4 Strategies to Avoid Tax Tsunami When Working Beyond 73 Years Old
Hey everyone—if you're reading this in April, you’re probably knee-deep in tax prep, trying to make that April 15th deadline for the 2024 tax year. Maybe you’ve already filed (congrats if you have!), but even if you haven’t, now is a great time to do a little future tax planning—specifically, thinking about Required Minimum Distributions, or RMDs.
What Exactly Are Required Minimum Distributions?
RMDs are the minimum amounts the IRS requires you to withdraw annually from most retirement accounts starting at age 73. These include:
Traditional IRAs
401(k)s
403(b)s
457 plans
Any other non-Roth retirement accounts
Starting the year you turn 73, you must begin taking withdrawals, and those withdrawals are counted as taxable income. If you miss an RMD, the IRS can slap you with a 25% penalty (though that drops to 10% if you make it up within two years).
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When Do You Have to Start?
Technically, you can delay your first RMD until April 1st of the year after you turn 73—but that means you'd have two RMDs in that year, which could increase your taxable income significantly. After that first year, the deadline is December 31st annually.
A notable exception: If you’re still working and don't own more than 10% of the company where your retirement plan is held, you can delay RMDs from that employer’s plan until after you retire.
How RMDs Are Calculated
Here’s a quick breakdown of the RMD calculation process:
Find your account balance from December 31st of the previous year.
Divide by a factor from one of the IRS RMD tables.
Most people use the Uniform Lifetime Table.
If your spouse is more than 10 years younger, you use the Joint Life and Last Survivor Table.
Example:
If you’re 73 and using the Uniform Table, the divisor is 26.5, which means your RMD is about 3.77% of your account. On a $100,000 IRA, that’s $3,770.
Multiple Accounts? Here's How That Works
If you have multiple IRAs, you can combine the total RMD and take it from just one account.
For 401(k)s or other employer plans, you must take separate RMDs from each.
Pro tip: Consider rolling over old 401(k)s into an IRA to simplify your distributions.
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Four Smart Strategies to Reduce Your RMDs
Now, let’s talk strategy. Waiting until 73 might not be the best idea, especially if your retirement accounts keep growing. Here are four ways to reduce the tax bite:
1. Start Withdrawals Early (Before Age 73)
Once you hit 59½, you can withdraw from retirement accounts without penalty. If you're retired, consider taking modest withdrawals in your early 60s to reduce your future RMDs. This is especially useful if you’re delaying Social Security to age 70 and need income in the meantime.
2. Do Roth Conversions
A Roth conversion means moving money from a traditional IRA into a Roth IRA. Yes, you’ll pay taxes on it now, but once in the Roth, it grows tax-free and isn’t subject to RMDs.
Bonus: If you can pay the taxes on the conversion using non-retirement funds, the strategy becomes even more powerful.
3. Make Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, you can donate directly from your IRA to a charity—up to $108,000 per year in 2024—and it counts toward your RMD.
The donation must be made directly from your IRA to the charity, and while it won’t show up on your 1099-R, it can reduce your taxable income. Keep good records and inform your tax preparer!
4. Use a Qualified Longevity Annuity Contract (QLAC)
A QLAC is a special kind of annuity you can buy with up to $200,000 from your retirement accounts. It delays income until as late as age 85, and the money used to purchase it is excluded from RMD calculations until payments begin.
It's a good option for those concerned about outliving their income—and want to reduce taxable income in their 70s.
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Closing Thoughts
RMDs may sound like just another tax rule, but with some planning, they don’t have to lead to a tax tsunami. Consider your income needs, your retirement goals, and whether any of these strategies fit into your plan.
If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question.
As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey
Founder & CEO of Morrissey Wealth Management
Host of the Retire with Ryan Podcast