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

The required minimum distribution (RMD) rules essentially require taxpayers to begin withdrawing funds from IRAs when they reach age 73 (72 for 2020-2022, 70½ prior to 2020). The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy, determined using IRS actuarial data.¹ Despite this, there are ways that individuals can minimize their RMDs in the years prior to attaining their required beginning date (RBD) if they will have no immediate need for the funds at that time.

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