Downsize Your Required Minimum Distributions
A little proactive planning now to help minimize your RMDs in the future can save you thousands of dollars in retirement.
There are so many decisions you have to make when you’re planning for retirement, it can be tempting to delay the ones that seem as though they can wait.
Take, for example, the required minimum distributions (RMDs) you must begin withdrawing from your tax-deferred investment accounts at age 70½. Dealing with the tax consequences of those withdrawals may seem a long way away when you’re in your late 50s or early 60s, but there are strategies you can put into place now that could save you thousands of dollars later.
Could You Be Headed for a $90,000 RMD?
I often meet with people who proudly tell me they have $1 million or more saved for retirement in an IRA, and I hate to be the one to burst their comfort bubble with a sad reminder that it isn’t all theirs. Uncle Sam isn’t going to put off getting his share forever. Eventually, you have to start paying taxes on that money.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And the older you get, the more you’ll be required to withdraw. RMD percentages, which are based on your age, increase every year. At age 70½, the RMD on $1 million would be less than $40,000. At age 90, it’s almost $90,000. (Think you won’t live that long? According to the Social Security Administration, about one out of every four 65-year-olds today will live past 90, and one out of 10 will live past 95.)
Add that amount to your Social Security benefits and any pension or other income you have, and you easily could jump to a higher tax bracket. If your income exceeds a certain threshold (determined by your filing status), a percentage of your Social Security and Medicare benefits also may be considered taxable.
Two RMD-Busting Strategies
So how can you avoid RMDs? This is where proactive planning can save you.
- Take distributions before you’re forced to. After age 59½, it may make sense to begin taking penalty-free distributions from a traditional IRA, instead of waiting until you’re 70½. The goal is to manage your retirement account with small withdrawals now to avoid income spikes from your RMDs later. You want to fill the lowest tax bracket you can without bumping yourself up to the next tax bracket. To recoup the taxes paid as quickly as possible, you could use an indexed universal life (IUL) policy because of higher caps, which allows us to grow it with a safety net. Or you could put the withdrawn funds into long-term investments that will sweeten your later years — or your legacy.
- You could convert money in a traditional IRA into a Roth IRA. There are no RMDs from a Roth account while the owner is alive. You will, of course, have to pay taxes on the amount that you convert. If you start in your 60s, you’ll have plenty of time to do this in small amounts to better spread out the tax bill. Or you can do a lump-sum rollover and take a one-time tax hit. That won’t be pleasant, but going forward, your money will grow tax-free.
Most people look at RMDs as something to worry about long after they’ve decided when to stop working, when to take their Social Security benefits and other pressing, but more positive, retirement questions.
But, believe me, your future self will thank you if you put it on your list of things to talk about the next time you meet with your financial adviser.
Kim Franke-Folstad contributed to this article.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Core Financial, LLC are not affiliated companies. Investing involves risk, including the potential loss of principal. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Any references to lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Core Financial, LLC is not affiliated with the U.S. government or any governmental agency. AW02181790
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Philip Gordley is an independent financial adviser in Albuquerque, N.M. The president and founder of Core Financial, he has more than 35 years of experience in the insurance and investment industry and has a bachelor's degree from Quincy College. Phil has been married for 26 years to his wife, Zora, and they have two teenage daughters.
-
Seven Habits for a Happy Retirement
happy retirement A long and happy retirement takes more than just money. Here are seven things happy retirees do – besides dutifully saving the money they’ll need to quit the 9-to-5 grind.
By Jacob Schroeder Published
-
The Fight Against Cancer Enters a New Phase
The Kiplinger Letter Breakthrough treatments hold promise for patients and investors.
By Matthew Housiaux Published
-
Seven Habits for a Happy Retirement
happy retirement A long and happy retirement takes more than just money. Here are seven things happy retirees do – besides dutifully saving the money they’ll need to quit the 9-to-5 grind.
By Jacob Schroeder Published
-
When Is the Perfect Time to Buy Life Insurance?
This is not an easily answered question, other than 'when you're the youngest and healthiest you can be.' Your occupation, habits and extracurricular activities will also affect your premium.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Should You Take the Survivor Option on Your Pension?
In some cases, you could buy life insurance instead and get a better deal in protecting your spouse. There are some things to keep in mind, though.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Want to Hire a Remote Financial Adviser? What to Consider
Working with a financial adviser who isn’t local isn’t as big of a deal as it used to be, but there are still some things to think about before diving in.
By Kelli Kiemle, AIF® Published
-
Is Your Money 'Lazy'? Here’s How to Put It to Work
A fat savings account may feel good, but letting your money just sit there could cost you more than you realize.
By Jason “JB” Beckett Published
-
Guide to Military Education Benefits and Resources
Service members and their dependents have many opportunities to get help with education before, during and after they serve.
By Zach Mindel Published
-
As Florida Condo Prices Fall, What’s a Condo Seller to Do?
Mandates that associations have adequate reserve funds for maintenance and repairs mean older buildings could be retired to make way for new development.
By Joseph Hernandez Published
-
What Is a Lifestyle Analysis in Divorce?
Divorcing high-net-worth couples, especially those in a gray divorce, often require a lifestyle analysis to determine how much spousal support is appropriate.
By Andrew Hatherley, CDFA®, CRPC® Published