Review: Tax-Smart RMD Strategies

Those pesky Required Minimum Distributions (RMDs) can really throw a monkey wrench into your tax planning during retirement. This article outlines some practical strategies to help take the tax sting out of RMDs.

To reduce the tax bite from these mandatory taxable distributions, the following four potential techniques (five, if you count the recommendation to marry someone 10 years your junior!) are examined in this article:

  • Fund a Qualified Longevity Annuity Contract (QLAC)
  • Convert Traditional IRAs to Roth IRAs
  • Proper Placement of Assets, or “Asset Location”
  • Qualified Charitable Distribution (QCD)

The Roth conversion strategy is one we’ve employed with numerous clients. It’s especially powerful when combined with the decision to delay social security benefits until age 70. We had one client start this in her early 60s, and by the time she reached 70 ½ and was subject to RMDs, her entire IRA had been converted to Roth. No RMD income to worry about, and every future distribution from her Roth will be tax-free!

Proper placement, or what we prefer to call “asset location,” is something we preach to every client. By placing tax inefficient assets in your IRA accounts where dividends are not taxed, you can reduce the tax pain of your income from other sources like RMDs.

Last, but certainly not least, is the Qualified Charitable Distribution (QCD). We still don’t know if Congress will extend the QCD as they’ve done in years past. But, there’s no danger in performing direct charitable transfers from your IRA. If Congress chooses to reinstate the QCD, you’ll be in compliance. If not, your attempted QCD will simply be treated as two separate transactions: An IRA distribution, and a charitable donation deductible on Schedule A – assuming you itemize deductions.

Feel free to contact us if you have any questions about any of these tactics to reduce the tax impact of RMDs.



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