Required minimum distributions or RMDs are usually framed as a financial disaster. A ticking time bomb that should be avoided.
In contrast, Roth conversions tend to be presented as an unambiguously savvy move. Pay taxes today, convert to a Roth IRA and watch your money grow tax-free.
This is a tidy but incomplete narrative.
Roth conversions may be a good fit for many Americans saving for retirement, but for a sizable minority, RMDs might make some sense.
The difference is more about psychology and behavior than tax math.
Here’s a closer look at why RMDs get such a bad rap and why, for some retirees, it could be preferable.
At age 73, most investors are subject to minimum withdrawals from their pre-tax retirement accounts such as 401(k) plans and traditional IRAs, per Internal Revenue Service (IRS) rules [1].
For control-oriented retirees, the notion of the government dictating when and how much you can tap into your nest egg is deeply unappealing.
That lack of flexibility is enough to push them to Roth conversions instead.
However, by 73, most retirees are halfway through their retirement. At this age, they qualify for Medicare and Social Security.
They’ve also depleted some of their nest egg and likely have a better sense of how to manage their retirement budget in the most efficient way.
For some, the prospect of RMDs isn’t a financial disaster. In fact, under specific circumstances, it could offer some psychological relief.
For some retirees, RMDs force them to unlock money they would otherwise have been reluctant to use.
This is important.
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Roughly half (46%) of all retirees said spending their own money creates a sense of anxiety, according to the Alliance for Lifetime Income’s 2024 Protected Retirement Income and Planning (PRIP) Study (2).
Nearly 41% said they don’t know how to stage withdrawals from their various retirement accounts. About 49% said they don’t know how to manage RMDs.
Deeply ingrained spending and saving habits can be difficult to break in your 70s. For these retirees, RMDs can be a forcing mechanism to finally enjoy the fruits of their labor.
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Charitable retirees can also minimize some of the tax burden.
Retirees over the age of 70 1/2 can make Qualified Charitable Donations (QCDs) that act as tax write-offs. Savvy planners can align their charitable donations with RMDs to minimize their tax bill in retirement [3].
RMDs can also act as a nudge for estate planning. If you have sizable account balances, these required withdrawals can be used to give your loved ones an early inheritance. For 2026, the annual exemption to the gift tax is $19,000 per donee.
If you and your partner have three children, you could give up to $114,000 total to them all.
Finally, consider the size of your retirement accounts. If your traditional IRA is worth less than $1 million, RMDs are unlikely to catapult you into a dramatically higher tax bracket.
For many retirees, the marginal tax rate on RMDs is similar to what they would pay converting to a Roth anyway, without the need to prepay decades of taxes upfront.
In other words, if you paid the same 20% tax rate throughout your retirement would you rather have $500,000 compounding uninterrupted or take a $100,000 tax bill today to let the rest $400,000 compound tax free?
Picking between RMDs and Roth conversions is often considered an obvious choice.
However, the decision is a little more nuanced, not because of math but because of individual mindset.
RMDs favor investors with a long-term approach, small account balances and charitable intent, while Roth conversions may be better for those with sizable assets and a desire for tighter control over their finances.
Ultimately, Roth conversions are not a universal fit for everyone. So, consider all the facets of your personal finances and retirement goals before you make the decision.
The wrong choice could be deeply expensive.
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Internal Revenue Service (1, 3); Alliance for Lifetime Income (2)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
