How Retirees Can Avoid the IRA RMD

When you first begin investing in a traditional 401k plan or IRA, very little is said about how your savings will be handled in retirement. As an alternative, your focus from the start is on the stage of your investment on similar contributions, tax benefits, and fund elections before you choose to be a member of these accounts. Therefore, without a doubt, it might be surprising for you to know that you have to make IRA minimum distributions from these accounts when you attain the minimum age retirement (what IRS calls the "required beginning date").

Amazed? That's right -- the moment you reach the required beginning date (presently the April 1 after you reach 70 ½) you have to start making the yearly IRA RMD from the savings that you built over your whole life. But you may have no need for these funds for living expenses or other uses. Is it possible to avoid taking the IRA RMD and allow your savings to continue to grow intact?

Unfortunately, the short answer is that it's very difficult to avoid the IRA RMD, although you do have a few options.

One option is to convert a part or all of your retirement savings that you hold in traditional 401k accounts/IRAs to a Roth IRA. The traditional retirement savings plans differ from Roth accounts in that the Roth accounts are funded with money from post-tax contributions. Since the government has not missed the collection of any taxes on such accounts (given that no tax deduction was provided at the time of contribution), it has not need to force later distributions in order to collect tax. As a consequence, there is no IRA RMD from a Roth IRA for the account holder.

The catch is that to convert your traditional IRA accounts or 401(k) to a Roth IRA, you will need to pay the taxes that IRS has never collected on your pretax contributions. Obviously, the option of converting your funds to a Roth retirement plan cannot be used by everybody as a means to side-step the yearly IRA RMD as most may not have cash available to pay the tax. Let's take a look. Assume you have $150,000 accumulated in your traditional IRA and you fall in the tax bracket of 28%. It will cost you $42,000 ($150,000 x 28%) to convert your traditional IRA to a Roth IRA. Moreover, the moment you move your money into a Roth IRA, you are burdened with a waiting period of 5 years before you can remove all of your funds tax free. (However, you can withdraw all of your principal amount tax-free at any time). Please check other restrictions on Roth IRA withdrawals.

Another provisions which gives flexibility in taking the required minimum distribution is for those still working at age 70 1/2. While the following provision will not excuse you from taking your IRA RMD, it will excuse you from taking the RMD from your qualified plan.You can postpone taking your withdrawals from your qualified retirement plan e.g. 401k or 403(b) until April 1st of the year after you retire. That provision only applies to the qualified plan in which you are current participant and not to other qualified plan accounts which you may still own at ex-employers.