When you retire there are things to consider before taking your required minimum distributions. Once you have reached the age of 73 you will be required to withdraw a specific amount from your tax deferred retirement accounts. These include your employer 401(k), 403(b), traditional, SEP and Simple IRAs. Due to the Secure Act 2.0, if you were born after the year 1959 you won’t have to take a RMD until the age of 75. Many people rely on RMDs to support their retirement years. On the other hand, for those who don’t need the money it can be a different story. A commonly asked question is “How can I reduce my RMD so that I won’t get placed into a higher tax bracket during retirement?” Here are 3 Strategies to consider when trying to limit the tax exposure from your RMDs:
- Convert to a Roth IRA account
A Roth conversion may make sense if you believe you will be in a higher tax bracket when you will be required to withdraw the money from your IRA or 401(k). This is another method to also manage and diminish your distributions at your RMD age. When making a Roth conversion you are moving pre-tax money. This means you have to pay the taxes all at once on the funds you transfer into a Roth account. This method takes your taxable retirement assets when you are in a lower tax bracket and converts them to tax-free assets you can withdraw from later into retirement.
- Qualified Charitable Donations (QCDs)
If your RMD is money that is not needed in your retirement living expenses then a QCD is a great opportunity to see your money go to a good cause rather than the government. Reaching the age of 70 ½ allows you to donate up to $105,000 for the 2024 tax year. A QCD is when your RMD is transferred directly from an IRA to a qualified charitable organization. This direct transfer makes the QCD not taxable as income for you while also meeting your required distribution for the year.
- Planning your first year distribution
Once you turn 73 you have until April 1st of the following year to take your first distribution. Depending on your current income this required distribution could force you into a higher tax bracket. For some it might be efficient to hold off on taking your RMD and plan to make two distributions in the following year. This would make sense if you believe you will be in a lower tax bracket when receiving the distributions. As mentioned already taking two distributions in one year will create more income taxed by the IRS which could also lead to you being in a higher tax bracket. This is why tax planning for your first RMD can be very crucial and should be discussed prior to the event of it happening.
