The RMD Hack That Can Save Retirees Thousands

"A lot of people opt to save for retirement in a traditional IRA or 401(k) without really thinking about the long-term consequences. And that's understandable. When you're presented with the option to shield some of your income from taxes right away, it's natural to take it. But what inevitably happens is that down the line, you find yourself subject to required minimum distributions, or RMDs, if your money is in a traditional retirement account."

"RMDs aren't automatically a problem. Let's say you're forced to take a $24,000 RMD this year, but you need $2,000 a month from your savings to supplement your Social Security checks and cover your retirement costs. In that case, being forced to take that money out of your savings is irrelevant - you'd be doing it anyway. RMDs become more of a problem when you don't need the money and are forced to take withdrawals."

Traditional retirement accounts like IRAs and 401(k)s offer immediate tax deferral but trigger required minimum distributions later. RMDs can be benign if retirees already need the funds, but unwanted withdrawals create taxable income and potentially raise taxes on Social Security and Medicare premiums. Minimizing or avoiding RMD taxes can reduce overall tax exposure and ancillary costs. A qualified charitable distribution (QCD) allows an IRA owner to satisfy an RMD without increasing taxable income when the transfer goes directly from the IRA to a qualifying charity. A QCD cannot be made from a 401(k).

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