8 Strategies for Turning RMDs Into Opportunities

Lifetime income taxes can be reduced substantially by using the right strategies to take required minimum distributions (RMDs) from traditional IRAs and other qualified plans.

In the March and April 2023 issues of Retirement Watch, I explained how the RMD rules can increase lifetime income taxes for traditional IRA owners and their families and discussed long-term strategies to reduce RMDs.

But not everyone is able or willing to eliminate lifetime RMDs from traditional IRAs and other retirement plans.

Don’t despair. Shrewd retirees can turn the tables and change RMDs from burdens into opportunities. The lifetime income tax burden of RMDs can be reduced.

Consider these strategies to optimize your RMDs. (These strategies are for traditional IRAs and their original owners, not to Roth IRAs or inherited IRAs.)

     Determine the best time for the first RMD. The first RMD must be taken by April 1 of the year following the year you turn age 73. If you turn 73 in June 2023, you have until April 1, 2024, to take that first RMD.

It is considered your 2023 RMD, even if you don’t take it until early 2024. Most taxpayers should take the first RMD in the year they turn 73, which is 2023 in this example. (You use the December 31, 2022, IRA balance to calculate the 2023 RMD, whether you take it in 2023 or by April 1, 2024.)

If the first RMD is delayed, in 2024 you’ll take that 2023 RMD plus your 2024 RMD. Taking two RMDs in one year could push you into a higher tax bracket or trigger Stealth Taxes.

     Know the aggregation rules for multiple IRAs. Many people have more than one traditional IRA. In that case, first you separately compute the RMD for each IRA. Under the aggregation rules you have a choice. You can treat the IRAs separately, taking a distribution from each IRA that’s at least equal to its RMD.

Or you can add all the RMDs to determine the aggregate RMD. Then, you can withdraw the aggregate RMD from the IRA accounts in any ratios you want. All of the RMD can be taken from one IRA. You can take roughly equal amounts from each IRA. You can take unequal amounts from each IRA. The only requirement is that by Dec. 31 the total of the distributions from the traditional IRAs at least equals your aggregate RMD for the year.

You can use the RMDs to rebalance your portfolio, draw down and eventually eliminate the smallest IRA, or to meet other goals.

     Know when to aggregate and when not to do so. Be sure to include all traditional IRAs when calculating the aggregate RMD. For this purpose, IRAs include SEPs and SIMPLE IRAs.

Balances of inherited IRAs and any employer plans, such as 401(k)s, are not included with traditional IRAs when computing the aggregate RMD. The RMDs for each of those other accounts must be computed and taken separately.

     Make your charitable gifts with RMDs. Your RMD can be taken as a QCD (qualified charitable distribution), which would increase after-tax income. Longtime readers know the QCD usually is the best way for those older than age 70½ to make charitable gifts.

Each taxpayer age 70½ or older can have charitable contributions made directly by the IRA custodian to the charity or through a check made out to the charity that the IRA owner gives to the charity.

The charitable contribution is excluded from the taxpayer’s gross income and it counts toward any RMD for the year. Note that QCDs can be taken after age 70½, though RMDs now aren’t required until age 73. You can take the QCD and reduce the IRA tax free even if you don’t have an RMD for the year.

The taxpayer can’t take a charitable contribution deduction for a QCD.

A taxpayer can make up to $100,000 of QCDs per year. A married couple potentially can donate $200,000 through QCDs, but each spouse must give $100,000 from his or her own IRAs. See our April 2022 issue for details about QCDs.

     Consolidate or split your IRAs. As part of your estate planning and RMD planning, consider if you want a different number of IRAs than you currently have. The law allows you to combine or split IRAs without tax consequences.

It’s best to make any changes with direct trustee-to-trustee rollovers instead of transferring the money yourself.

Some people want multiple IRAs. They want each beneficiary to have a separate IRA or have different assets or strategies in different IRAs.

Some people want to keep money that was rolled over from a 401(k) separate from other IRA assets. (That used to be required by the tax code but no longer is.) Or the IRA owner might buy a qualified longevity annuity contract (QLAC) in an IRA, allowing RMDs on that portion of the IRA to be delayed to as late as age 85. RMDs can be easier to compute when the QLAC is in a separate IRA.

Other IRA owners prefer to consolidate IRAs. They believe multiple IRAs are more difficult to manage both during the owner’s lifetime and when beneficiaries inherit. They’re also concerned the investment returns and distributions from the IRAs might be different, so if each IRA has a separate beneficiary the beneficiaries might not inherit the same amount.

     Distribute assets instead of cash. There’s no need to sell assets to make the RMD in cash. RMDs can be made in property, known as an in-kind distribution. That keeps your asset allocation unchanged.

For most IRAs, an in-kind distribution involves simply directing the custodian to transfer a certain number of shares of a fund or stock from the IRA to a taxable account. The value of the shares on the day of the distribution is the amount of the distribution.

That value is the asset’s new tax basis in the taxable account. In a future sale of the asset, you’ll have a capital gain or loss based on the appreciation or depreciation after that day.

An in-kind distribution can be especially profitable when an asset declined in price and you believe the decline is temporary. Distribute the depressed asset, and the value on that day will be taxed as ordinary income to you. When the price recovers, the appreciation will be a tax-

advantaged capital gain instead of ordinary income if you hold the asset for more than one year after the distribution.

The in-kind distribution also is helpful when the IRA owns unconventional assets, such as real estate, mortgages, or a small business. It’s hard to sell portions of such assets to make an RMD in cash. Instead, make an in-kind RMD by creating paperwork that transfers a percentage of the asset’s ownership to your name.

     Decide the best time of year to take RMDs. You can take the RMD at any time during the year. Some people schedule monthly distributions that at least add up to the RMD, because they like the regular cash flow. Others take RMDs early in the year to be sure the requirement is met.

Still others wait until the near end of the year. They want to maximize tax-deferral of gains and income and delay paying estimated taxes on distributions.

You might want to watch asset values during the year and distribute an investment in-kind after it has declined in value, as discussed earlier.

1. Rowe Price did a study some years ago comparing RMDs taken at the end of the year to those taken early in the year. It found an IRA lasted longer when RMDs were delayed until late in the year.

The study was done using a period when the stock market was steadily rising. The result would be different in a declining market or if the IRA were invested differently. The timing also probably doesn’t matter much if you take in-kind distributions, and the distributions remain invested.

     Take more than the RMD. The RMD is the minimum that must be distributed each year. You can distribute more. You might want to take a larger distribution when your income tax rate for the year will be less than usual, whether because of higher deductions or lower income. That will reduce the amount taken next year when your tax rate might be higher.

In the March and April 2023 issues, we discussed long-term strategies that involve taking substantially more than the RMD.