The government wants its share of tax dollars from traditional retirement accounts, which have often grown without being taxed for decades. While the SECURE Act 2.0 pushed back the age when you have to start taking Required Minimum Distributions (RMDs) to 73—and eventually 75 in 2033—it can still be hard to lower your RMDs once your account grows large. The key is advanced tax planning, often done years in advance. But even if you haven't started planning early, here are four strategies to help lower your RMDs and reduce your tax burden.

Distribution Planning: Take Withdrawals Early

Many people retire and find themselves in one of the lower tax brackets, like 10%, 12%, or 22%. While it might seem smart to let your traditional retirement account continue to grow tax-deferred, that growth could push you into a higher tax bracket later when you're forced to take RMDs.

Instead, you might want to consider strategically taking out money earlier when you’re still in a lower tax bracket. For example, if you have a large retirement account—let’s say $2 million or more—you could end up in a higher tax bracket when RMDs kick in, even if your balance is smaller. If you’re married, there’s also the risk of the "widow’s penalty." This happens when one spouse passes away and the surviving spouse files as a single taxpayer, which often results in higher taxes.

To avoid getting caught in a higher tax bracket later, you can gradually take out money now while you're in a lower tax bracket. This way, you’re not hit with a large RMD at a higher tax rate down the road. Also, keep in mind that the current tax cuts under the Tax Cuts and Jobs Act are set to expire in 2026. If your tax rate increases then, the money you withdraw now at a lower rate will save you from paying higher taxes later.

Consider Roth Conversions

A Roth IRA conversion is another way to lower future RMDs. When you convert part of your traditional IRA to a Roth IRA, you pay taxes on the converted amount now, but the benefit is that Roth IRAs aren’t subject to RMDs. This means you won’t be forced to take money out at a later date, and it grows tax-free.

One strategy is to perform “serial Roth conversions,” which means converting small amounts each year while you’re in a lower tax bracket. This spreads out the tax hit over several years, rather than paying it all at once. For example, if your retirement account has grown to $2 million, converting small amounts every year can prevent the balance from growing too large and creating even larger RMDs later.

This type of planning isn’t about paying the least tax this year, but rather paying the least total tax over your lifetime. By converting portions of your account now, you avoid larger RMDs in the future, which could come at a higher tax rate.

Use Qualified Charitable Distributions

A Qualified Charitable Distribution (QCD) allows you to donate up to $100,000 from your IRA directly to a charity once you’ve reached the age where you need to take RMDs. The big benefit here is that a QCD is tax-free. So, if you’re charitably inclined, a QCD can be a smart way to reduce both your taxable income and your future RMDs.

Here’s how it works: Let’s say you’re already taking RMDs, and you decide to donate part of it to a qualified charity. That amount won’t count as taxable income, which lowers your tax bill. This can also help reduce taxes on things like Social Security or Medicare premiums, which are affected by your overall taxable income.

This strategy is useful if you already give to charity and want to reduce your future tax burden. Instead of making donations out of your regular income, you can make them directly from your IRA.

Purchase a Qualified Longevity Annuity Contract

A Qualified Longevity Annuity Contract (QLAC) allows you to defer part of your RMDs to later in life, typically until you turn 85. Essentially, you use some of your IRA money to buy an annuity that provides a steady stream of income starting later in life. The advantage is that the amount you use to buy the QLAC doesn’t count toward your RMDs right away, which can help reduce your taxable income in earlier years.

As of SECURE Act 2.0, you can now put up to $200,000 into a QLAC, which is an increase from the previous limit. This could significantly reduce your RMDs if both you and your spouse take advantage of this strategy.

QLACs have become more attractive lately because rising interest rates have increased the income they provide. For example, in December 2021, a 70-year-old man could buy a QLAC for $135,000 that would pay $38,000 annually starting at age 85. A year later, thanks to higher interest rates, that same $135,000 could buy $75,000 in annual income.

While QLACs may not be for everyone, they offer a way to ensure that part of your retirement savings lasts throughout your life. Plus, with the "return of premium" feature, your heirs can inherit the amount you paid in (minus any payouts), so you don’t lose the money if you pass away early. 

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By considering these strategies, you can lower your RMDs and reduce the taxes you pay overtime. Advanced planning and working with a financial advisor can help you choose the right approach for your situation and ensure you’re making the most of your retirement savings.