What’s Discussed

• Required Minimum Distributions (RMDs) are mandatory withdrawals from retirement accounts, such as traditional IRAs and employer-sponsored 401(k)s.
• Some retirees may find that Social Security benefits and other income already cover their living expenses. Even if you don’t need RMD funds for spending, you are still required to withdraw them — and these withdrawals are taxed at ordinary income rates. Strategic planning and tax-efficient withdrawals can help reduce your tax burden.
• To reduce future taxes on RMDs, consider these strategies:
  • Use RMDs for year-end estimated tax payments
  • Donate RMDs directly to charity
  • Convert traditional IRA funds to a Roth IRA to lower future RMD amounts
• The best approach depends on your personal financial situation. Each strategy has specific IRS rules and guidelines, so professional advice is recommended. Atlas Capital is happy to consult with you and your tax planner.

1. Use RMDs for Year-End Estimated Tax Payments

A lesser-known strategy is using RMDs to manage the timing of estimated tax payments. Most taxpayers make four roughly equal payments throughout the year, but RMD-withheld taxes can be paid at year-end — offering a time-value-of-money advantage.

Taxes withheld directly from retirement accounts are treated as if paid evenly throughout the year, even if the payment is made in December. This allows you to defer some of your estimated taxes and keep more invested for longer. For example, you could take most of your RMD early in the year and wait until December to withhold taxes from the remaining portion.

2. Donate RMDs to Charity

Another powerful strategy is using your RMDs for charitable giving. The portion sent directly from your IRA to a charity — known as a Qualified Charitable Distribution (QCD) — is excluded from taxable income. If the funds were instead paid to you first, they would be taxed as ordinary income.

This approach can be especially beneficial for those who might otherwise face higher tax brackets, Medicare surtaxes, or taxable Social Security benefits. In many cases, QCDs provide greater tax savings than itemizing charitable deductions on your return.

3. Convert to a Roth IRA to Reduce Future RMDs

A third option is to reduce your future RMD obligations altogether through a Roth conversion. By converting a portion of your traditional IRA to a Roth IRA, you pay taxes on the conversion amount now — but future growth and qualified withdrawals are tax-free, and Roth IRAs are exempt from RMDs.

This strategy can make sense if you expect to be in a higher tax bracket later in retirement. Having both tax-deferred and tax-free accounts also provides flexibility in managing taxable income during retirement.

Some key considerations for Roth conversions include:

• Pay conversion taxes using funds from a taxable account to maximize the amount entering the Roth.
• Convert after age 59½ to avoid early withdrawal penalties.
• Remember that conversions increase taxable income for the year, potentially moving you into a higher bracket.
• You must wait five years before making tax-free withdrawals from the converted amount.

Summary

Not every retiree ends up in a lower tax bracket during retirement. If you expect steady or higher income, RMD strategies can help manage your taxes more efficiently. Since these approaches involve detailed IRS rules and personal financial factors, professional advice is essential. Atlas Capital Advisors is here to help you evaluate which strategy best fits your goals.

Disclaimer

The information provided in this article by Atlas Capital Advisors Inc., a registered investment advisor (RIA), is for general informational purposes only and should not be considered professional tax advice. Tax laws are complex and subject to change. Readers should consult qualified tax professionals for guidance tailored to their individual circumstances. Atlas Capital Advisors Inc. makes no warranties as to the accuracy or completeness of the information and is not liable for any actions taken based on this content.