How a Business Owner With $1.2 Million in a 401(k) Legally Avoids RMDs

"Under current law, required minimum distributions (RMDs) begin at age 73, with a distribution factor of 26.5, leading to a first-year RMD of approximately $45,283 on a $1.2 million balance. This amount counts as ordinary income, potentially triggering additional tax implications, including taxation of Social Security benefits and IRMAA surcharges."

"Converting pre-tax 401(k) balances to a Roth account before RMDs begin eliminates the mandatory withdrawal requirement entirely on converted amounts. This strategy incurs a tax liability in the year of conversion but can be advantageous if the current marginal rate is lower than the expected future rate."

Business owners with significant 401(k) balances face required minimum distributions (RMDs) starting at age 73, which can increase taxable income and affect Social Security benefits. To avoid RMDs, one strategy is to convert pre-tax 401(k) balances to a Roth account before reaching RMD age. This conversion eliminates the mandatory withdrawal requirement on converted amounts, although it incurs a tax liability in the year of conversion. This approach is beneficial when current tax rates are lower than expected future rates.

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