The Best Strategies for Your Required Minimum Distributions

Daniel Penzing
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Roth Conversion

The Roth conversion ladder is a retirement strategy that involves converting a retirement plan, such as an IRA, to a Roth IRA.

The strategy involves spreading the conversion amount over a number of years. You begin by converting the least earnings each year. Then you add the money you converted in your next year. Eventually, you convert the entire balance to a Roth.

This strategy is best suited for someone who is retiring soon, or someone who has a variable income stream. It has the advantage of allowing you to pay a lower amount of taxes on a larger amount of earnings.

The downside is that it’s a less tax-efficient strategy than a lump-sum conversion. It’s also trickier to convert after-tax funds to a Roth. What’s more, each conversion is counted as a separate distribution.

You should consult a tax professional before using this strategy to make sure it’s appropriate for you.

Qualified Charitable Distribution (QCD)

If you made after-tax contributions to your IRA or 401(k) for yourself, the distributions from those plans are not taxable, and hence, they are exempt from the RMD rules. They are also eligible for the QCD program if you are age 70½ or older. The QCD is similar to the RMD program because it allows you to continue to make qualified charitable distributions directly from an IRA or 401(k) plan to benefit public charities and certain other organizations.

Who Qualifies for this QCD?

The following institutions can make this QCD:

  • C corporations unless they are profitable for five years prior to the year of the distribution
  • S corporations for which the owner is age 70½ or older
  • Partnerships if the owner is 70½ or older
  • Limited liability companies if the owner is 70½ or older
  • A trust or estate if the owner is 70½ or older
  • A personal trust administered by a custodian to make a QCD

How it is Done:

To use the QCD procedure to make a direct transfer from an IRA or 401(k), you must be age 70½ by December 31 of the year for which the distribution is made. You must also receive notice from your IRA custodian or from your plan administrator that you have the right to do this distribution.

Those Working at Age 70½

For those required minimum distributions (RMDs) who are under age 70½, or the “direct transfer rule,” you will need to do a little more legwork to keep from being forced to take a larger distribution than necessary. But congratulations, you have the opportunity to earn your RMDs. And while this strategy may take a few extra minutes of your time every year, you can carve out several thousand dollars over the course of your lifetime simply by following the proper steps. And you can make this money by investing your RMDs.

So what do you need to do to take advantage of your RMDs instead of letting the Feds have them?

Start by finding out how much your RMD is. Use an RMD calculator to get an estimate of how much you are expected to withdraw each year.

Now go to your bank, credit union, or brokerage account and request a check or an electronic withdrawal for the amount that you calculated. This is the number you’ll direct your financial professionals to use each year.

If you are using a bank or credit union to make the withdrawal, they will provide you with a check. If you are using your brokerage account, the RMD amount will be automatically taken from your account. Either way, the amount will be subtracted from your account at the time of withdrawal.

First-Year RMD

For the first year you are taking RMDs, you have one predetermined amount you must withdraw that is based on your age on December 31. Because you are just starting out, this withdrawal will be large so you need to get your money working as soon as possible.


As you can see in the example to the right, Bob has one required withdrawal for the year, and it’s based on his age (91) and is 4.6% of the amount in the IRA.

What Bob wants to do is withdraw a lump sum from his IRA and then invest it into another retirement account. He has a Traditional IRA contribution deadline on December 31 (contributions are due by April 15 the year after). In order to make his full contribution, he must take his full withdrawal by December 31.

Using 1/30th for the monthly withdrawal, Bob can divide the lump sum to complete his full contribution by his deadline.

If needed, if you can or need to take less than the required withdrawal in a certain year, you can. However, you will lose out on the earnings you would have otherwise received on the amount not withdrawn for that year.

Be Strategic

With so many different investment options and tax considerations, deciding the best time to start taking your required minimum distributions (RMD) can often feel overwhelming. If you have just created a retirement account at work or you are thinking about moving some accounts around, the best way to approach your RMDs is strategically.

Before you dive into creating a complex plan, the biggest step you can take is to know where you are today.

What is your current age?

What is the minimum amount you have to withdraw?

What types of taxes will you pay before you can actually withdraw your money?

These are all fundamental questions to ask before you create a complex system to determine when you should start taking RMDs.

Here are some specific considerations you should make when deciding where to start taking your distributions:

Reinvest the RMD

Just because you are forced to take the RMD, doesn’t mean you have to waste these assets. For example, you could invest the RMD that you draw from your IRA and turn your RMD into a new source of funds. In this case you can invest your RMD in a growth stock mutual fund that has potential to offer higher returns in the future.

Thanks to the power of compounding your carefully chosen investment will boost your retirement nest egg.

Put It in a CD

Generally, your RMD is taxed at a lower rate than most of your other income. Tax rules say that your RMD is figured at the same tax rate that you pay on your other retirement income. But, that doesn’t mean you will pay the same rate. If you put your RMD into a CD, you will most likely pay a lower rate and defer paying taxes. This is because a CD is given tax-deferred status.

It may also make sense to invest the RMD in a CD to get a better rate than you would get from a savings account. Even if you decide to put your RMD into a CD that is only for one year, this will give you time to figure out how to invest and protect your assets.


All eligible retirement accounts have a required minimum distribution provision; sometimes it’s referred to as the RMD. In a nutshell, this is the minimum amount of money that you are required to withdraw from your traditional IRA or 401(k) during the year (beginning in the year you turn 70.5). However, there are ways that an employee can delay or even escape the RMD altogether, the most common being by transferring the account to an HSA or qualified continuing care facility.

If you are already familiar with RMDs and know all the ins and outs of the RMD rules, you may want to jump to the best strategies for managing your RMDs without penalties. If you’re not familiar with RMD rules, or you’re a bit rusty, the next section is for you.

What are Required Minimum Distributions (RMDs)?

As you probably learned in Econ 101, one of the key benefits of allowing tax-deferred investment plans is that it allows assets to grow over time for retirement and other purposes. The caveat, of course, is that the investor will have to pay taxes on distributions taken from the accounts, which can be steep if an individual hasn’t invested correctly (a big no-no, we know).