Required Minimum Distribution Strategies for 2022 and Beyond

By Laurie Haelen

Laurie Haelen, AIF (Accredited Investment Fiduciary), is senior vice president, manager of investment and financial planning solutions, CNB Wealth Management, Canandaigua National Bank & Trust Company. She can be reached at 585-419-0670, ext. 41970 or by email at

Over the course of many years, the retirement landscape has evolved to a point where most people will rely heavily on assets accumulated in tax-deferred investment vehicles, such as 401(k)s, 403(b)s and individual retirement accounts (IRAs). This is a result of most employers doing away with the traditional pension model, thereby requiring most people to fund a large majority of their retirement income on their own.

Although Social Security remains available for many retirees, in many cases it is not enough for people to fund their lifestyle needs. Saving in tax-deferred vehicles through an employer is the easiest way to save for retirement. However, when it comes time to draw income from these tax-deferred vehicles, not all strategies are created equal, and it is important to review your options carefully before embarking on withdrawals from your retirement nest egg.

One strategy that has been popular for many years is to utilize a Roth IRA for a portion of your retirement savings. Roth IRA withdrawals are tax free if you have held the account for at least five years. If you meet the income requirements and can fund a Roth IRA or invest in a Roth 401(k) via your employer-sponsored plan, this is a simple way to reduce future income taxes. If not, a Roth conversion may be an option for you.

A Roth conversion involves taking an existing IRA and converting all or a portion of the account into a Roth IRA account. This conversion comes with a tax impact, as the amount distributed from your regular IRA is subject to ordinary income tax in the year in which you do the conversion. A Roth conversion can be advantageous in the early years of your retirement, as required minimum distributions have not yet started, and your tax bracket may be lower. A tax professional can help you understand if this strategy is beneficial for you.

A simpler option is to begin taking some withdrawals from your IRA earlier in retirement, yet not until after age 59½ to avoid the 10% penalty imposed prior to that age. Remember, the larger your IRA balance grows, the bigger your eventual required minimum distribution (RMD) will be. Drawing some funds from your IRA earlier than age 72 will spread the tax impact over many years, while reducing the future RMDs. To mitigate taxes, diversify the income you take, drawing a portion from your taxable assets (non-IRA holdings, such as brokerage accounts) and the rest from your 401(k)/IRA.

If you are already past the age of 70½, the options change, but there are still ways to reduce the taxable impact of retirement plan withdrawals. A relatively new one that is very effective is making a qualified charitable distribution (QCD) from your IRA to a qualified charitable organization.

QCDs satisfy RMDs but are not taxable, and an individual, whether married or single, can donate up to $100,000 per year from his or her IRA. Keep in mind that the funds must be sent directly from your IRA custodian to a 501(c)(3) organization. Donor advised funds are not eligible. Although QCDs are not deductions, your RMD, if given to a qualified charity, no longer counts as taxable income. In other words, if you are charitably inclined, this is a great way to reduce your taxable income while satisfying your desire to give to your favorite causes.

A lesser-known strategy is called a qualified longevity annuity contract (QLAC). These are annuity contracts that can only be purchased with assets from a qualified retirement plan, such as a 401(k), 403(b) or an IRA. You can contribute the lesser of 25% of a retirement account or $145,000 to a QLAC, and the advantage to this strategy is it enables you to defer the income from these funds until the age of 85.

Since they are annuity contracts, QLACS can provide an income stream later in retirement while reducing your RMDs in the earlier years of retirement. If you do not anticipate needing all your RMD income, a QLAC may be an option for you. Before embarking on this strategy, it is important to understand the financial strength of the insurance company that you choose.

Another option to mitigate taxes is to continue working past the age of 72, assuming you are investing in the retirement plan of the company where you are employed, and the plan document allows for you to defer withdrawals. Since you can only do this with employer-sponsored plans, in some cases you can do a reverse rollover (if the plan allows this). This involves moving some assets from an IRA into the company-sponsored plan, thereby reducing the amount of IRA assets subject to an RMD. Your 401(k) will not be subject to RMDs due to the “still-working” exception.

Keep in mind that the plan must have good, low-cost investment options and that the source of the money contributed to the plan must be the same as the funds in the current plan, i.e., pre-tax contributions.

I have described just some of the available strategies to help mitigate taxes that are inherent in withdrawing income from tax-deferred assets. Each strategy has its own set of unique circumstances, and it is therefore very important to meet with a qualified financial planner or tax adviser to see which one may be advantageous for you.

The key, though, is to realize that there are many options and that they are likely to change, so staying abreast of the options available can help you avoid surprises as you navigate your retirement years.