Sub Headline: Managing RMDs Can Serve Several Retirement Purposes & Reduce Taxes

Synopsis: Required minimum distributions (RMDs) from qualified plans are mandatory. In fact, non-compliance could cost you 50 percent of the portion that is short the minimum mandatory payout. But even compliant RMDs could be costing you unnecessary taxes by not managing their distributions.

Content: Here are a couple of considerations to think about before you address RMDs: RMDs are includable in the provisional income test to determine Social Security benefit taxation and means testing of Medicare. So it’s not just taxes on RMDs—there’s more at stake here. Watch the interview with retirement consultant Bruce Bullock as he discusses a couple of tax-saving options for retirement.

There’s a three-prong attack in reducing your tax bill triggered by RMDs: IRA conversions to Roth IRAs, stretch IRAs with spouse and children and
Qualified Longevity Annuity Contracts (QLACs).

IRA Conversions to Roth IRAs Converting IRAs to Roth IRAs after age 59½ is a tax-arbitrage strategy based on paying less in taxes today than during retirement by eliminating—or at least lowering—your RMDs at age 70½. When you consider converting taxable IRAs to tax-free Roth IRAs, you need to determine your present and future retirement tax bracket and let the math make the call. In a progressive marginal tax system, the goal of conversion is to pay taxes in your current tax bracket and not exceed it. That means you’re going to convert your IRAs over time and before age 70½ (between ages 59½ and 70½.) But that may not be enough to significantly reduce your RMDs. In that case, the next two strategies come into play.

Stretch IRAs with Spouse and Children Many IRA owners have benevolent plans for their assets, generally targeting their children and grandchildren. Instead of cashing the IRA in and paying taxes and then giving the proceeds to family, you could split the IRA into two separate IRA accounts naming a child as sole beneficiary of one account. Because there are two separate accounts, each child receives RMDs based on their individual life expectancy.

Qualified Longevity Annuity Contracts (QLACs) A QLAC is a relatively new retirement strategy that allows you to defer 25 percent of your RMDs, not to exceed $125,000 ($250,000 for married couples), until age 85 using a lifetime deferred income annuity.

These three strategies can be combined to really minimize your taxes on RMDs and may reduce your Social Security taxes and reportable income for Medicare.

Syndicated financial columnist Steve Savant interviews retirement consultant Bruce Bullock creating a tax advantaged retirement. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets nationwide. (www.rightonthemoneyshow.com) …(read more)

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Taxable Required Minimum Distributions (RMDs) can be a significant source of stress for many retirees. The government mandates that individuals with certain retirement accounts must withdraw a certain amount each year, and this withdrawal is subject to income tax. However, there are strategies individuals can use to mitigate the tax burden associated with RMDs.

The first step in minimizing taxable RMDs is to diversify retirement savings across different types of accounts. This could include traditional Individual Retirement Accounts (IRAs), Roth IRAs, and taxable brokerage accounts. By spreading savings across multiple accounts, retirees gain the flexibility to withdraw from different sources and potentially lower their taxable income.

One effective strategy is to convert traditional IRAs into Roth IRAs. Roth conversions allow retirees to move funds from a traditional account, where withdrawals are subject to income tax, to a Roth account, where qualified distributions are tax-free. Although a conversion will generate a tax bill in the year it is made, it eliminates future RMDs and can potentially provide significant tax savings in the long run.

Retirees should also consider the timing and amount of their withdrawals. Taking smaller distributions each year can help keep taxable income lower and potentially reduce the tax obligation. Additionally, spreading withdrawals throughout the year rather than taking a lump sum in December can help even out the tax liability and potentially avoid moving into a higher tax bracket.

Charitable contributions can also be a useful tool in mitigating taxable RMDs. Qualified charitable distributions (QCDs) allow individuals to directly transfer up to $100,000 per year from their IRA to a qualified charity, without the distribution being included in taxable income. This strategy can be particularly beneficial for those who don’t rely heavily on RMDs for their living expenses.

Another option to consider is utilizing tax-efficient investments within taxable brokerage accounts. By selecting investments with lower annual tax distributions, retirees can minimize the impact of taxable RMDs. Index funds or tax-managed funds are examples of investments that can help to reduce taxable income while still generating returns.

Lastly, retirees can also explore delaying their Social Security benefits. While delaying benefits will not directly reduce taxable RMDs, it can increase the proportion of income that comes from Social Security, which is typically tax-advantaged. This can help to offset the tax liability associated with RMDs.

In conclusion, taxable RMDs may be mandatory, but there are various strategies that can be employed to mitigate the associated tax burden. Diversifying retirement savings across different types of accounts, converting traditional IRAs into Roth IRAs, timing withdrawals strategically, utilizing qualified charitable distributions, investing in tax-efficient funds, and delaying Social Security benefits are all effective methods retirees can use to minimize the impact of taxable RMDs. By carefully planning and implementing these strategies, retirees can better manage their tax obligations and maximize their retirement funds.