After Carl and I chatted with The Money Guys, we’ve had a LOT of conversations surrounding where our money is currently located, and how to optimize for less overall taxes paid. (And this article is for those of you who ARE NOT yet 73 and taking RMDs. So please keep reading for tips for our younger audience.)
We appreciate the roads, schools and safety services our tax dollars provide, don’t get us wrong. But we’re not looking to pay more in taxes than we have to. We optimized for taxes going into these investments, it seems silly NOT to optimize the money when you’re pulling it out.
We didn’t really think about the withdrawing part as we invested. “We’ll worry about that later,” we said.
Well, later is rapidly approaching, and the IRS has some thoughts.
RMDs: The IRS Wants Its Cut, Whether You Need the Money or Not
What bothers me most about Required Minimum Distributions is that “R” part. Required. Once you hit a certain age, the government requires you to start pulling money out of your traditional retirement accounts, whether you need the cash or not. This applies to traditional 401(k)s, traditional IRAs, SEP IRAs, and SIMPLE IRAs. Roth IRAs are exempt during the original owner’s lifetime, which is one more reason people love them.
The current RMD age is 73, thanks to the SECURE 2.0 Act, and it’s scheduled to bump up to 75 in 2033. The amount you’re required to withdraw each year is calculated by taking your account balance as of December 31 of the previous year and dividing it by a life expectancy factor from an IRS table. As you get older, that factor shrinks, which means the percentage you’re forced to withdraw grows every year. It’s the IRS’s version of “use it or lose it,” except it’s actually “use it, pay tax on it, and if you don’t need it, invest what’s left in a taxable account.”
Here’s where it gets painful for the FI crowd specifically. A lot of people who retire early spend their 40s and 50s living on a taxable brokerage account or Roth contributions, letting their traditional 401(k) and IRA balances grow untouched. That’s smart in the moment. But thirty years of compounding in a tax-deferred account can turn a modest balance into a genuinely enormous one. When RMDs kick in, the required withdrawal on a large balance can shove you into a much higher tax bracket than you planned for, and it can happen at the exact same time Social Security starts, which stacks two new income sources into the same tax year.
Miss an RMD entirely, or take out less than required, and the penalty is 25% of the shortfall (it drops to 10% if you correct the mistake within two years). That’s not a rounding error. That’s a real financial gut punch for a paperwork mistake.
The FI Community doesn’t want to pay the 10% early withdrawal penalty, they’re CERTAINLY not going to pay 25% for taking out less than required!
The fix isn’t complicated, but it does require you to actually think about it years in advance instead of waiting for your custodian’s reminder email. That’s where Roth conversions in lower income years, before RMDs start, become so valuable. Every dollar you convert and pay tax on now is a dollar that never generates a forced, possibly badly timed withdrawal later. It’s one of the few tax moves where doing it “too early” is rarely the mistake. Doing it too late is.
This is that tip for our younger audience I mentioned at the beginning of this article.
Carl and I are 52 and 53 respectively. We have 20 and 21 years before RMDs kick in, which gives us time to make some moves. There were plenty of years where, if we had been thinking about it, we could have done a few Roth Conversions to top off our tax bracket, or even just contributed directly to the Roth 401(k) option I had at my company.
We also have a Self Directed 401(k) that could have had a Roth designation.
Tax Gain Harvesting: Resetting Your Cost Basis
Tax Gain Harvesting is another tool you should be looking into. Perhaps your 401(k) doesn’t have so much in it, but your after tax brokerage account does. When you sell equities in an after tax brokerage account, you pay taxes on the gain, only. But what if your sales price is almost entirely gain?
On your journey, pay attention to the amount of gains you’ve had. Tax gain harvesting is super easy. You sell your holdings, and immediately buy them back (if you want to continue to own them). You’ve just reset your cost basis on a holding you want anyway. Yes, you will owe taxes on the gain, but now you’re in control of the timing of those taxes.
You don’t have to harvest all the gains at once, but if you pay attention to your tax brackets and have a bit of room in a lower bracket, filling it up by harvesting these gains gives you more control over how much tax you’ll pay.
Remember, regardless of your political affiliation, the US Government has been writing a LOT of checks in the past few years, from Covid relief checks to wartime payments, to Washington DC beautification projects, and those checks have to be funded somehow. Scott and I do not believe the current tax brackets will stay this way forever, even if they’re “permanent” right now.
QCDs: The Trick That Lets You Give Money Away and Skip the Tax Bill
If you’re 70 and a half or older and you’re charitably inclined, qualified charitable distributions might be the single most underused tool in the retirement tax kit.
Here’s how it works. Instead of taking your RMD as cash, depositing it in your bank account, and then writing a check to your favorite charity, you have your IRA custodian send the money directly to the charity. Because the money never touches your hands, it never counts as taxable income to you. You can direct up to $108,000 per person in 2025 this way (the limit is indexed for inflation, so check the current figure before you file), and it counts toward satisfying your RMD for the year.
Compare that to the alternative: take the RMD as income, then take a charitable deduction for the donation. Sounds like a wash, right? It’s not, for two reasons. First, most retirees take the standard deduction these days, so a charitable donation on top of that often doesn’t reduce your taxes at all unless you itemize. Second, even if you do itemize, a QCD keeps the income off your tax return entirely, which matters for more than just your tax bracket. It also affects things like the taxability of your Social Security and your Medicare premiums, both of which we’ll get to in a second.
The people who benefit most from QCDs are the ones who were already planning to donate to charity anyway. If giving is part of your retirement plan, and you’re of RMD age, doing it through a QCD instead of writing a personal check is close to a free lunch. You get to support the causes you care about, and the IRS never finds out the money existed.
One catch worth flagging: QCDs have to come from an IRA, not a 401(k). If your money is sitting in an old employer plan, you may need to roll it into an IRA first to take advantage of this strategy, so this is worth setting up well before your first RMD is due, not the week before the deadline.
Putting It Together
None of these exist in isolation. Your RMD affects your provisional income, which affects how much of your Long Term Capital Gains can fit into the 0% tax bracket, which affects your overall bracket, which affects whether that next Roth conversion makes sense. A QCD can lower your RMD’s tax impact and, as a side effect, help keep your other taxation down too. And we haven’t even discussed Social Security, yet!
The common thread is that none of this is automatic or forgiving. The IRS isn’t going to call and remind you that this was the year to start Roth converting, or that routing your charitable giving through a QCD would have saved you money. That’s on you, or on whoever is helping you plan.
The good news is that every strategy here rewards planning ahead by years, not weeks. If you’re in your 50s or early 60s and RMDs feel like a problem for future you, that’s exactly the right time to start mapping out conversions, deciding how you’ll structure charitable giving, and modeling what your provisional income looks like once Social Security enters the picture. Future you will be much happier paying less tax on a plan than paying full price for no plan at all.
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