When you reach the age for Required Minimum Distributions (RMDs), new factors come into play for managing these withdrawals and their tax implications. RMDs can have complex tax effects; without a clear strategy, they may disrupt your financial plans and even result in penalties.

What are RMDs, why are they necessary, and what effective strategies can be used to manage them?

At Bulman Wealth Group, we have decades of experience in retirement planning, empowering our clients to build financial confidence with our California-based team of financial professionals.

This blog discusses key strategies to guide you through managing RMDs in 2025, and we’ll share insights into some retirement tax benefits in California.

Understanding RMDs

What are RMDs?

RMDs are mandatory withdrawals from certain retirement accounts, such as traditional IRAs and 401(k)s, that begin at age 72. The IRS requires these withdrawals so that tax-deferred funds are eventually subject to taxation. Inherited retirement accounts also frequently require RMDs, depending on the account type and beneficiary status. The annual RMD amount is calculated based on your account balance and life expectancy, and failing to take these withdrawals on time can lead to substantial penalties.

RMD Penalties

Missing RMD deadlines can lead to steep penalties of up to 50% of the required amount. This can be a significant financial hit, making it wise to approach RMDs carefully and consider strategies to minimize the impact of these withdrawals.

RMD Strategies for 2025

Roth IRA Conversion

Converting traditional IRA assets to a Roth IRA before RMDs start can reduce future taxes, as Roth IRAs aren’t subject to RMDs. Roth conversions have no income or age limits, so anyone can take advantage of this option. However, if you’re already required to take RMDs, you must first satisfy the RMD for the year before converting additional assets to a Roth.

Some choose a step-by-step approach, converting assets over several years to spread out the tax burden. While a Roth conversion has short-term tax implications, it offers flexibility and potential tax-free growth in retirement.

Qualified Charitable Distributions (QCDs)

If you’re looking to support charitable causes, QCDs offer a tax-efficient way to meet RMD requirements. Retirees over 70½ can transfer up to $100,000 directly from an IRA to a qualified charity, reducing taxable income and supporting philanthropic goals. QCDs are especially beneficial for maximizing retirement tax benefits in California without incurring additional state taxes.

Special Considerations for Inherited IRAs

Inherited IRA rules have undergone significant changes under the SECURE and 2.0 Act, impacting beneficiaries who inherit IRAs. Most non-spouse beneficiaries must fully withdraw the inherited balance within 10 years of the account owner’s death. Although there are exceptions for certain eligible beneficiaries, like spouses and minor children, understanding how these rules apply is crucial for planning distributions and minimizing tax burdens for heirs.

Working with a Bulman financial advisor in California can help if you’ve inherited IRA assets. We’ll offer personalized strategies to manage tax implications and preserve your wealth.

Systematic Withdrawals

A systematic withdrawal plan allows you to spread RMDs across monthly, quarterly, or semiannual intervals instead of a lump sum. This approach supports steady cash flow and may minimize the impact of market fluctuations—especially if you need to sell investments at year-end and markets are down. The full RMD amount must be withdrawn by December 31 to avoid penalties.

Life Insurance Strategies

Incorporating life insurance into your estate plan can help manage the impact of RMDs. By using RMDs to fund a life insurance policy, you can create a tax-free inheritance for your heirs, potentially offsetting the tax burden of RMD withdrawals. This strategy helps preserve the wealth you’ve built and offers flexibility to leave a legacy aligned with your goals..

RMDs and California Tax Considerations

For Californians, RMDs carry unique tax implications due to the state’s progressive income tax system. RMDs are considered taxable income and can push you into a higher tax bracket, especially when combined with other retirement income. California has some of the highest state income tax rates in the U.S. and doesn’t allow certain federal deductions, making it essential to understand how RMDs affect your tax burden.

To help reduce the impact of RMDs, consider strategies such as tax-loss harvesting and charitable giving. Tax-loss harvesting allows you to offset gains with losses in taxable accounts, which can lower your total taxable income. Donating a portion of your RMDs through a Donor-Advised Fund (DAF) is another effective way to reduce taxable income. DAFs allow you to support causes you care about while potentially lowering your tax bracket and preserving more wealth.

Bulman’s financial advisors are experienced with various retirement tax benefits specific to California. We can analyze which strategies would be useful to your situation.

Long-Term Care Planning and RMDs

Long-term care costs are a growing concern, especially in California, where expenses are high. Planning for these potential costs is essential, as Medicare and Medigap do not cover long-term care. Long-term care insurance is one option, providing funds for in-home support, assisted living, or nursing care. However, Medi-Cal may be an alternative if one cannot qualify for insurance.

To qualify for Medi-Cal, you may need to “spend down” countable assets, like cash and retirement accounts, while certain non-countable assets, such as your primary residence and one vehicle, are excluded. If RMDs are being taken, these distributions are counted as income, potentially impacting eligibility. An estate plan that integrates long-term care planning in California with RMD management can be invaluable for seeking to protect assets and meet healthcare needs.

Bulman Wealth for Your Retirement Planning in California

Navigating RMDs and other retirement planning complexities is challenging. Bulman’s experienced team of fiduciary financial advisors in California will help you effectively manage RMDs and reduce tax burdens, so you’re prepared for the future with a well-crafted plan.

We focus on five key areas of financial planning: Investment Management, Retirement Income Planning, Healthcare in Retirement, Estate Planning, and Tax Planning. Our services offer a comprehensive approach to assist you with your financial goals.
Contact us today to schedule a consultation with a Bulman financial advisor to discuss your specific RMD situation and develop a personalized plan.