“Best Tips for Avoiding the RMD Tax Bite After Age 72” – Steven Jarvis, CPA
Exploring how to handle the required minimum distribution (RMD) tax bite as you turn 72 is a common concern for many individuals, especially those with a steady stream of other income. Learning how to manage the tax repercussions of RMDs can be crucial to ensuring financial stability amidst these changes. If you’re someone in a similar situation, continue reading to discover strategies that can help you ease the tax bite of RMDs.
Ensure Proper RMD Withdrawals
No matter your age, there are proactive steps you can take to prepare for the RMD tax bite. The first step is to make sure there is a plan for distributing the required amount each year without incurring penalties. The penalties for missing RMDs can be as high as 50% of the amount not withdrawn, so it’s worthwhile to emphasize the importance of this point.
Determine Correct Withdrawal Amounts
The most important questions to answer each year regarding RMDs are which accounts require an RMD and how much is required from each account. People are seldom surprised by the second question, but the first question is often overlooked. To avoid confusion, those with multiple tax-deferred accounts must be confident about where the distributions come from.
Consider Qualified Charitable Distributions (QCDs)
One of the most effective ways to reduce the tax bite on RMDs is through making a qualified charitable distribution, which allows funds to be distributed directly from an IRA to a qualified charity, removing the distribution from taxable income. This strategy can also lower the taxpayer’s adjusted gross income, affecting their Medicare premiums and reducing future RMDs and related taxes.
Account for Additional Income Streams
If QCDs are not made or only cover a portion of the RMD, retirees can reduce taxes due by finding ways to reduce other taxable income throughout the year. Opportunities in retirement to reduce taxable income, such as accelerating or delaying income in otherwise high tax years, can help lessen the impact of RMDs. Additionally, strategically converting traditional IRA dollars to Roth before age 72 can significantly reduce taxes paid once RMDs begin.
Creating a Plan
Regardless of whether the tax-reducing strategies discussed here are applicable to you, having a plan to meet your RMDs once you turn 72 is imperative to avoid penalties. Tax-savvy moves, such as making qualified charitable distributions, should be considered. If you’re seeking further guidance on required minimum distributions, consulting with a financial advisor may be beneficial.
For those ready to get matched with a qualified financial advisor, SmartAsset’s free tool matches you with up to three financial advisors that serve your area, without any cost to you. Ensure you’re in the best position to manage RMDs and make the most of your retirement income.