5 Strategies to Reduce Future Required Minimum Distributions (RMDs) Before They Begin
If your retirement savings exceed what’s needed to support your lifestyle, required minimum distributions (RMDs) could significantly increase your taxable income and even raise your Medicare premiums. Fortunately, there are strategies to proactively reduce future RMDs or defer them to minimize their impact. Here are the five effective strategies:
1. Roth Conversions
• Convert part of your traditional IRA or 401(k) to Roth IRA before reaching RMD age.
• Roth IRAs do not have RMDs during your lifetime, and future withdrawals are tax-free.
• Conversions will trigger taxes in the year of conversion, but this can be managed by spreading conversions over several years, especially when your taxable income is lower.
2. Qualified Charitable Distributions (QCDs)
• Once you reach age 70 1/2, you can donate up to $108,000 annually directly from your IRA to qualified charities.
• These distributions count toward satisfying your RMDs but are not included in your taxable income.
• This strategy is ideal if charitable giving is part of your financial plan.
3. Accelerated Withdrawals
• Take larger withdrawals from your traditional accounts before RMD age to reduce the account balance subject to future RMDs.
• Withdrawals are taxable, but they may reduce future RMDs and spread out the tax impact over time.
• Be mindful of staying within your current tax bracket to avoid triggering higher taxes.
4. Delay Social Security Benefits
• Delaying Social Security until age 70 can reduce taxable income during your early retirement years, allowing more room for tax-efficient Roth conversions or withdrawals.
• This also maximizes your Social Security benefits, which can complement other tax-planning strategies.
5. Shift to Taxable and Tax-Deferred Accounts
• If you’re still working or contributiong to retirement accounts, consider redirecting new savings to taxable brokerage accounts or tax-deferred options, such as health savings accounts (HSAs).
• Taxable accounts offer flexibility for withdrawals without RMD rules, and HSAs provide tax-free withdrawals for qualified medical expenses.
Final Thoughts
Planning ahead to manage future RMDs can reduce taxes and prevent surprises in retirement. By implementing these strategies, you can maintain more control over your income and minimize unnecessary tax burdens.
Scott Higgins | AIF ®, CFP®, CPFA®, NSSA®
Financial Advisor
Since 2012 at Rose Street, Scott has been responsible for helping the firm’s individual wealth management clients with income strategies for retirement and consulting with employers with their employee retirement plans. In free time, he enjoys golf, biking, skiing, cooking, and traveling. Fun Fact, Scott has a hobby of filling growlers with coins!
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