Retirement Planning, Elder Law, and Senior Finance Retirement: How to Lower Taxes on Your RMDs 1/5/2022 | By Sandra Block Sandra Block, senior editor at Kiplinger’s Personal Finance magazine, examines two ways to lower taxes on your RMDs – required minimum distribution, i.e., the amount of money that must be withdrawn from an employer-sponsored retirement plan. The buoyant stock market has swelled the amount of money Americans have in their retirement savings plans, which is undoubtedly a welcome development for seniors who will need that money to live on. But most of the more than $13 trillion in savings is stockpiled in tax-deferred plans, which means retirees will eventually have to pay taxes on it. And depending on the size of the account, that tax bill could be significant. The IRS requires owners of traditional IRAs and other tax-deferred accounts to take minimum annual withdrawals starting at age 72. RMDs are taxed as income, so a large withdrawal could vault you into a higher tax bracket. In addition, more of your Social Security benefits could be taxed, you could lose out on certain deductions and credits tied to your modified adjusted gross income, and you could pay higher premiums for Medicare parts B and D. Lower taxes on your RMDs Here are some ways to reduce the size of your required withdrawals and, consequently, your tax bill. Tap your IRA for charity. If you’re 70 1/2 or older, you can donate up to $100,000 a year from your IRAs to charity via a qualified charitable distribution, and after you turn 72, the QCD will count toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income, which besides lowering your federal and state tax bill can also lower taxes on items tied to your AGI, such as Social Security benefits and Medicare premiums. Make sure the donation is made directly from your IRA to the charity: otherwise, it won’t qualify for a QCD. You can’t make a QCD to a donor-advised fund or private foundation, and the recipient must be a 501(c)(3) charity registered with the IRS, says Mari Adam, a certified financial planner in Boca Raton, Florida. Convert to a Roth. When you convert money in a traditional IRA to a Roth, you must pay taxes on the amount you convert (although part of the conversion won’t be taxed if you’ve made nondeductible contributions to your IRA). But after the conversion, all withdrawals are tax-free, as long as you’re 59 1/2 or older and have owned a Roth for at least five years. Unlike traditional IRAs and other tax-deferred accounts, Roths aren’t subject to required minimum distributions, so if you don’t need the money, you can let it continue to grow, with no obligation to the IRS. Converting to a Roth is also a hedge against future tax increases. Plus, if you expect to leave funds in your IRA to your children, converting to a Roth could lower the taxes they’ll pay on their inheritance. However, a large Roth conversion, like a large RMD, could push you into a higher tax bracket and trigger other tax consequences. “My advice on this is, don’t aim too big,” because you may live to regret it, Adam says. You can keep the cost of a conversion down by converting during the period between the year you retire and the year you’re required to take RMDs. © 2021 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC. Related: Should adult children have a joint bank account with their parents? Read More Sandra Block Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.