Personal Finance

3 Retirement Steps to Take in Your 60s to Avoid Huge RMDs in Your 70s

Dana George

Published: February 7, 2025 5:30 pm

The average retired Social Security recipient collects $1,976 monthly, while the average couple receives $3,089. While some retirees have arranged their finances to live on Social Security benefits alone, most Americans need other sources of income. And that’s where RMDs come in.

What is an RMD?

RMD stands for Required Minimum Distribution, the minimum amount of money that must be withdrawn annually from certain retirement accounts once the account holder reaches a specific age — typically, 73. The requirement applies to:

• Profit-sharing plans
• Most 401(k) plans
• 403(b) plans
• 457 (b) plans
• Traditional IRAs
• SEPs
• SARSEPs
• Simple IRAs

According to the Internal Revenue Service (IRS), failure to take RMDs as scheduled can lead to stiff penalties. An RMD is the IRS’s way of ensuring taxes are eventually paid on funds saved before taxes are withheld.

How are RMDs calculated?

While plenty of online calculators are available to help you figure out your required minimum distribution, they’re calculated by dividing your prior year-end account balance by your life expectancy factor. In other words, the amount will be different for each retiree. While there’s not much you can do to change your life expectancy factor, you can manipulate how much money sits in your retirement accounts. 

How is my RMD taxed?

If the funds in your retirement account were tax-deductible when you made them, the full amount you withdraw will be treated as ordinary income for the year it’s withdrawn. If some of the funds in your account were non-deductible when you made them, that money will not be subject to income taxes. And because RMDs are taxable, you want to do everything possible to reduce or avoid taxes before your first minimum distribution is due. Here are three ways that can be accomplished:

#1 Donate to charity

According to Vanguard, qualified charitable distributions (QDCs) are not subject to ordinary income taxes. Instead, the amount donated is excluded from your taxable income. Let’s say you were to withdraw the money and donate it as cash. Cash donations have deductibility limits and are generally less advantageous to you than making QCDs. Whether you’re charitably inclined or don’t need your full RMD for everyday living expenses, donating to charity is a great way to reduce your tax burden. 

A couple of things to keep in mind about QDCs:

• You can’t claim the QDC as a “charitable deduction” on your taxes. However, the distribution doesn’t count as income, which will ultimately reduce your tax bill.
• An IRA custodian must transfer QDC funds directly. 

#2 Begin taking RMDs at age 59 1/2 

While most retirees must begin taking withdrawals at age 73, there’s no rule saying you can’t do it earlier. Starting at age 59 1/2 allows you to begin withdrawing funds earlier, but without being hit with a 10% penalty. If the idea appeals to you, here are a couple of benefits:

• Using a proportional withdrawal strategy — a fancy term for taking money from both your tax-deferred accounts and taxable brokerage accounts at the same time — you can avoid pushing yourself into a much higher (and more expensive) tax bracket. 
• By starting at age 59 1/2, you have a headstart on reducing the overall size of tax-deferred accounts.  By the time you must make a withdrawal, you’ve drawn your accounts down, which should minimize your tax burden in later years. 
• Withdrawing funds from a tax-deferred account earlier than initially planned may make it possible to defer claiming Social Security benefits. Every year you postpone collecting Social Security (up to age 70) increases your benefit by 8%. 

The downside: Taking withdrawals early could mean missing out on potential growth. This is where you’d do well to work with a financial planner. A financial planner can help you decide if your tax savings strategy will save enough money to make up for losing out on growth. 

3. Covert to a Roth account

Because contributions to a Roth account are taxed before being invested, Roth accounts are exempt from RMDs. In other words, you could invest the money and leave it to grow. Here’s how a Roth conversion works:

• You slowly begin to withdraw funds from your tax-deferred IRA. 
• The funds withdrawn are taxed as ordinary income, a tax you pay the year of the withdrawal. 
• The money you take from the tax-deferred IRA is moved to a Roth account, guaranteeing you’ll never have to pay taxes on it again. 

When it makes sense to convert to a Roth account:

It may make sense to convert if:

• You have reason to believe you’ll be in a higher tax bracket when it’s time to begin taking RMDs. 
• You’re thinking of your heirs and want to leave them a tax-free asset.

Hint: If you decide to convert tax-deferred investment funds to a Roth account, consider paying any taxes due with money from other taxable accounts, like a bank account or CD proceeds. That way, you exchange taxable assets (like money from your bank account) for a tax-free asset. 

Your life is likely to look quite different after retirement. One thing that’s unlikely to change is the desire to avoid paying too much in taxes. Taking time in your 60s to plan for eventual RMDs is an ideal way to minimize the amount you owe Uncle Sam in your golden years.