Nothing lasts forever. This includes tax deferral on your IRAs. Eventually, Uncle Sam is going to want his share and will require funds to come out of these accounts. That is when required minimum distributions (RMDs) must begin. What if you don’t need the money? What if you don’t want a tax hit? Here are 5 strategies to reduce your RMDs.
Strategy to Reduce RMDs #1: Move your money to your plan.
Are you still working after age 70 ½? If you do not own more than 5% of the company where you work and the company plan offers a “still working exception” you may be able to delay taking RMDs from your company plan until April 1 following the year you retire. If your plan allows, you can roll your pre-tax IRA funds to your plan and delay RMDs on these funds too. Just be careful. If you have an RMD for the year from your IRA, you must take it before you can roll over the rest of the funds.
Strategy to Reduce RMDs #2: Consider a QLAC.
A Qualifying Longevity Annuity Contract (QLAC) is a product designed to help with longevity concerns. Any funds you invest in the QLAC are not included in your balance when it comes to calculating your RMDs until you reach age 85. This will reduce your RMDs. You can purchase a QLAC with the lesser of 25% of your retirement funds or $125,000. The 25% limit is applied to each employer plan separately, but in aggregate to IRAs.
Strategy to Reduce RMDs #3: Be charitable.
Are you charitably inclined? If you are planning on giving money to charity anyway why not do a Qualified Charitable Distribution (QCD) from your IRA? If you are 70 ½, you may transfer up to $100,000 annually from your IRA to a charity tax-free. The QCD will also satisfy your RMD but without the tax bite.
Strategy to Reduce RMDs #4: Go Roth.
If reducing RMDs is a top concern for you, you may want to consider a Roth conversion. This is because you are not required to take RMDs from your Roth IRA during your lifetime. While conversion is a taxable event, you can exchange a one-time tax hit for a lifetime of never having to worry about RMDs and their tax consequences. Keep in mind your beneficiaries will need to take RMDs from the inherited Roth IRA. However, these distributions will most likely be tax-free.
Strategy to Reduce RMDs #5: Do it your way.
Who says you have to be on Uncle Sam’s schedule? Once you reach age 59 1/2, you can access your IRA funds without penalty. From age 59 ½ to age 70 ½ is the sweet spot for IRA planning. The money is yours penalty-free if you choose to take a distribution. However, you are not required to withdraw specific amounts each year, as you will be once RMDs are required. Take advantage of these years to take money from your IRA on your own schedule. If you are now retired and your income is lower this may be the time to take taxable IRA distribution to reduce RMDs later. You may consider using these funds to purchase life insurance or fund an HSA, if you are eligible. Or, you could use them to enjoy your well-earned retirement.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.
Copyright 2017 Ed Slott and Company, LLC – Written by Sarah Brenner, JD
Reprinted from The Slott Report, July 17, 2017, with permission.
Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.