The IRS Has an RMD Plan for Your IRA

The IRS has a plan for drawing down your IRA. Do you have one?

How much is spendable depends on many moving parts, to be addressed before and after retirement, and that useful period between retirement and the time when Social Security and RMDs begin.

At a certain age, the IRS stops waiting. It requires money to come out of qualified (before-tax) retirement accounts, whether the account owner needs the income or not. For some retirees, the RMD is welcome cash flow. For others, it is a forced taxable event that can affect tax brackets, Medicare premiums, Social Security taxation, and estate planning.

The earlier you plan the more options you’ll have. These include the planners’ standard playbook (Roth IRA conversions) to Stretch IRA Trusts and a menu of charitable giving trusts for larger accounts.

Here are three less-discussed planning strategies worth understanding.

1. In-kind distributions

Most people assume an RMD must be taken in cash. It does not always have to be. In some cases, securities can be distributed "in kind" from the IRA to a taxable investment account.

This can accomplish several things. The fair market value of the transferred shares counts toward the RMD. The investor avoids selling a stock or fund they still want to own. The assets can continue to participate in future growth outside the IRA. And once the investment is in a taxable account, it may become eligible for capital gain treatment and, if held until death, a possible step-up in basis for heirs.

This freezes the scratchy problem of converting capital gains to ordinary income taxation.

The drawback: the RMD is still taxable as ordinary income. If shares are moved instead of cash, the retiree needs other cash or liquid assets to pay the tax bill.

2. QLAC longevity annuities

A Qualified Longevity Annuity Contract, or QLAC, is designed to address one of the biggest planning risks: living a very long time.

A QLAC allows part of a qualified retirement account to be converted into future guaranteed income, often beginning much later in retirement. Used properly, it may reduce near-term RMD pressure on the amount used to buy the contract and create more income for the years when health care, long-term care, and longevity (income) risks may become more serious.

The tradeoff is flexibility. Dollars used for a QLAC are no longer freely available in the same way an IRA balance is. The strategy must fit the client’s broader liquidity, health, income, and family needs. It is not just a tax decision.

3. Flexible gifting strategies

Some retirees take RMDs they do not actually need for living expenses. After taxes, those dollars can still be used intentionally.

A managed gifting strategy may help children or grandchildren fund Roth IRAs, education accounts, housing needs, or other long-term goals. In some cases, the better strategy might involve trusts, especially where asset protection, divorce risk, creditor concerns, or future access to income and principal matter.

The drawback is that gifting should not come at the expense of the parent’s own retirement security. Health expenses, long-term care, inflation, and the need for future income must come first. Giving away assets that may later be needed can turn a tax strategy into a family burden.

RMD planning is not just about avoiding penalties. It is about deciding what the retirement account is supposed to accomplish.

The IRS will eventually require distributions. Good planning asks whether those distributions can meet goals and not just create taxable income.