Approaching 401K RMD's - What's a Good Approach?

[zaqxsw]

I converted all of our Traditional IRAs to ROTH after retirement, and before Social Security, over a 5-year period. It was during my lowest tax bracket for decades. The only RMD account we have left is my 401K. Of course you can't do QCD's from a 401K. I'd have to roll it over to another Traditional IRA that I would then have to take RMD's from unless my QCD's prevented it. I'm really not interested in doing this for various reasons.

I currently have no need to take withdrawals from any of our accounts. Certainly not when RMD's start in 2027. My primary goal is to avoid IRMAA surcharges, and I'm not too concerned about the possibility of moving from the 22% bracket to the 24% if I can keep my MAGI below IRMAA limits going forward. I project I'll be skirting just below the IRMMA limits even with RMD's added into my MAGI for a while.

So, does it make sense to start taking 401K withdrawals now, and in each year going forward, to reduce future RMD's? This could be withdrawals in addition to RMD amounts starting in 2027 from the 401K account. I would do so to the extent that I keep my estimated MAGI below IRMAA limits. A dubious, touchy job given swings in interest rates and capital gain/losses!

Or am I just being a borderline OCD financial nut and need to stop this silliness?

 

[Original Wally]

ONE thing to remember, if you are ALREADY donating to a charity, shift that payment to a QCD.

 

[Koolau]

Welcome to the club! Yes, dealing with your 401(k) and balancing off IRMAA or even NIIT and tax-bracket creep are real issues that some of us have had to deal with. I too converted all my tIRAs to Roths.

For me, I started taking from my 401(k) way before RMDs to lower the RMDs when they began. Of course, in the current market climate, my 401(k) has continued to grow faster than I've been able to empty it with RMDs and extra withdrawals.

SO, yes, I'd start now planning for the issues around RMDs. You may need to approach IRMAA by reducing OTHER sources of income if you can. You'll have relatively little ability to reduce RMDs without changing your 401(k) investments - but that sorta defeats the whole idea of maxing your overall investment results. It's not 3-D chess, but it's complicated and doing one thing may affect other things in unexpected ways.

Full disclosure: I did blow through 2024 IRMAA by accident!

Full disclosure (2): IRMAA isn't the end of the world.

 

[Al18]

There was nothing special about the funds in my 401k- I could get the same funds in an IRA. 401K withdrawals have mandatory 20% federal withholding. There is no mandatory federal withholding from an IRA. I would rollover the funds to an IRA.

 

[Sunset]

Are you allowed to take yearly withdrawals from your 401K or do you have to convert it all to IRA in one step ?

 

[zaqxsw]

Are you allowed to take yearly withdrawals from your 401K or do you have to convert it all to IRA in one step ?

I can do annual "Rollovers". I do not need to convert it all at once. I can also do annual withdrawals, but I don't think that is what you were asking about.

 

[engineernerd]

Have you put as much of your fixed-income portfolio as possible into your 401K? Putting your slowest-growing investments there helps reduce future RMDs and also makes them more predictable.

You could keep an eye on the 401K balance each year as you approach December 31, and do a partial rollover to a tIRA that is set up for QCDs, maybe? I have no experience with QCDs and very little knowledge about them, just so you know.

P.S. - I agree with Koolau that IRMAA, especially the first tier,* is a relatively modest cost.
* - Total $1148.40 per Medicare recipient in 2026. Includes both Part B and Part D for all 12 months.

P.P.S. - I don't see how you can "reduce your RMD" by taking a distribution each year in which you are subject to RMDs. Or do you mean to ask if it makes sense to take more than the RMD in the beginning several years so your RMDs further down the line will be lower? If so, I think that's a question for your crystal ball.

 

[mrfeh]

Might want to pay for a year of Pralana. It would attempt to optimize your results.

 

[zaqxsw]

Have you put as much of your fixed-income portfolio as possible into your 401K?

About 75% is fixed income. I don't want to play around with my overall AA to attempt to reduce my RMD's. Thanks for the suggestion!

 

[jazz4cash]

I’m glad you asked. I’ll be in similar situation in a few yrs. I think it starts with why do you maintain a 401k from a former employer? If you have good reasons (as I do) I would concentrate 401k asset allocation to funds that are good performers and not available outside the 401k like stable value funds. Beyond that I think I would move some funds to IRA to at least have the option of QCD’s but unless you move everything out of the 401k you will still have a 401k RMD since you can’t aggregate. I wonder if an annuity or SEPP would help.

 

[zaqxsw]

I’m glad you asked. I’ll be in similar situation in a few yrs. I think it starts with why do you maintain a 401k from a former employer? If you have good reasons (as I do) I would concentrate 401k asset allocation to funds that are good performers and not available outside the 401k like stable value funds.

Exactly what I am doing. Not interested in rolling anything over to a tIRA. Good feedback from everyone. Thanks, and I'll probably be going with the crystal ball approach.

 

[jollystomper]

This is a area I need to give more thought to. I am not really concerned, it is a "first world problem" for me. But, since I am now 2.5 years away from QCD eligibility and 5 years away from RMDs, I should probably start a new worksheet tab in my retirement spreadsheet workbook and do some modeling for this . I have been able to convert DW's tIRA completely to a Roth IRA, but, even with doing Roth conversions for the last 7 years, that will not be possible for my 401(k) and tIRA.

Right I am looking at my 401(k) and IRA RMDs being used for taxes, warm giving, charity, and reinvestment. Our combined SS income and my pension will be more than enough for our spending plans (and even if we crank spending up there is taxable interest and dividend income to cover that). I need to figure out how to manage my RMDs for those uses.

I kept my 401(k) for both the stable value fund and the ERISA protection (my state offers roughly equivalent protection for my tIRA, but moving from this state in the future is a consideration). Since QCDs must come from tIRA withdrawals, I will have to rollover enough monies from my 401(k) into my tIRA to support the QCD amounts I intend to use. I have to plan for this before RMD time.

So a possible strategy for me will be using tIRA RMDs completely for QCDs, and using the 401(k) RMDs for taxes, warm giving and reinvestment. We will hit the first IRMAA level at that time, but probably no further until one of us passes.

 

[audreyh1]

Can you at least have your slowest growing assets in your 401K, and your highest growing in your Roth?

Our IRAs are almost completely fixed income, so we don’t worry about them outgrowing future RMDs (including QCDs).

 

[jollystomper]

FWIW QCDs don’t have to come from RMDs. If you do a QCD from your IRA and you are subject to RMDs, then it will count towards your RMD amount as long as you haven’t already withdrawn the full RMD amount to yourself that year. But you can give additional beyond as QCDs, and you can give QCDs after 70.5 which is before you are subject to RMDs. QCDs must be gifted directly to the charity from the IRA.

Thanks. I made a mistake in my post that I have corrected. I had said that "QCD must come from RMD withdrawals", when I meant to say "QCDs must come from tIRA withdrawals". So I have to move 401(k) money into my tIRA to use it for QCDs. I will be looking to do this before I hit RMD time, since, as you state, I can do QCDs before I hit RMD age.

 

[davidfin]

I converted all of our Traditional IRAs to ROTH after retirement, and before Social Security, over a 5-year period. It was during my lowest tax bracket for decades. The only RMD account we have left is my 401K. Of course you can't do QCD's from a 401K. I'd have to roll it over to another Traditional IRA that I would then have to take RMD's from unless my QCD's prevented it. I'm really not interested in doing this for various reasons.

I currently have no need to take withdrawals from any of our accounts. Certainly not when RMD's start in 2027. My primary goal is to avoid IRMAA surcharges, and I'm not too concerned about the possibility of moving from the 22% bracket to the 24% if I can keep my MAGI below IRMAA limits going forward. I project I'll be skirting just below the IRMMA limits even with RMD's added into my MAGI for a while.

So, does it make sense to start taking 401K withdrawals now, and in each year going forward, to reduce future RMD's? This could be withdrawals in addition to RMD amounts starting in 2027 from the 401K account. I would do so to the extent that I keep my estimated MAGI below IRMAA limits. A dubious, touchy job given swings in interest rates and capital gain/losses!

Or am I just being a borderline OCD financial nut and need to stop this silliness?

Through planning and luck, the combined value of our SS benefit and projected RMD will pretty much equal our projected cash needs for the foreseeable future. What do they say about battle plans? The plan rarely survives the first shot.

 

[jazz4cash]

Through planning and luck, the combined value of our SS benefit and projected RMD will pretty much equal our projected cash needs for the foreseeable future. What do they say about battle plans? The plan rarely survives the first shot.

Funny how planning enhances luck, isn’t it?

 

[stepford]

Through planning and luck, the combined value of our SS benefit and projected RMD will pretty much equal our projected cash needs for the foreseeable future. What do they say about battle plans? The plan rarely survives the first shot.

Through luck and poor planning my SS benefit will roughly equal the tax I will owe on RMDs.

 

[Winemaker]

While I am not a big fan of annuities, buying a QLAC, can reduce your pretax balance to further reduce RMDs now. While one may miss out on the growth of the principal, your heirs can inherit your initial cost, depending on what kind of contract you buy.

While I am taking withdrawal, and Roth conversions, my $2.4M pretax has 6 more years before RMDs. I will make my choice then, if necessary.

 

[Exchme]

You could do Roth conversions for the next couple of years up to the top of the base IRMAA tier to get some of it into Roth and reduce the RMDs a bit.

As others mentioned, it's generally best to preferentially put your bonds/fixed income in tax deferred, leaving more room in Roth and taxable for stocks. It is easy enough to maintain your overall asset allocation when you do this and it would reduce your MAGI in taxable to minimize bonds that are in there.