RMD from my account with individual stock holdings and leave the fund portfolio alone. What matters is that you take the right amount from the IRAs, not where you go for them. (Of course, it should be noted that you can change positions within your IRA without tax consequences at any time; you don’t need to wait for RMDs to do so.)

There is an important caveat here, though, which is that if you have RMD-subject accounts that are different types—say, an IRA and 401(k)—you must calculate your RMD amount for each account separately and take an RMD from each. You wouldn’t have the opportunity to take all of your withdrawals from the IRA while not touching the 401(k), for example.