RMD Strategies for Before & After Retirement

Key Points – RMD Strategies for Before & After Retirement:

Getting an early start to RMDs
What’s Your RMD Age?
Working with a Team of Professionals to Discover RMD Strategies Before and After Retirement
6 Minutes to Read | 24 Minutes to Watch

Getting an Early Start on RMD Strategies

One of the most important aspects of retirement planning is starting early. But for the people who take the DIY retirement planning approach, there’s one thing that can easily be overlooked: Required Minimum Distributions. There have been some major changes with RMD rules over the past few years, so we’re going to review those and discuss RMD strategies before and after retirement.

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What Is a Required Minimum Distribution?

Before we dive into those major rule changes and RMD strategies before and after retirement, we need to explain what RMDs are. RMDs are the minimum amount that you’re required to take out of your retirement account or IRA each year. The idea of RMDs came about so that people can’t put off taxes while accumulating funds in their retirement accounts and then passing them on to their beneficiaries as an inheritance.

RMDs must be taken from traditional IRAs, SIMPLE IRAs, SEP IRAs, and retirement plan accounts, regardless of whether you’re retired or still working. Those might sound like easy—yet still annoying—rules to follow, but Congress has made RMD rules more and more complex over the years.

Understanding RMDs

RMDs have turned traditional IRAs and 401(k)s into a tax time bomb that people don’t understand how to diffuse. That’s how our good friend, America’s IRA Expert Ed Slott, sees it, and we agree with him. Understanding how to manage IRAs and 401(k)s is critical when it comes to controlling your taxes in retirement. RMDs are a big piece of that.

Think about it this way. If you have $1 million in a traditional 401(k), are you aware that you don’t actually have $1 million? One reason for that is because traditional 401(k)s and IRAs are tax-deferred assets. You won’t be taxed when you put the money in, but you will be when you take the money out.

What’s Your RMD Age?

Thanks to RMDs, you can’t just simply keep that money in your 401(k) or IRA and avoid paying taxes on it. As of January 1, 2023, IRA owners are required to begin taking money out of their accounts by April 1 of the year after they turn 73. That rule went into effect after SECURE 2.0 became law. By 2033, the RMD age will be 75.

From January 1, 2020, to December 31, 2022, the RMD age was 72. This RMD rule change went into effect as a part of the SECURE Act. Prior to 2020, the RMD age had been 70½ since RMDs were established as a part of the Tax Reform Act of 1986.

So, let’s say that you turned 73 in 2023. You’ll be required to take your first RMD by April 1, 2024. But if you wait until 2024 to take your first RMD, you’ll be required to take two RMDs in 2024.

This Is Complicated Stuff

But here’s another twist. Let’s say you turned 72 in 2021. Your required beginning date would have been April 1, 2022. You’ll remain on your RMD schedule despite the new RMD rule changes that went into effect with SECURE 2.0.

When we said that Congress has been making the RMD rules more complex, we weren’t kidding. That’s why it’s so important to work with a team of professionals that understands the rules of RMDs and all the ins and out of the tax code.

“We know that Required Minimum Distributions typically don’t start before retirement unless you’re working past the age of 73. But they need to be part of your planning process before you actually hit your Required Minimum Distribution age.” – Dean Barber

At Modern Wealth, we have CPAs who spend hours upon hours studying the tax code. They work alongside our CFP® professionals and review our clients’ financial plans from a tax perspective so that things like RMDs don’t get missed. They’ll examine RMDs strategies for people before and after retirement.

RMD Strategies Before and After Retirement

The RMD strategies that someone utilizes are going to depend on their unique situation. We don’t want your 401(k) or IRA to turn into a tax time bomb, so we’re going to review some strategies to consider for how to plan around RMDs before and after retirement.

Roth vs. Traditional

Many people will just save to the traditional side of their 401(k) and not fully realize that that money will still be taxed when they take it out. That’s one of many reasons why we tell people to not save money anywhere without first knowing the rules for how to take the money out.

We see a lot of people get hung up on trying to pay as little in taxes as possible each year. That mindset can be nice at first, but those are oftentimes the same people who don’t realize that a tax timebomb is building inside their 401(k) and traditional IRAs.

Rather than saving blindly to the traditional side of your 401(k), did you know that most companies now offer Roth 401(k)s? With Roth 401(k)s, you’re required to pay tax on each contribution you make. However, from that point on, all the earnings and distributions will be tax-free. The same goes for Roth IRAs after you convert a traditional IRA to a Roth IRA. You just need to pay tax on the conversion in that case. And here’s another big thing to remember: there are no RMDs on Roth IRAs.

If you’re contributing to a Roth 401(k), the company match will go into the traditional part of your 401(k). So, you’re automatically going to have some money that’s tax-deferred coming out of that 401(k) and some money that’s tax-free coming out of that 401(k).

Creating Tax Diversification

That’s important to keep in mind, as everyone should have the goal of creating tax diversification. That means that you have money in tax-deferred, taxable, and tax-free buckets. Part of putting together a good financial plan is understanding how much should go into each one of those buckets. Obviously, we’d put everything into tax-free if we could. Unfortunately, that’s not possible. You’ll need money in the other buckets to do Roth conversions and other tax planning strategies. You can learn more about the importance of mitigating taxes over your lifetime by downloading our Tax Reduction Strategies guide below.

Tax Reduction Strategies

Roth Conversions Before and After Retirement

One of the best times to do Roth conversions is the period between the time somebody retires and the time that their required beginning date for RMDs. That serves as a hedge against those RMDs.

However, you can still do a Roth conversion after your required beginning date, too. Several of our clients are doing so because of some big upcoming changes in the tax code. On December 31, 2025, the Tax Cuts and Jobs Act will sunset, which means tax rates will be going up in 2026 unless Congress steps in and does something. Essentially, between now and December 31, 2025, people are getting Roth conversions at a discount due to these upcoming changes in the tax code.

“Roth conversions are one of the best things to ever happen in the tax code. You have to pay the ticket (the tax) to get that tax-free status. But once you have it, it’s yours forever.” – Bud Kasper, CFP® , AIF®

There are many cases in which Roth conversions can make a lot of sense for people, but there are some instances where they don’t. Learn some of the important considerations surrounding Roth conversions by downloading our Roth Conversion Case Studies white paper.

Roth Conversion Case Studies

Qualified Charitable Distributions

Roth conversions can be a very effective tax planning tool, but it’s far from the only tax planning tool. One other popular tax planning strategy for people who are charitably inclined and 70½ and over is utilizing Qualified Charitable Distributions.

With QCDs, you can donate up to $100,000 a year directly to a qualified charity from a traditional IRA and not have it show up on your tax return. That jumps up to $105,000 a year in 2024. That’s another reason why it’s critical to still keep some money in tax-deferred accounts and have good tax diversification. QCDs have become more popular due to the increased standard deductions and they lower your RMDs. So, QCDs can be a very effective way to mitigate RMDs after retirement.

“Qualified Charitable Distributions have become even more powerful after the Tax Cuts and Jobs Act because you have such a high standard deduction.” – Dean Barber

Paying Tax on the Seed vs. Paying Tax on the Harvest

There’s another saying from Ed Slott about Roth vs. traditional that we think about often as well. You can either be taxed on the seed (when you save to Roth) or be taxed on the harvest (when you save to the traditional). Doesn’t it make more sense to pay tax on the seed and then have the harvest grow tax-free?

Inherited IRA Rules

That’s critical for you and your beneficiaries to understand if you want to leave a legacy. Oftentimes, non-spouse beneficiaries will receive an inheritance during their peak earning years. Inheriting traditional IRAs could completely change their tax situation whereas inheriting Roth IRAs will serve as tax-free income.

We should clarify, though, that there are RMDs for non-spousal beneficiaries of inherited IRAs and inherited Roth IRAs. It was only a few years ago that beneficiaries could “stretch” inherited IRAs by taking distributions over their lifetimes. That all changed when the SECURE Act was passed.

Now, for some beneficiaries, the money within those inherited IRAs must come out within a 10-year period following the original account owner’s death. While there are RMDs on Roth IRAs as well, there are no taxes due on those distributions for the beneficiaries since they’ve already been paid.

“Because there are no Required Minimum Distributions or Required Beginning Dates for Roth IRAs, you can leave that money in the Roth IRA all the way up until the end of the 10th year following the year of death. Then, you can take it all out in one lump sum.” – Dean Barber

Forward-Looking Planning

Not realizing that RMDs are in the picture with IRAs can negatively impact a few other parts of your plan in a big way. Your RMDs can be so large that 85% of your Social Security becomes taxable and significantly increase your Medicare premiums. No one wants those things to happen. That’s why looking into RMD strategies before and after retirement is pivotal to mitigate those RMDs.

“You need a forecast in your plan. What amount is that going to be and what rate is it going to come out at assuming that tax rates don’t change?” – Dean Barber

With forward-looking planning, you can project how much your RMDs will be at what ages, and what accounts RMDs are coming from. That allows you to pay as little tax as possible through your retirement years. That’s when you have the control to reduce your tax burden.

If you’re not retired yet, make sure you realize what accounts you should be taking from when. You can then see the tax impact and the tax savings by taking the distributions from the right accounts and the benefits of creating tax diversification.

Start Planning Before You Retire

The bottom line with RMD strategies before and after retirement is building your financial plan 10-15 years prior to retirement. Ideally, you’ll start thinking about this in your mid-to late-40s or early 50s. That’s when you should begin crafting a plan that not only looks at where you’re saving to, but at the distribution strategy around those savings.

Where’s your money going to come from in the future? And how are you going to develop those strategies so that you’re paying as little tax as possible over your lifetime? It takes time to get clear answers to those questions. And if you really want clear answers, you need to be working with a team of professionals so that nothing gets overlooked. You can start a conversation with us below to begin discussing how to build your plan, which will consider RMD strategies before and after retirement.

Schedule a Meeting

Effectively utilizing RMD strategies isn’t something that you should be doing guess work with. Our team is ready to work together to get the best results for you and to mitigate any financial stress that comes from RMDs, taxes, and elsewhere in your financial life.

RMD Strategies Before & After Retirement | Watch Guide

00:00 – Introduction
01:20 – What Is an RMD?
05:57 – Roth vs. Traditional and the Tax Time Bomb
07:20 – Roth Conversions
11:40 – Qualified Charitable Distributions
17:43 – Paying Tax on the Seed vs. the Harvest
21:42 – What We Learned Today

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.