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Meet Alice. She recently retired after spending 30 years teaching English literature at a world-renowned university. She also made responsible choices with her money and paid off her house while building a nest egg worth $700,000.
Much of this money is in a traditional IRA. She also receives a pension of $5,000 per month and Social Security benefits of $2,000 per month, after taxes. The combined checks comfortably cover all of her current living expenses, amounting to about $6,000 per month.
Earlier this year, Alice learned that required minimum distributions (RMDs) could help her money go further. She now wants to know the optimal way to comply with RMD rules without paying too much tax down the road. Although she has 12 years before she has to worry about the RMD rules taking effect, she doesn’t want to drain her nest egg unnecessarily quickly and would prefer to have something to leave behind for her children.
Beyond planning for a potential need for long-term care, Alice should also consider a plan for RMDs during her retirement. Since much of Alice’s nest egg is saved in a traditional IRA, the funds will be subject to RMDs once she reaches age 73.
Here’s what she might do next.
While your golden years may be full of memorable moments, the reality of aging is that it can also come with increased living expenses. At some point, you may no longer be able to handle certain tasks alone.
Some retirees simply need an extra helping hand with grocery shopping or household chores. Others may need long-term care with daily support for daily tasks. And while it’s easy to imagine staying healthy and independent forever, things don’t always work out that way.
Alice is a relatively young retiree and likely has many years of independence ahead of her. But it’s worth considering that at some point she may need to outsource some daily life tasks. In fact, according to the Center for Retirement Research (CRR) at Boston College, 80% of people aged 65 will need long-term care at some point during their remaining years (1).
Unfortunately, the cost of long-term care is high. The CRR also reported that in 2023, the median annual cost of a room in a private nursing home was $116,800, compared to $75,500 for a live-in aide, or $64,200 for an assisted living facility.
One way to mitigate the potential costs of long-term care is to purchase long-term care insurance. For a single man, the average annual premium purchased at age 65 is $1,200. For a single woman, like Alice, that same premium is $1,900, according to the American Association for Long-Term Care Insurance (2). If possible, Alice should find a way to pay for this insurance policy, especially since her premium will only increase if she waits longer to sign up.
Since she spends less than her income each month, this is an expense to consider to protect her financial future.
When considering long-term care insurance, GoldenCare offers different options depending on your needs. These include hybrid life or annuity insurance with benefits for long-term care, short-term care, extended care, home health care, assisted living, and traditional long-term care insurance.
With GoldenCare, Alice could even combine her term life insurance policy with a long-term care insurance policy to give her and her family peace of mind.
Read more: Warren Buffett Used 8 Solid, Repeatable Money Rules to Turn $9,800 into a $150 Billion Fortune. Start using them today to get rich (and stay rich)
Think of RMDs as the minimum amount an account holder must withdraw after a set age.
Starting at age 73, you’ll need to withdraw a set amount each year from accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs and employer retirement plans, according to the IRS. This is the IRS’ way of making sure you don’t let your retirement money sit there forever. And if you skip your RMD, you’ll be hit with a 25% tax penalty on the set amount.
According to NBC, 53% of Fidelity investors with a 2025 RMD have not yet taken one. If they are not taken by April 1 of the year following age 73, or December 31 of each subsequent year, they will be subject to this hefty IRS penalty (3).
There are many considerations that go into developing the best strategy to reduce your RMDs. And this can be a crucial financial decision, given that RMDs are taxed as ordinary income once distributed. This additional income can have a profound impact on your financial situation – potentially putting you in a new tax bracket, reducing your deductions or even increasing Medicare premiums.
An optimal process involves understanding several tax rules and their seemingly unrelated consequences. For this reason, it is often best to work with a financial advisor.
An advisor may suggest to Alice that if she wants to minimize her RMDs, the best way is to reduce the balance in the affected account. For example, she could pursue a conversion strategy that would withdraw funds from her traditional IRA and place them in a Roth IRA, which is not subject to RMDs.
In this case, she would still have to pay income taxes on the funds she withdraws from her traditional IRA before putting them into a Roth IRA.
Alternatively, a counselor can simply tell Alice that she should take the easier route. Although she could further optimize her situation with RMDs, the hassle of timing conversions correctly and managing the tax consequences may not be worth it, both financially and administratively, for her.
Clearly, RMD strategies are both individual and complex. But finding a financial advisor who meets your specific needs and financial goals is easy with Vanguard.
Vanguard’s hybrid advisory system combines advice from professional advisors and automated portfolio management to ensure your investments achieve your financial goals.
With a minimum portfolio size of $50,000, this service is best suited for clients who already have a nest egg and want to try growing their wealth with a variety of different investments. All you need to do is arrange a consultation with a Vanguard advisor, who will help you create a tailored plan and stick to it.
Another option for Alice, although it would require some long-term planning, is to capitalize on the backdoor Roth IRA method. This is a strategy that wealthy individuals might want to consider when planning for their retirement.
That’s because Roth IRAs don’t have RMDs, so you can grow your money, tax-free, indefinitely. There are RMD rules for Roth IRA beneficiaries, however – so make sure you understand all the financial and tax implications before going down this route.
Although Roth IRAs do not allow joint filers earning more than $246,000 or individuals earning more than $165,000 in modified adjusted gross income to make contributions, there is a workaround. Instead, you can contribute to a traditional IRA and then convert it to a Roth IRA.
If that sounds complicated – and it indeed is – then the experts at Advisor.com are here to help. Their platform connects you with licensed financial professionals in your area who can provide personalized advice.
A professional advisor can also help you determine how many years you have left to invest before retirement and assess your comfort level with market fluctuations – two key factors in establishing the right asset allocation for your portfolio.
Through Advisor.com, you can schedule a free, no-obligation consultation to discuss your retirement goals and long-term financial plan.
We rely only on verified sources and credible third-party reports. For more details, see our editorial ethics and guidelines.
Boston College Retirement Research Center (1); American Association for Long-Term Care Insurance (2); CNB (3)
This article provides information only and should not be considered advice. It is provided without warranty of any kind.
