Trust Encompass

RMD Planning

Required Minimum Distributions are not just a withdrawal requirement — they are a tax event that compounds every year, interacting with your tax bracket, Social Security, and Medicare premiums simultaneously.

Many high-income earners spend decades contributing to tax-deferred retirement accounts, building up substantial balances. Then, at age 73, the IRS requires annual distributions — on a schedule they control, regardless of your income need. For many retirees, this creates a tax crisis that could have been substantially reduced with proactive planning.

01How RMDs Work

Required Minimum Distributions are calculated annually based on the account balance at December 31 of the prior year divided by a life expectancy factor from IRS tables. The percentage increases each year as the life expectancy factor decreases. For a 75-year-old, the RMD factor is approximately 4.4%. For an 85-year-old, it approaches 6.8%. On a $2 million IRA, these percentages represent $88,000 and $136,000 in forced taxable income — whether needed or not.

  • RMDs begin at age 73 under the SECURE 2.0 Act (increased from 70½ and 72)
  • Applies to traditional IRAs, 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs
  • Roth IRAs are NOT subject to RMDs during the original owner's lifetime
  • Failure to take RMDs results in a 25% excise tax on the amount not withdrawn

02The Compounding Tax Problem

RMDs don't just create taxable income — they interact with your entire financial picture. As RMD amounts grow year over year, they can push Social Security benefits into higher taxable territory, trigger or increase IRMAA Medicare premium surcharges, and push portfolio income into higher brackets. These interactions often create a self-reinforcing tax spiral that grows more expensive with each passing year.

  • Up to 85% of Social Security benefits become taxable above certain income thresholds
  • IRMAA surcharges are triggered at specific MAGI thresholds — RMDs can push you over
  • Higher ordinary income from RMDs can increase the tax rate on capital gains
  • Inherited RMDs from a deceased spouse can compound the surviving spouse's tax burden

03Pre-RMD Reduction Strategies

The most effective RMD management happens before RMDs begin — in the window between retirement and age 73. During these years, a systematic Roth conversion strategy can transfer assets from the taxable RMD bucket to the tax-exempt Roth bucket, permanently reducing future distributions while the conversions are made at today's known tax rates.

  • Roth conversions in the 60-72 age window reduce future account balances subject to RMDs
  • Converting $200,000-$400,000 per year can meaningfully reduce lifetime RMD pressure
  • Conversions must be modeled against projected Social Security and other income
  • The goal is often to equalize tax burden across decades, not eliminate it entirely

04Qualified Charitable Distributions (QCDs)

For retirees who are charitably inclined, Qualified Charitable Distributions offer a uniquely powerful tool. A QCD allows individuals over age 70½ to direct up to $105,000 annually (indexed for inflation) from their IRA directly to a qualifying charity — counting toward the RMD requirement without the distribution appearing as taxable income. For those who give regularly to charity, a QCD effectively makes charitable contributions pre-tax.

  • QCDs satisfy the RMD requirement without generating taxable income
  • Available to IRA owners age 70½ or older
  • Maximum of $105,000 per year per individual (2024, indexed for inflation)
  • Must be distributed directly from the IRA to the qualifying charity

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