Starting at age 73, the IRS requires you to take minimum distributions from your traditional retirement accounts whether you need the money or not. Without a coordinated strategy, RMDs can push you into higher tax brackets, increase Medicare premiums, and accelerate portfolio depletion. Here's how to minimize the damage.
What Are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are mandatory annual withdrawals that the IRS requires you to take from traditional IRAs, 401(k)s, 403(b)s, and most other tax-deferred retirement accounts starting at age 73 (under the SECURE Act 2.0, effective 2023). The government requires these distributions because the money in these accounts has never been taxed — and the IRS wants its share.
The amount you must withdraw each year is calculated by dividing your account balance on December 31 of the prior year by an IRS life expectancy factor from the Uniform Lifetime Table. For a 73-year-old, that factor is 26.5, meaning you must withdraw approximately 3.77% of your account balance in the first year. The percentage increases each year as the life expectancy factor decreases.
Why RMDs Can Be Financially Devastating Without a Plan
For many Michigan retirees, RMDs represent a significant — and often unwelcome — source of taxable income. Consider a retiree with $1.5 million in traditional IRA accounts. At age 73, their RMD would be approximately $56,600. If they're also receiving Social Security and have other income, this RMD could push them into the 22% or even 24% federal tax bracket.
But the tax bill isn't the only problem. As we discussed in our IRMAA article, a large RMD can trigger Medicare surcharges that add thousands of dollars per year to healthcare costs. And because RMDs are calculated on your prior-year balance, a strong market year can result in an even larger required withdrawal the following year — creating a compounding tax problem.
Strategy 1: Roth Conversions Before Age 73
The most powerful long-term RMD reduction strategy is to convert traditional IRA assets to Roth IRA assets before RMDs begin. Because Roth IRAs are not subject to RMDs during the owner's lifetime, every dollar converted to a Roth is a dollar that will never be subject to a mandatory distribution.
The optimal window for Roth conversions is typically the period between retirement and age 73 — when income is often lower than it will be once RMDs kick in. By systematically converting traditional IRA assets during this window, retirees can dramatically reduce the size of their future RMDs and the associated tax burden.
Strategy 2: Qualified Charitable Distributions (QCDs)
If you are charitably inclined and over age 70½, Qualified Charitable Distributions (QCDs) are one of the most tax-efficient strategies available. A QCD allows you to transfer up to $105,000 per year (2024) directly from your IRA to a qualified charity — and this transfer counts toward your RMD without the income appearing on your tax return.
This is enormously powerful for retirees who are already charitably inclined. Instead of taking the RMD as income, paying taxes on it, and then donating the after-tax amount to charity, a QCD allows you to satisfy the RMD entirely tax-free. For a retiree in the 22% bracket, a $20,000 QCD saves $4,400 in federal taxes — plus potential IRMAA savings.
Strategy 3: Coordinating RMDs with Social Security and IRMAA
RMD planning cannot be done in isolation. The timing of your Social Security claim, the size of your other income sources, and your IRMAA exposure all interact with your RMD strategy in important ways.
For example, delaying Social Security to age 70 maximizes your benefit — but it also means your RMDs will begin at the same time as your maximum Social Security benefit, potentially creating a large combined taxable income. In some cases, claiming Social Security earlier and using the proceeds to fund living expenses — while converting traditional IRA assets to Roth — can result in a better long-term tax outcome.
This is precisely the kind of coordinated analysis that requires your financial advisor, tax advisor, and estate attorney to work together — and that the Michigan Society for Financial Education teaches through our educational programs.