Smart Strategies for RMDs, Roth Conversions, and Inherited IRAs
As the year winds down, it’s the perfect time to review your retirement accounts and make a few smart moves that can lower taxes and set you up for success in 2026. Whether you’re retired, planning ahead, or managing an inherited account, recent IRS updates and SECURE Act 2.0 changes could affect your strategy.
Here’s what you need to know and how to make the most of it.
Required Minimum Distributions (RMDs): What They Mean for You
Once you reach a certain age or inherit an IRA, you’re required to take withdrawals from traditional IRAs and 401(k)s. These rules ensure your savings eventually get taxed, but they also give you an opportunity to plan your income and avoid surprises.
Key Rules:
- Current RMD age: 73 (born 1951–1959)
- Future change: 75 starting in 2033 (born 1960 or later)
- First RMD for those turning 73 in 2025: April 1, 2026; then every December 31.
Watch Out For:
- Taking two RMDs in 2026 (April and December) could push you into a higher tax bracket.
- Missing an RMD can mean a penalty of up to 25%, though the IRS may waive it if corrected promptly.
Planning tips:
- Give to charity tax-free: If you don’t need all your RMD for living expenses, you can donate up to $108,000 directly to charity through a Qualified Charitable Distribution (QCD). It counts toward your RMD, avoids taxes, and may help keep your income low enough to prevent higher Medicare premiums.
- Consider Roth conversions: Reduce future RMDs and taxable income.
Roth COnversions: Why THey’re worth considering
A Roth conversion moves pre-tax retirement assets into a Roth IRA, paying tax now for tax-free growth and withdrawals later. It also reduces future RMD obligations.
Key Rules:
- Year-end is an ideal time to consider conversions for planning purposes.
- You must take your RMD first; RMD amounts cannot be converted.
Watch Out For:
- Conversions may increase Medicare premiums (IRMAA) two years later.
- Example: Converting $50,000 in 2025 could raise your monthly Part B premium from $244.60 to $349.40 in 2027: an extra $1,257 per year.
- Roth conversions are irreversible.
Planning tips:
- Spread conversions over multiple years to manage the tax impact.
- Start early before retirement age, to convert pretax assets gradually.
- Reducing traditional IRA balances now means fewer RMDs later.
Inherited IRAs: New Rules for 2025
Starting in 2025, RMDs for inherited IRAs are mandatory. The IRS will no longer waive penalties for missed withdrawals (as they did from 2020–2024).
Key Rules:
- Spouse Beneficiaries:
- Can treat the inherited IRA as their own, delaying RMDs until their own RMD age.
- If the decedent had begun RMDs, the spouse must continue based on that schedule or roll the account into their own IRA.
- Non-Spouse Beneficiaries:
- Pre-2020 inheritance: The old “Stretch IRA” rules may still apply, allowing smaller RMDs over your lifetime.
- Post-2020 inheritance: Must fully distribute the account within 10 years.
- If the original owner died before starting RMDs: No annual RMDs in years 1–9; account emptied by year 10.
- If the original owner died after starting RMDs: Annual RMDs are required in years 1–9, based on your life expectancy; account fully distributed by year 10.
Watch Out For:
- Penalty for a missed RMD is 25% of the amount not withdrawn (reduced to 10% if corrected within two years).
- Not knowing whether the original owner had started RMDs can lead to mistakes and penalties.
Planning tips:
- Spouses may roll the inherited IRA into their own for long-term flexibility.
- Non-spouse beneficiaries can plan withdrawals over the 10-year period to manage taxable income.
- Confirm whether the original owner had started RMDs to set the correct schedule.
Looking Ahead to 2026
Year-end is the perfect time to review your retirement strategy. With SECURE 2.0 and IRS updates in play, thoughtful planning now can reduce next year’s tax burden and help you take advantage of new opportunities.
Our team can help you navigate RMDs, Roth conversions, and inherited IRA strategies. Reach out to schedule your year-end review and start 2026 with confidence.
FAQs:
Q: Are distributions from an inherited IRA taxable?
A: Yes. Distributions from a traditional IRA are taxed as ordinary income to the beneficiary. For Roth IRAs, distributions are tax-free if the account was established at least five years before the withdrawal.
Q: What is the five-year rule for Roth conversions?
A: Each Roth conversion must remain in the Roth IRA for five years before you can withdraw the converted amount tax-free without penalties. Keep this in mind when planning conversions near retirement.
Q: Can I use loans as part of my retirement tax strategy, and what are the risks?
A: Yes. 401(k) loans can offer short-term liquidity without triggering taxes, but they reduce your account’s growth and must be repaid on time. If you default or leave your job, taxes and penalties may apply. Be sure to plan carefully!
Diem Bui – CPA, EA, MBA, Tax Manager
References
Retirement plan and IRA required minimum distributions FAQs | Internal Revenue Service
Notice 2024-35, Certain Required Minimum Distributions for 2024
Retirement plans FAQs regarding loans | Internal Revenue Service
