Are There Ways To Lower Taxes On Required Minimum Distributions?

One question that we get a lot when people get to that age of taking their Required Minimum Distribution or ‘RMD” from their pre-tax IRA, 401k, etc. usually goes along the lines of “Is there a way to avoid or pay less tax on this?”  First off, let’s look at what an RMD is and when you have to take it.  Anyone currently not taking an RMD from a pre-tax account will be required to start at age 73 if they were born prior to 1960.  If you were born after 1960 you will not start your RMD until age 75.  This changed in recent years from the old numbers of age 70 ½ and then 72 respectively.

Qualified Charitable Distribution (QCD)

The long story short is there aren’t many ways to avoid taxation on your RMD.  One that people will use is called a Qualified Charitable Distribution or “QCD”, this allows you to give your RMD directly to a qualified charity with a 501(c)(3).  There are some very important rules to follow here so make sure you are working with your wealth management professional to make sure all those rules are met.  Also, keep in mind that you have to have some charitable intent for this avenue to make sense, as it allows those of us who have charitable intent to use possible legacy money or monies not needed for retirement to enjoy giving to charity during their lifetime.

Working with Wealth Management and Tax Professionals

One of the more popular options is to work with your wealth management professional and your tax professional on developing a strategy to minimize your RMD over time, this can be done in a number of ways.  First, look at how you are investing your money and how you are funding your income streams in retirement.  What accounts are you using?  What monies are you using first?  What investments make up that income stream?  All of this can play a significant role in what your RMD’s look like, especially if you develop a plan to minimize taxes and retire prior to your RMD age.  You have time to work with your professionals to develop a plan to help to minimize the tax burden.

Roth Conversion Strategy

The other idea would be to develop a Roth conversion strategy with your wealth management professional and your tax professional.  Are you able to convert money to Roth IRA (which is tax-free) and develop a plan to minimize what your RMD will be when you get to that age?  This can be a wonderful way to create a plan where you understand your taxable liability while creating a bucket of money that will be forever tax free for yourself and your family.

Every Situation is Unique

In conclusion, there are a few ways to minimize the burden that may be caused by your RMD.  It is important to work with your professionals to figure out a plan that works for you, as sometimes the above strategies are not an answer for your specific needs.  Working with your wealth management professional and tax professional, as a team should be the first step in creating a plan for your RMD’s in retirement and giving you the peace of mind that you have a plan in place to tackle this important event in retirement.

This is being provided for informational purposes only.  The views expressed are those of Silver State Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC, DBA Silver State Wealth Management, an SEC registered investment adviser. Silver State Wealth Management, nor any of its members, are tax accountants and do not provide tax advice. For tax advice, you should consult your tax professional. 

 
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