I’m a tenured professor with a $600K IRA, and I’m concerned about RMDs affecting my taxes. How can I reduce my tax burden?

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Meet Joan. He recently retired after spending 30 years teaching anthropology at a state university. He also made good decisions with his money and paid off his house while building a nest egg worth $600,000.

Most of this money is in a traditional IRA. He also receives a pension of $4,000 a month and Social Security payments of $1,800 a month, after taxes. The combined checks comfortably cover all of his current living expenses, sitting at about $4,500 a month.

Earlier this year, Joan learned that Required Minimum Distributions (RMDs) can help her money go further. Now you want to know how to comply with the RMD rules without overpaying taxes down the line. Although she has 12 years before she worries about RMDs kicking in, she doesn’t want to empty her nest egg too soon, as she’d like to leave money for her children when she passes away.

Joan also realizes that her nest egg may have to be used for long-term care, the cost of which is high in her state. According to data from CareScout, nursing home care in the US averages $9,581 for a private room or $10,798 for a private room each month – that’s about $130,000 per year (1). This is completely out of reach for most retirees.

Without any long-term care planning, Joan can also consider how RMDs fit into her retirement. Since most of his nest egg is kept in a traditional IRA, the funds will be less than RMDs once he reaches age 73.

Here’s what he can do next.

While your golden years may be filled with memorable moments, the reality of aging is that it comes with increased living expenses. At times, you may not be able to take care of certain tasks on your own, and depending on your family situation, you may have to manage them on your own.

Some retirees just need an extra hand with groceries or household chores. Others may need long-term care with daily support for daily activities.

Although it’s easy to think that you stay healthy and independent forever, things don’t always work out that way. These costs can be as high as $2,058 per month for an average assisted living facility, or $6,200 for an apartment in an assisted living facility, based on the same CareScout report.

Joan is young and probably has many years of independence ahead of her. But it helps to think that he may eventually need to outsource certain activities of daily living. In fact, according to the Center for Retirement Research at Boston College, 80% of people age 65 will need long-term care at some point during their twilight years (2).

One way to reduce the potential costs of long-term care is to purchase long-term care insurance.

For a single male, the average annual premium purchased at 65 is $1,200. For a single woman, like Joan, that same premium is $1,900, according to the American Association for Long-Term Care Insurance (3). If possible, Joan can find a way to pay for this insurance policy – especially if her premium will only increase if she waits longer to buy.

Since he spends less than his salary each month, it is an expense that must be considered to protect his financial future. Long-term care insurance not only covers your stay in a nursing facility, but it can also reduce the cost of home care, speech or physical therapy, improving the accessibility of your home to get around, and the cost of living in an assisted living facility (4).

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Think of RMDs as the minimum amount an account holder must withdraw after a set number of years.

Starting at 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 how the IRS makes sure you don’t let your retirement savings sit forever. And if you exceed your RMD, you’ll be hit with a 25% tax penalty on the set amount.

This is a more common problem than you might think. Vanguard reported that by 2024, nearly 7% of their IRA investors did not take their RMDs, and paid an average tax penalty of $1,100 as a result (5).

There are many considerations that go into making the best strategy for reducing your RMDs. And that would be a significant financial move, given that RMDs are taxed like ordinary income once distributed. That extra income can have a big impact on your financial situation – it could introduce you to a new tax bracket, reduce your deductions or increase your Medicare premiums.

Due process involves understanding many tax rules and seemingly unrelated consequences. As a result, it is often best to seek the help of a financial advisor.

The advisor may suggest that Joan reduce her RMDs by reducing the relevant account balance. For example, he could pursue a conversion strategy that would take funds out of his traditional IRA and into a Roth IRA, which is not subject to RMDs.

If so, he will still have to pay income taxes on the money he withdraws from his traditional IRA before he can roll it over to the Roth IRA.

Alternatively, the counselor could simply tell Joan that she should take the easy way out. Although he can continue to maximize his status through RMDs, the difficulty of properly timing conversions and managing his tax consequences may not be worth it, both financially and administratively.

Obviously, RMD strategies are not unique and complex. Finding the right financial advisor for your specific needs and financial goals is easy with Vanguard.

Vanguard’s hybrid advisory system combines advice from expert advisors with automated portfolio management to make sure your investments are working to achieve your financial goals.

With a minimum portfolio size of $50,000, this service is best for clients who already have a nest egg built up and would like to try growing their wealth through diversified investments. All you have to do is set up a consultation with a Vanguard consultant, and they will help you set up the right plan and stick to it.

Another option for Joan, although it will require some long-term planning, is to use the reverse Roth IRA method. This is a strategy that generally works for high net worth individuals.

That’s because Roth IRAs don’t have RMDs, so you can grow your money, tax-free, forever. There are RMD rules for Roth IRA beneficiaries though – so make sure you fully understand all the financial and tax implications before you go down this route.

Although Roth IRAs do not allow joint filers making more than $246,000 or individuals making more than $165,000 in adjusted gross income to make contributions, there is an adjustment. Instead you can contribute to a traditional IRA and convert it to a Roth IRA.

If that sounds complicated – and it is – the experts at Range are here to help. They provide all-in-one white-glove wealth management services for high-income professionals and wealthy households, including navigating the complexities of the Roth IRA backdoor tax strategy and the mega-backdoor Roth IRA approach.

But Range advisers can also provide practical advice throughout your financial life, making them well suited to anyone with a high net worth – not just retirees.

For those who are more focused on maximizing their IRAs and retirement accounts, you may want to consider working with Advisor.com. Their platform connects you with licensed financial professionals in your area who can provide you with personalized guidance.

This is a great service for those who want to get a handle on their finances or do a quick double check that their retirement plan is still on track. Even better, a professional advisor can help you determine how many years you have left to invest before retirement and assess your comfort level with market volatility — two key factors in building the right asset mix for your portfolio.

And the best part? You can schedule a free, no-obligation consultation to discuss your retirement goals and long-term financial plan, and make sure their choice is right for you.

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We rely only on vetted sources and reliable third-party reporting. For details, see our editorial ethics and guidelines.

CareScout (1); Center for Retirement Research at Boston College (2); American Association for Long Term Care Insurance (3); CNBC (4); Vanguard (5)

This article provides information only and should not be construed as advice. Offered without warranty of any kind.