Personal Finance

3 Things All Baby Boomers Need to Know About Required Minimum Distributions

Maurie Backman

Published: January 24, 2025 4:14 pm

Saving for retirement in an IRA or 401(k) could result in major tax savings. Not only do you get to exempt some income from taxes, but you get to enjoy tax-deferred gains in your account, paying taxes only when you withdraw money from your nest egg down the line.

But there’s a downside to saving for retirement in an IRA or 401(k). Eventually, you’ll be forced to start removing money from your account in the form of required minimum distributions (RMDs).

Now for some people, RMDs aren’t a problem. If you’re required to remove $12,000 from your IRA based on your account balance and life expectancy, but you were already planning to do that to cover your living costs, then there’s no issue.

But for seniors who don’t need that money, RMDs can be a pain. Not only can they trigger a tax bill, but they can leave you with that much less money to grow in a tax-advantaged manner.

Still, with proper financial planning, RMDs don’t have to be a problem. Here are three things you should know about RMDs if you’re stressed out about having to take them as a retiree.

1. They no longer apply to Roth 401(k)s

It used to be that Roth IRAs were the only tax-advantaged retirement plan to let seniors off the hook with regard to RMDs. But you should know that Roth 401(k)s no longer impose RMDs, either.

That’s a good thing, because while Roth IRAs are subject to income limits, Roth 401(k)s aren’t. This means if you earn too much for a Roth IRA but you have access to a workplace plan with a Roth savings feature, you’re all set.

Of course, if you do earn too much for a Roth IRA, there’s always the backdoor option to explore. But a Roth 401(k) may just be easier.

2. They don’t need to be spent

It’s a big misconception that RMDs force you to spend down your savings year after year. It’s true that RMDs make you remove funds from a tax-advantaged savings plan or otherwise risk costly penalties. But the IRS isn’t going to force you to spend your RMDs.

If you’re in a position where you don’t need the money for living expenses, you can always take your RMDs and invest them in a taxable brokerage account, or use them to build a CD ladder at a bank offering great rates. Clearly, any gains or interest you earn in that scenario won’t be tax-advantaged. But you’ll at least have the option to keep growing your money if you don’t feel compelled to spend it on something specific.

3. Donating them could eliminate your tax hit

The main problem with RMDs is that seniors get stuck paying taxes on distributions they may not even want. But it’s not a given that RMDs will constitute a tax burden for you.

If you donate your RMDs to charity — something known as a qualified charitable distribution — you can get out of paying taxes. The key, though, is to donate your RMD directly to a qualifying organization, as opposed to you taking that money and then writing out a separate check.

RMDs are a reality for many retirees, but they don’t necessarily have to be something that messes with your finances later in life. There are steps you can take to avoid RMDs to begin with. But if those don’t work, there are ways to manage your RMDs in the most advantageous way possible. It also pays to consult a financial advisor for help in managing your RMDs and any associated tax bill that might come of them.