6 Smart Strategies to Reduce Your Required Minimum Distribution

6 Smart Strategies to Reduce Your Required Minimum Distribution

Saving for retirement and investing in tax-deferred accounts like your 401(k)s and IRAs is extremely helpful to reach your retirement goals.

However, once you turn 70 1/2, Uncle Sam definitely wants his share, so he forces you to take withdrawals from those accounts or face a 50% penalty of the amount you should have withdrawn.

If you’ve built up large balances in your 401(k)s, rollover IRAs or other tax-deferred accounts the first thing I would like to say is congratulations.  You did a great job of working hard and saving so congratulations to you.

There is a potential problem approaching you that is right around the corner.  Paying more in taxes than you have to.  The thing to watch out for is getting bumped into a higher tax bracket.  What?  Let me explain.  Now that you have large balances in your tax-deferred accounts and you have other sources of income such as a pension, investment income and Social Security, these are considered regular income by the IRS and will be taxed.  These income sources and RMDs could potentially push you into a higher tax bracket. (By the way, let me know if you would like your Social Security to be taxed or not).

Unfortunately, many investors are NOT being educated enough in advance of their 70th birthday to avoid a very large tax bill.  With that being said, I asked my friend and CPA, Tom Woulfe from Evans and Woulfe Accounting for his help with co-writing this important message.  So, we put together 6 tax-smart strategies to reduce your RMD (Required Minimum Distribution).

Defer Taking Social Security Benefits

Defer taking social security benefits, which results in higher social security payments in future years.  Instead, take IRA distributions for living expenses before RMD start when you turn 70 1/2.  Then future RMD are lower since the tax advantage accounts’ balances are reduced.

Consider Qualified Charitable Contribution (QCD) 

An individual age 70½ or older can make direct charitable gifts annually of up to $100,000 from an IRA to a public charity and not have to report the IRA distributions as taxable income on his federal income tax return.  

Roth IRAs

Roth IRAs do not require RMD, so, consider converting your traditional IRA to a Roth before you reach 70 ½ to reduce RMD in the future.  You can choose to convert your IRA assets to a Roth IRA at any time, even in retirement.  \

Related: How to Pay Fewer Taxes in Retirement

Qualified Health savings Funding Distribution (QHFD) 

Take an IRA distribution to fund Health Savings Account (HSA) –  A HSA if not used for Medical expenses, after age 65, can be used for anything.  A QHFD is done by direct transfer from your IRA to your HSA. 

Consider Rolling your IRA into 401K before age 69 1/2. 

 If you have a 401(k)s or 403(b)s you can put off taking RMDs if you’re still working.  So, if you plan to keep working into your 70’s you may be able to let your 401(k) or 403(b) accumulate until April 1 following the calendar year in which you retire

Consider  a Qualified Longevity Annuity Contract (QLAC)

Consider  a Qualified Longevity Annuity Contract (QLAC) in your IRA which would be excluded from RMD calculation.  This means that a person can take up to 25% of their overall account balances in their retirement plans but not more than $125,000 and use that money as premium to fund a longevity annuity contract.

Tom Woulfe from Evans and Woulfe Accounting and I have had many conversations to help investors make informed decisions before and during retirement.  If you have not been educated about these strategies and you’re at a cross point maybe it’s time for change.

The rules are intricate and not everyone may benefit from each strategy, so it’s wise to consult with a financial advisor and tax professional if you are considering any of these options.

I would like to personally thank Tom Woulfe for his contribution to this important topic.  We have been discussing this for a long time, and I greatly value his knowledge and experience.

Scott Krase
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Scott Krase is the President and Founder of the independent, fee-only wealth management firm CrossPoint Wealth. He utilizes a holistic approach to investment management a ... Click for full bio

Most Read IRIS Articles of the Week: Feb 19-23

Most Read IRIS Articles of the Week: Feb 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018

Click the headline to read the full article.  Enjoy!

1. Don’t Get Pinged by the Social Security Earnings Limit

I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach

2. We're Back to “Bad News is Good News” and “Good News is Great News”

This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins

3. Q1 2018 Factor Views

Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman

4. A Beneficial Basket of Commodities

Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon

5. 3 Trends Shaping the Future of Asset Management

As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. Peter Hopkins

6. 5 Ways Advisors Leave Money on the Table, and What to Do About It

My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach

7. The Market Has Gone Wild! Is It Time to Change Your Investment Strategy?

Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein

8. How to Deepen Client Relations and Capture New Business Using Engaging Content

Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran

9. Three Ways The Most Successful Gain Big Attention

How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski

10. Who Are the Hottest FinTech Firms and Influencers Around the World?

"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list."  — Chris Skinner

11. The New Stock Market Normal Is Not What You Think!

Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain​​​​​​​

Douglas Heikkinen
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio