3683 / What can be done before the IRA required beginning date in order to minimize required minimum distributions?

Many individuals can reduce their RMDs by converting a portion of their traditional IRA funds into Roth funds. Roth IRAs have no minimum distribution requirements, so converting traditional IRA funds to Roth accounts will reduce the owner’s RMDs. Unfortunately, if the taxpayer is still working, the taxpayer may still be in a high enough income tax bracket that the taxes generated by the rollover can be substantial (all pre-tax dollars rolled over from a traditional IRA to a Roth IRA are taxed at the owner’s ordinary income tax rate).

If the individual is still working, the taxpayer can also consider rolling the funds into a qualified plan (such as a profit-sharing or 401(k) plan) where distributions are not required until the later of the year the taxpayer reaches their RBD or the year the taxpayer retires. In this case, it becomes important that the taxpayer learn the rules of the qualified plan before making the rollover. Some plans do not accept rollovers, and others require that distributions begin at the individual’s RBD regardless of the option to postpone until retirement.

Importantly, both of these rollover moves must be made before the RMD requirements kick in—otherwise the individual will have to pay both the taxes associated with the RMD (which cannot be rolled over) and those generated by the rollover itself.²

A taxpayer can also reduce RMDs by purchasing a qualified longevity annuity contract (QLAC) (see Q 556)—which is a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the taxpayer reaches old age. The value of the QLAC is excluded from the account value when calculating the RMDs, though the taxpayer is limited to purchasing a QLAC with an annuity premium value equal to $200,000 (in 2023, up from $145,000 in 2022, $135,000 in 2020 and 2021). The SECURE Act 2.0 eliminated the rule that previously limited the value of a QLAC to 25 percent of the account’s value.  Further, the law modified the previous rule that limited the value of the QLAC to $145,000 by raising the cap to $200,000 (the $200,000 limit will be indexed for inflation in future years).³