If you turn 73 this year, you must begin your Required Minimum Distributions (RMDs) from your traditional IRAs and employer retirement plans (no RMDs from Roth IRAs). The amount of your 2025 RMD will be 3.77% of the value of all your traditional IRAs as of 2024. RMDs from employer plans are calculated separately. The RMD may be taken at any time during the year, or partial distributions may be taken throughout the year. If you have several IRAs, you may choose to take the entire RMD from just one of them, or take distributions from each of them.
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The RMD moment is a time to consider rebalancing your portfolio, if appropriate. Some retirees choose to reduce their equity exposures as they age, so as to reduce portfolio volatility in retirement. On the other hand, stock investments are more likely than fixed income investments to keep pace with inflation. Consider consulting with an Arvest Client Advisor on this aspect of your RMD planning.
For the first year of RMDs, a grace period is allowed. That first RMD may be paid as late as April 1 of the following year, that is, April 1, 2026 for those who turn 73 in 2025. There is no grace period for the following years, so anyone who waits will have to take two RMDs in 2026. The RMD will be taxed as ordinary income, so doubling up increases the potential for tax headaches. Taking the 2025 RMD before the end of the year will also lower the RMD for 2026, as the account will be smaller.
Qualified Charitable Distribution: A Strategy for Higher-Income Retirees
RMDs are subject to ordinary income tax, but for higher-income retirees they can have additional tax consequences to take into consideration such as:
- Increasing the amount of Social Security benefits subject to income tax
- Pushing the tax on realized capital gains into higher tax brackets
- Boosting Medicare Part B premiums
While these extra taxes affect only higher-income retirees, it is possible for the total marginal tax rate on an RMD to approach 50%. Aren’t tax rates in retirement supposed to be lower than in the working years, not higher?
One remedy for affected taxpayers to consider is the Qualified Charitable Distribution (QCD), sometimes referred to as a Charitable IRA Rollover. Up to $108,000 may be transferred directly from an IRA to a qualified charity in 2025 ($115,000 in 2026, for those planning ahead). The QCD satisfies the RMD mandate, but is not included in income, and so avoids the add-on taxes mentioned above.
Navigating RMDs & Roth IRA Conversions
To avoid the extra taxes triggered by RMDs, consider options well in advance of retirement. Generally, one can contribute to Roth IRAs and Roth accounts in 401(k) plans, as these do not have required distributions of any kind before death. The trade-off is the loss of the tax deduction for the contributions, but the offset is potentially tax-free income in retirement. Higher-income taxpayers may be able to account for the trade-off.
What about taxpayers whose income is too high to permit contributions to a Roth IRA? For singles, the contribution limit phases out as modified adjusted gross income goes from $150,000 to $165,000, for marrieds filing jointly, it is $236,000 to $246,000 in 2025.
An alternative approach, known as the “backdoor Roth IRA,” may also be available for consideration. Taxpayers with a higher income might consider making non-deductible contributions to a traditional IRA. There are no income restrictions for such contributions. Later, the non-deductible contributions can be converted to a Roth IRA, because there are no income limits on the conversions.
However, another limit does come into play, the “pro rata” rule. If the taxpayer has made deductible contributions to IRAs in the past, the conversion to a Roth must come proportionately from deductible and nondeductible contributions.
Simplified illustration. Taxpayer has an IRA worth $95,000, to which he makes a $5,000 nondeductible contribution. The next day, $5,000 from the IRA is converted to a Roth IRA. That is 5% of the total value of the IRA, so $250 comes from the nondeductible contribution, $4,750 comes from deductible contributions, and so it is taxable.
The taxpayer cannot establish separate IRAs to get around this problem. All IRAs, including SEPs and SIMPLE IRAs, must be combined to determine the percentages in this calculation.
A taxpayer might consider converting all traditional IRAs to Roth IRAs, perhaps over several years to reduce the income tax burden, before embarking on the backdoor Roth IRA technique. If this step is completed, the backdoor Roth IRA strategy may function as needed.
Be sure to discuss your tax planning options with a tax professional.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.
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