6 Tax-Smart Ways to Lower Your RMDs in Retirement

Most of us invest in a 401(k) or similar savings plan because we want to enjoy a comfortable retirement.

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Most of us invest in a 401(k) or similar savings plan because we want to enjoy a comfortable retirement. But there are short-term benefits, too. Contributions are excluded from taxable income—a lucrative break that helps make saving less painful (and doesn’t require the services of a Panamanian law firm).

But unlike dubious foreign tax shelters, this one has an expiration date. Once you turn 70½, Uncle Sam wants his share, so he requires you to take withdrawals from your traditional IRAs, 401(k)s and other tax-deferred plans—or face a penalty of 50% of the amount you should have withdrawn.

If you’ve built up a large balance in 401(k)s, rollover IRAs and other tax-deferred accounts and have another source of income, such as a pension, RMDs can create a host of tax tribulations. Because the withdrawals are taxed as regular income, RMDs could push you into a higher tax bracket. And the increase in your adjusted gross income could trigger other unpleasant consequences, such as higher taxes on your Social Security benefits, a surtax on your taxable investments and a Medicare high-income surcharge.

The key to avoiding a big tax bill is to start planning for RMDs well before your 70th birthday.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.