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his share, so he forces you to take withdrawals from those accounts or face a 50% penalty of the amount you should have withdrawn.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.
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
Founder and President
CrossPoint Wealth
Thomas Woulfe, CPA, Partner, Evans and Woulfe Accounting
Tom graduated from DePaul University with a Bachelor of Science Degree in Accounting in 1986, and became a Certified Public Accountant in the same year. Tom has over 25 years of accounting and tax experience in large and small corporate environments as well as public accounting. Tom joined Sharron in 2015 to create Evans and Woulfe Accounting, CPA firm.
Scott Krase is an Investment Advisor Representative offering Investment advisory services through RCM Wealth Advisors, an SEC Registered Investment Adviser. SEC registration does not imply any level of skill or training
