If you have over $1 million in an IRA or 401(k), the IRS is waiting to claim a significant portion of your savings through Required Minimum Distributions (RMDs). In fact, RMD taxes could be as high as 40%. But with careful planning, you can minimize what you owe and keep more of your hard-earned money.

In this post, we’ll explore eight strategies that can help reduce your RMD taxes and optimize your retirement income plan.

1. Smooth Out Your Tax Exposure

One common mistake retirees make is focusing only on minimizing taxes for the current year. However, when planning for RMDs, you need to look at the long term. Many retirees withdraw from their brokerage accounts first, as these withdrawals are taxed at lower capital gains rates. They leave their tax-deferred accounts, like IRAs or 401(k)s, for later, thinking it’s the best move.

Unfortunately, this strategy can lead to a “tax bomb” in later years when RMDs push you into higher tax brackets, increasing your RMD taxes. By taking some IRA income in the early years of retirement at lower tax brackets, you can avoid paying higher rates later.

2. Diversify Your Accounts for Tax Efficiency

Just like you diversify your investments, you should also diversify your accounts for tax purposes. Instead of focusing solely on pre-tax accounts like a traditional IRA or 401(k), consider spreading your savings across pre-tax, Roth, and taxable accounts. This gives you more flexibility when withdrawing funds in retirement, helping to minimize RMD taxes across all your accounts.

3. Take Advantage of the “Tax Valley”

The early years of retirement often come with lower tax exposure, creating a “tax valley” before RMDs kick in. During this time, you can consider converting part of your pre-tax IRA to a Roth IRA. While you’ll pay taxes on the amount you convert in the year of conversion, your Roth IRA will grow tax-free, and withdrawals will be tax-free in the future. This can be a powerful strategy to reduce RMD taxes later in life.

4. Defer Social Security to Maximize the Tax Valley

Deferring Social Security benefits can extend your tax valley, allowing you to take advantage of lower tax rates for longer. By waiting until age 70 to start collecting Social Security, you can reduce the need for large IRA withdrawals and create more room for Roth conversions, minimizing RMD taxes.

5. Work Longer to Defer RMDs

If you continue working past RMD age, you may be able to defer taking RMDs from your current employer’s 401(k), as long as you don’t own more than 5% of the company. This can help you avoid taxable withdrawals for a few more years and reduce your RMD taxes while allowing your savings to grow tax-deferred.

6. Calculate Your RMD Correctly

Ensuring that you take the correct amount of RMD each year is critical. Taking too little can result in a hefty 25% penalty from the IRS, while taking too much can increase your RMD taxes unnecessarily. If your spouse is 10 years younger, use the Joint Life Expectancy Table to calculate your RMD, as it allows for smaller withdrawals and lower taxes.

7. Optimize Asset Location

Where you hold your assets can make a big difference in your RMD taxes. Growth-oriented investments, such as stocks, should typically be held in tax-free accounts like Roth IRAs, where they can grow without increasing your RMDs. Meanwhile, more conservative investments, such as bonds, may be better suited for tax-deferred accounts like traditional IRAs, which are subject to RMDs.

8. Utilize Qualified Charitable Distributions (QCDs)

If you are 70½ or older, you can use Qualified Charitable Distributions (QCDs) to satisfy part of your RMD without paying taxes on the amount donated. This strategy not only reduces your taxable income but also helps you meet your charitable giving goals more tax-efficiently, reducing your overall RMD taxes.

Conclusion

By implementing these eight strategies, you can significantly reduce the RMD taxes you’ll owe on your retirement savings. Proper planning allows you to enjoy more of your hard-earned money during retirement, rather than handing it over to the IRS. Consult with your tax or financial professional to create a tailored plan that works for your unique situation.

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