Ask Liz Weston

Get smart with your money

RMDs

Q&A: Is there a way to avoid taxes on RMDs?

By 3 Comments

Dear Liz: I have read advice on how to minimize taxes for people who potentially could have higher incomes and taxes after age 70 when they have pensions, Social Security payments and retirement account RMDs. The most common strategy seems to be doing Roth conversions during the later stages of employment, particularly if one spouse retires before the other so family income decreases.

However, I have not read good advice for older people when this problem has already started (other than noting that one way to avoid paying taxes is to donate the RMD funds). Is there any strategy for people who already have this triple income to reduce paying taxes and high Medicare premiums? We lived below our means for our working lives to save for retirement, but now see our savings dissipate due to the taxes and Medicare premiums.

Answer: Your situation illustrates why it’s so important to get good tax advice years before RMDs start, because you have fewer options after that point.

The alternative you mentioned is called a qualified charitable distribution. QCDs allow you to transfer a certain amount (up to $111,000 per individual in 2026) directly from your IRA to a charity. The transfer can satisfy your RMD requirement, but the amount is not included in your taxable income.

Another option is buying a qualified longevity annuity contract, or QLAC. These deferred income annuities start paying out guaranteed income for life once you’ve reached a certain age (up to age 85). You can use up to a certain lifetime amount of IRA money ($210,000 per individual in 2026) to purchase the contract. That money is excluded from RMD calculations until payouts begin.

As with any annuity, you’ll want to research your options, understand the downsides — including lack of liquidity, because the amount you spend typically can’t be recovered — and seek out fiduciary advice before you proceed.

Q&A: Broker made mistake calculating RMDS

By Leave a Comment

Dear Liz: While preparing our 2025 taxes, I noticed that our brokerage doubled the required minimum distributions for my husband and me for 2025. I called, and they said they were “running two systems” and sent a notice to investors to look for any problems. I do not recall ever receiving such a notice. Also, I did not notice the increase, as the bank used for these direct deposits also has multiple CDs, and the account is a “rainy day” fund that we use only for emergencies.

This money moved us into another tax bracket and we will be hit with a big tax bill. Also, we have lost out on future returns from the money that was distributed rather than left alone to grow. What is the brokerage’s responsibility? Do we just have to bite the bullet and pay the taxes on a mistake?

Answer: You had a 60-day window to return the excess withdrawal to your retirement accounts without incurring taxes, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Assuming that window has passed, you can consider making a claim against the brokerage firm for the higher taxes and lost earnings. Start by making a written complaint to the brokerage firm’s compliance department. If you don’t get satisfactory results, you can file a complaint with the FINRA, the Financial Industry Regulatory Authority, at https://www.finra.org/investors/need-help/file-a-complaint.

Unfortunately, the IRS holds taxpayers responsible for correctly calculating and taking RMDs, even when their brokerage firms make mistakes. You would be wise to put reminders in your calendar to check your brokerage’s calculations as well as the actual distributions while you still have time to correct any errors. You may also want to consider consolidating your finances to make it easier to monitor your accounts.

Q&A: How long should I wait before withdrawing from my IRA?

By

Dear Liz: My husband and I disagree over when to use pre-tax monies (e.g., IRAs). He’ll be 69, and I’ll be 67 in the coming year, so we aren’t required to take distributions yet, and he isn’t starting Social Security until 70.

He insists it’s better to use our regular assets to live on and let the IRA monies grow as long as possible. I’d rather save the regular assets (many of which have high capital gains) and leave them to our adult kids after we die.

The pre-tax funds are now $4 million. Now that our kids would have to empty the IRA accounts within 10 years (no more stretch IRAs), doesn’t that make it more reasonable to start using some of those funds now? I’m assuming the IRA balances would still be significant, even after taking required minimum distributions. I’ve gotten most of my IRA funds converted to Roth so we don’t have to take RMDs on that money, but he won’t consider conversions. Is he right about limiting our expenditures to money from the regular brokerage account? Once we start Social Security and RMDs, we’ll have to pay more taxes on any withdrawals compared to now.

Answer: A lot of savers got the message pounded into their heads that retirement accounts should be left to grow tax-deferred as long as possible. The idea was that you’d be in a lower tax bracket when you retired and were finally forced to start withdrawals. You could leave any remaining retirement money to your children and they could continue benefiting from tax deferral by extending distributions over their lifetimes.

As you note, this “stretch IRA” option is no longer available for most non-spouse beneficiaries, who must empty inherited retirement accounts within 10 years. Plus, good savers like you and your husband often face a higher tax bracket, not a lower one, when required minimum distributions begin. That further weakens the argument for delaying withdrawals as long as possible. Also, large-enough RMDs can raise your Medicare premiums and make more of your Social Security income taxable, compounding the overall cost.

From your heirs’ point of view, inheriting your Roth IRA or regular assets is a much better deal than inheriting a pre-tax IRA. Every withdrawal from the pre-tax IRA will be subject to income taxes. Not so the Roth, which offers tax-free withdrawals. Regular assets will get a new, stepped-up value at death so that no capital gains taxes will be due on the appreciation that occurred in the original owner’s lifetime.

You have a few years to make adjustments before you’re locked into RMDs. Roth conversions are one possibility, as are “proactive” withdrawals — starting distributions from your IRAs before they’re required. Additional options to explore include qualified charitable distributions (direct transfers from your IRA to a charity) and qualified longevity annuity contracts, which can provide a lifetime stream of income starting at age 85.

You’d be wise to consult a tax pro who can model different scenarios to figure out the best approach for your situation.

Q&A: Should I convert my IRA to a Roth?

By

Dear Liz: I have $160,000 in a 403(b) retirement plan and I’m 70. I know I have to start taking required minimum distributions (RMDs) at age 73. Should I transfer the funds to a Roth IRA or can I start taking the RMD from the 403(b) and leave the remainder to grow?

Answer: You can take your RMDs from the 403(b). Transferring the money to a Roth IRA would be known as a conversion, and that could make the entire amount taxable.

Late-in-life conversions can make sense if future RMDs will push you into a higher tax bracket than you are now, or if you’re willing to pay the tax bill to provide future tax-free income to your heirs. (Roths don’t have RMDs, so the account can be passed intact to your beneficiaries, who will usually have 10 years to drain the account.) Conversions can have other consequences, such as raising Medicare premiums, so a tax pro’s advice should be sought before proceeding.

Q&A: RMDs gave me permission to retire

By

Dear Liz: When Roth conversions came along, they were touted as a way to avoid taxable required minimum distributions in retirement. I had built up a solid “traditional” account, and saw no reason to add to my tax bill by converting. I ignored the noise, although I did open and contribute to a Roth account in addition to my traditional IRA.

Now in my 70s, living on Social Security, RMDs and some investment income, I’m grateful I blocked the noise. In fact, I have the RMD income to thank for getting me to realize that I could afford to retire. If I’d converted, I’d probably still be working and afraid to spend my tax-free Roth. And it turns out the tax bite on the RMD isn’t all that bad.

Answer: Thanks for sharing your perspective!

Q&A: How to avoid or reduce taxes on required minimum distributions

By

Dear Liz: I’m confused about required minimum distributions from my retirement accounts. I’d like to avoid taxes on my withdrawals, but it seems there is no way to avoid them. Please give me some guidance.

Answer: If you got a deduction for contributing this money, and you want to keep the funds you’re required to withdraw, then yes, you have to pay taxes on these distributions.

Required minimum distributions from retirement accounts currently have to start at age 73. There are a few exceptions. Roth accounts don’t offer deductions on contributions and also don’t have RMDs. You can postpone RMDs from a workplace plan such as a 401(k) or 403(b) as long as you’re still working for the employer that sponsors the plan, the plan offers this “still working” option, and you don’t own 5% or more of the company.

If you don’t need the money, you could consider donating your required minimum distribution to charity. Known as “qualified charitable distributions,” these donations can start as early as age 70½. As long as the money goes directly from an IRA to a qualified nonprofit, you can avoid paying taxes on the distribution. For 2025, the maximum qualified charitable distribution is $108,000 per individual. (You can’t make a qualified charitable distribution from a workplace plan, but you can roll some or all of the account into an IRA and make the donation from there.)

Sometimes RMDs can be large enough to catapult savers into a higher tax bracket and trigger higher Medicare premiums. If that’s the case, and you’re still a few years away from starting RMDs, consider talking to a tax pro about ways to manage the tax bill. Starting distributions early or converting some funds to a Roth IRA might be options.