What If I Don’t Need the Money From My RMDs?

You May Have to Withdraw Money You Don’t Need

You’ve worked hard to save for retirement. You may have enough income from Social Security, a pension, or other sources to cover your living expenses. But once RMDs begin, the IRS generally requires withdrawals from certain retirement accounts, whether you need the money or not.

These withdrawals can increase taxable income. They may also affect Social Security taxes and Medicare premiums. Planning before RMDs begin may help reduce future required withdrawals and the taxes they create.

Betty’s Story: Planning Before Retirement

Betty Jones is a hypothetical household. Betty is 62 and plans to retire at 67. She has $1.5 million in traditional retirement accounts and no Roth savings. She expects $36,000 a year from Social Security when she retires and plans to spend $65,000 a year after taxes.

Betty wanted to know what might happen when the IRS requires withdrawals from her retirement accounts, even if she does not need the money for living expenses.

What SageonRQ Found

SageonRQ evaluated 14,106 retirement strategies using Betty’s information. The selected Modeled Plan included Roth conversions, which generally create taxable income when money moves from traditional retirement accounts to Roth accounts. The IRS explains Roth IRA conversions.

Four Ways Betty’s Projected Outcome Improved

1. $618,294 More in After-Tax Retirement Value

Betty’s projected net-of-tax ending value increases from $5,457,047 under the Current Plan to $6,075,341 under the Modeled Plan. That is an increase of $618,294 in projected after-tax retirement wealth.

2. $145,243 Less in Lifetime Taxes

Her projected lifetime taxes fall from $922,498 to $777,255. Retirement tax decisions can affect many years, not just the year in which a decision is made.

3. Nearly $3 Million Less in Required Withdrawals

Projected lifetime RMDs fall from $3,658,595 to $672,091, a reduction of $2,986,504. Reduced RMDs are not the same as tax savings. This means much less money must be withdrawn under the RMD rules, giving Betty more control over taxable income.

4. Nearly 95% of Ending Savings in Roth Accounts

Betty begins with no Roth savings. Under the Modeled Plan, her projected Roth balance reaches $5,747,339 at age 90, or approximately 94.6% of ending retirement value. Qualified Roth withdrawals are generally free of federal income tax. A larger Roth balance may also provide tax benefits for heirs under current rules, depending on their circumstances. See IRS guidance on inherited Roth accounts.

Why Did Betty’s Plan Improve?

SageonRQ identified approximately $2.17 million in total projected Roth conversions. Moving money into Roth accounts over time changes future taxable withdrawals and the mix of retirement assets. In this illustration, the combined strategy produces a higher net-of-tax ending value, lower lifetime taxes, and fewer RMDs.

Should Everyone Make Roth Conversions?

No. Roth conversions usually create taxable income in the year of conversion. A strategy that helps one household could raise taxes or lower ending wealth for another. The results depend on income, spending, assets, tax rules, and the years remaining in the plan.

What If You Don’t Need Your RMDs?

You generally still must take them when the rules apply. You do not have to spend the money. After paying taxes due, you can generally reinvest what remains in a taxable account. Some eligible IRA owners may also use qualified charitable distributions. Planning ahead may provide other choices, including Roth conversions before RMDs begin.