Key TakeawaysTraditional tax-deferred account types is where the RMD will apply. The notable exception is anything with a Roth tag applied to it.The age for RMDs had been stuck at 70 and a half for many years. It moved to 72 briefly. It’s now at 73 and will be at 73, that’ll be the required beginning date for people, until 2033, and then in 2033, it’s set to move out to age 75.If you’re someone who has not yet retired, the best thing you can do to reduce your future RMDs is to look at other account types. If you are retired but not yet subject to RMDs, you can consider strategies like accelerating your withdrawals from the traditional tax-deferred accounts or doing conversions to Roth accounts during that period when your taxable income’s relatively low. If you’re age 70 and a half or older, you can take advantage of qualified charitable distribution. If you’re over age 73 and still working and contributing to an employer plan, you can forestall RMDs from that employer account at least while you’re still working.It seems like there should be some way to add art to my RMD timing, like lower your RMD amount by taking it when the market’s down, but the issue is that your RMD amount is based on whatever your balance was at the end of the previous year.You can use your RMDs to improve your portfolio a little bit. As long as you’re taking the right amounts from the right account types, the IRS doesn’t specify where you go for those funds. If you don’t need your RMDs, there’s nothing stopping you from reinvesting the money.

Margaret Giles: Hi. I’m Margaret Giles from Morningstar. Tax-deferred retirement accounts often provide a tax break when you make a contribution, but the trade-off is that you need to pay taxes and take withdrawals on a preset schedule in retirement. Joining me to discuss some of the questions she frequently receives about those required minimum distributions is Christine Benz. She’s Morningstar’s director of personal finance and retirement planning. Christine, thanks for being here.

Christine Benz: Margaret, it’s great to see you.

Which Accounts Are Subject to RMDs?

Giles: So, the first question is about which account types are subject to RMDs and which aren’t, so can you discuss that? I know there’ve been some changes recently.

Benz: Yes. So anything that is traditional tax-deferred account type, so that would be traditional IRAs, traditional 401(k)s, 403(b)s, 457s, traditional SEP IRAs, anything where you have made a contribution, possibly on a tax-deductible basis and enjoyed tax-deferred compounding on your money, that is where the RMD will apply. The notable exception is anything with a Roth tag applied to it. If you have Roth IRAs, Roth 401(k)s, any of the other Roth flavors, you are able to avoid required minimum distributions. And the change you noted, Margaret, was, due to Secure 2.0, Roth 401(k)s had been sort of this weird account type where you did have to take RMDs even though the Roth general tax treatment applied, and so that has been a change thanks to Secure 2.0. Now, Roth 401(k) s are not subject to RMDs.

Giles: Good to know that that’s not set in stone.

Benz: Yes.

How the Age for Required Minimum Distributions Is Changing

Giles: So, the age for required minimum distributions, RMDs, has been a bit of a moving target. Can you discuss what it is today and how it’s changing?

Benz: Yeah. It had been stuck at 70 and a half for many years. It moved to 72 briefly. It’s now at 73 and will be at 73, that’ll be the required beginning date for people, until 2033, and then in 2033, it’s set to move out to age 75.

Why Higher-Income Retirees Love to Hate Their RMDs

Giles: All right, so a couple of different moving targets we’re seeing. Now, you’ve said that affluent retirees love to hate their RMDs. Why is that?

Benz: Well, one is that it can increase their taxable income, so if they didn’t plan to take as much of a withdrawal from that traditional tax-deferred account, they still have to take it and pay the taxes due. So that is one key reason, and then there can be these knock-on tax effects that really bother retirees, in my experience. So the big one is what’s called the income-related Medicare adjustment amount, or IRMAA for short, and that’s a Medicare surtax, effectively, that if your income is above a certain level, then you will be subject to higher levels of Medicare premiums.

How You Can Lower or Avoid RMDs

Giles: So, are there any ways to lower those RMDs or even avoid them altogether?

Benz: There are a few things that people can think about, and the specific strategy that you use, I think, depends on your life stage. So if you’re someone who has not yet retired, still accumulating assets for retirement, the best thing you can do to reduce your future RMDs is to look at other account types, that you still may want to use the traditional tax-deductible account for a portion of your retirement savings, but you can also use Roth accounts. You can also use a taxable brokerage account, and those two accounts, both Roth accounts and taxable brokerage accounts, would not be subject to any predetermined required minimum distributions. So, pre-retirement, that’s kind of the best thing you can do, focus on tax diversification.

And then if you are retired but not yet subject to RMDs, this has been kind of called the sweet spot for RMD planning, and the reason is that you oftentimes have more control over your taxable income in those years than you did either while you were working and earning a paycheck or once those RMDs commence. So you can consider strategies like maybe accelerating your withdrawals from the traditional tax-deferred accounts or doing conversions to Roth accounts during that period when your income’s relatively low, your taxable income. And then you can also take advantage, if you’re age 70 and a half or older, you can take advantage of what’s called a qualified charitable distribution, and this is a way of taking a portion of that traditional tax-deferred account and giving it to charity, and there are some really nice tax benefits associated with that QCD. So that’s kind of the postretirement, pre-RMD window. Once RMDs commence, you have a few fewer tools in your toolkit. You could still do the QCD, and that can still be a very advantageous thing to think about.

For the rare subset of people who are over age 73 and still working and contributing to an employer plan, well, you can forestall RMDs from that employer account at least while you’re still working, so that’s another thing to think about. And then I would say for very affluent retirees, even if the RMDs have already started, if the goal is to earmark the assets for your heirs, you might want to think about doing some conversions even at that life stage. And in the realm of conversions generally, get some help on figuring out whether you should do conversions and also how much you should plan to convert in a given year. This is not back-of-the-envelope time. You really need someone who’s going to be able to plug it into a calculator and help you figure out the tax effects before you actually proceed.

Can You Lower Your RMDs by Taking Them When the Market Is Down?

Giles: Absolutely. Does it matter when in a given year someone is taking an RMD, and is it possible to lower your RMD amount by taking it when the market’s down?

Benz: Yes, I’ve gotten this question quite a bit, Margaret, and it seems like there should be some way to add art to my RMD timing, but the issue is that your RMD amount is based on whatever your balance was at the end of the previous year. So to use an example, in 2025, people who are subject to RMDs are going to look back to Dec. 31 of 2024. That’s the balance that they will use to calculate their RMDs. So unfortunately, it’s already sort of cooked by the time you come into the year when you have to take that RMD, it’s already been determined by whatever your balance was.

I will say there have been a few years, and the pandemic was a recent period, where Congress has put the brakes on RMDs for a given year with an eye toward letting people’s balances kind of repair themselves during a really bad market environment. Those episodes have been few and far between, but they are something that people can kind of think about, especially if that bad market environment starts to unfold very early in a given calendar year. That seems like an opportune time for Congress to think about tapping on the brakes with those RMDs.

How RMDs Can Improve Your Portfolio

Giles: You make the point that retirees can find a silver lining in the realm of RMDs. What is it?

Benz: Right, and there are a couple of things people can think about. One is that you can actually use your RMDs to improve your portfolio a little bit, so yes, you have to take the money out, you have to pay taxes on it, but as long as you’re taking the right amounts from the right account types, the IRS doesn’t specify where you go for those funds. You don’t have to take pro rata distributions across all of your holdings. If you have holdings that look ripe for the picking for whatever reason, maybe something fundamentally doesn’t add up or you’re overweight in them, you can pull your RMDs just from those holdings. So a good example would be if you need to rebalance. If your portfolio is heavy on, say, US stocks, and you think you need more in safer assets, you could pull your RMD from those holdings and leave the other ones alone.

And then another point I often make in the RMD context is that if you don’t need your RMDs, if you find yourself in that high-class situation where it’s more money than you actually need to live on, there’s nothing stopping you from reinvesting the money. So if you are still working and earning an income, you can actually put the money into a Roth IRA up to the annual contribution limits, or you could take it and put it in a taxable brokerage account where there aren’t any strictures around when the money must come out. So those are a couple of things to think about for people who find themselves with unneeded RMDs.

Giles: Absolutely. I like ending it on a silver lining. Christine, thanks for taking the time.

Benz: Thank you so much, Margaret.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.

Watch Can You Recession-Proof Your Portfolio? for more from Christine Benz and Margaret Giles.