Two RMD moves that cut taxes and dodge the 25% penalty

Required minimum distributions on traditional IRAs and 401(k)s begin at age 73 or 75 depending on birth year, and missing the Dec. 31 annual deadline triggers a 25 percent penalty on the amount not withdrawn.

The IRS mandates RMDs because tax-deferred retirement accounts must eventually be taxed, according to the agency's rules under Treasury Regulation section 1.401(a)(9)-6. The SECURE 2.0 Act of 2022 shifted the RMD start age to 73 for those born between 1951 and 1959, and to 75 for those born in 1960 or later. These thresholds and penalty rates are subject to change, so retirees should verify the latest figures against official IRS guidance.

Two strategies can reduce the financial stress of RMDs. First, most financial institutions allow automatic RMD scheduling — quarterly or lump-sum — which eliminates the risk of missing the deadline. Second, qualified charitable distributions (QCDs) let IRA owners donate funds directly to registered charities without adding to taxable income, while still satisfying the withdrawal requirement.

The stakes are significant. A 73-year-old with $1.5 million in a traditional 401(k) faces a forced withdrawal of roughly $56,600 this year, according to IRS Uniform Lifetime Table calculations. A QCD can redirect that money to charity tax-free, potentially keeping the retiree in a lower tax bracket and reducing Medicare premium surcharges tied to income thresholds. For a retiree in the 24 percent federal bracket, a $56,600 QCD could save roughly $13,600 in federal income tax compared with taking the distribution as cash.

The QLAC Option for Deeper Deferral

For retirees who want to go further, a qualifying longevity annuity contract (QLAC) offers another lever. Under SECURE 2.0, IRA owners can move up to $210,000 of pre-tax retirement money into a QLAC — a deferred income annuity — and that premium is carved out of the account value used to compute RMDs during the deferral years. The latest permitted income start age under SECURE 2.0 is 85.

The QLAC framework lives in Treasury Regulation section 1.401(a)(9)-6 and IRS Notice 2014-66. The SECURE 2.0 Act eliminated the old cap that restricted QLAC premiums to 25 percent of a retirement balance and replaced it with a single dollar limit indexed to inflation. The reported current-year premium cap is $210,000, applied per person across all retirement accounts combined. QLACs are available in traditional IRAs, SEP and SIMPLE IRAs, and most 401(k), 403(b), and governmental 457(b) plans that offer them.

QLACs fit retirees who have other liquid assets, expect a long life, and want a floor of guaranteed income in their 80s. They are a poor fit for anyone whose main goal is trimming this year's tax bill, anyone with health issues that shorten life expectancy, or anyone who might need the money for a medical event, long-term care, or a home repair. Roth IRAs are already exempt from lifetime RMDs, so a QLAC inside a Roth defeats the point.

Trade-Offs and Practical Steps

The trade-offs are real. Once a QLAC premium leaves an account, it is locked up — it cannot be tapped for unexpected expenses. The guarantee is only as solid as the insurance company, and state guaranty associations have coverage caps that often hover around $250,000 for annuity benefits, varying by state. During the deferral period, the money sits with no market exposure, and unless an inflation rider is added, the future payout is a fixed number that will buy less over time. If the owner passes away before payments start and skipped the return-of-premium or death benefit option, heirs could end up with little or nothing.

For most retirees, the simpler moves — autopilot scheduling and QCDs — deliver the most immediate relief. Setting up automatic withdrawals before the Dec. 31 deadline keeps the 25 percent penalty at bay, while QCDs convert a forced taxable withdrawal into a tax-free charitable contribution. Every dollar donated through a QCD avoids federal income tax, and for retirees in higher brackets, that can mean thousands of dollars in annual savings. The tax is only deferred, not eliminated — every QLAC dollar eventually received is reported as ordinary income in the year it lands.

This article is for informational purposes only and does not constitute investment or professional advice.