Do 401(k) Withdrawals Before I Turn 73 Count Toward My RMDs?
January 9, 2025
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If you have a tax-deferred retirement savings account such as a 401(k), taking earlier or larger withdrawals than required won’t directly reduce future mandated distributions. However, since pulling money out now will likely reduce the future balance of your 401(k), it could indirectly reduce the size of the compulsory distributions. That’s because these obligatory withdrawals are calculated based on the amount of money in your tax-deferred account at the end of the year. In some situations, you can delay, reduce or even eliminate the need to take RMDs using other approaches, including transferring retirement funds to a Roth account or using funds in your 401(k) to buy a special type of annuity.
While the basic rules are laid out below, you should also consider speaking with a financial advisor about building the best retirement income strategy based on your specific circumstances.
When you save money for retirement using a tax-deferred account such as a 401(k), the taxes are only delayed, not avoided. In most cases, you will have to pay income taxes on the funds when you withdraw them. And rules about Required Minimum Distributions (RMDs) that necessitate regular withdrawals starting at age 73 keep most savers from leaving the money in the account to grow tax-free indefinitely.
The RMD rules are explicit and strict. One clear restriction is that you can’t apply withdrawals taken before RMDs are required to directly reduce the amount of future RMDs. The same goes for withdrawals in excess of RMD amounts later on after RMDs have begun.
Having said that, taking money out now or later in excess of the RMD amounts will help reduce the balance in the account that is subject to RMDs. Since RMD amounts are calculated as a percentage of the account balance, a lower balance will generally mean a lower RMD. Withdrawals are usually taxed as normal income no matter when they are taken, so it may make sense to take them now if you think you’ll be in a higher income tax bracket after retirement. A financial advisor can help you plan an execute an RMD strategy.
Some other ways to reduce, delay or avoid taking RMDs could also help. For one, if you are still working after retirement, you may be able to delay RMDs. This only affects 401(k) plans, not IRAs. And it only applies to 401(k) plans that belong to the company you are working for when you would otherwise have to take RMDs. That is, you’ll still have to take RMDs from 401(k) plans from previous employers. If you stop working, you’ll need to start RMDs. And some plans may not allow this at all.
Another approach that could help is to use funds in your 401(k) to purchase a special annuity. A Qualified Lifetime Annuity Contract (QLAC) lets you defer RMDs until as late as age 85. The IRS limits the amount of tax-deferred money you can use to purchase a QLAC to $200,000 for 2024. Also, you’ll have to pay taxes on future payments from the annuity and you can only delay these payments until age 85.
Roth conversions offer another potential solution. You can withdraw funds from your 401(k), paying taxes on the funds as regular income, then deposit them into a Roth IRA. Since Roth accounts are not subject to RMD rules, you won’t have to take mandatory withdrawals from the new Roth IRA.
The catch here is the prospect of a large current tax bill on the withdrawn funds. You may be able to mitigate this tax charge by only converting part of your 401(k) or by spreading the conversion out over several years. One approach is to set the annual or one-time conversion amounts so that they don’t push you into a higher tax bracket.
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Taking withdrawals now won’t directly reduce future RMD obligations. However, anything you do to reduce the balance in your 401(k) reduces the amount that will be used to figure your RMDs when you have to start paying them. This can make sense if you will be in a higher tax bracket after retirement. You can also reduce, avoid or delay taking RMDs until after the usual effective age of 73 by using 401(k) funds to buy special annuities, converting 401(k) funds to a Roth account that is not covered by RMD rules or by continuing to work at the employer sponsoring your 401(k).
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