retirement

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.

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 Or you could put the withdrawn funds into long-term investments that will sweeten your later years — or your legacy.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

About the Author

Philip Gordley, Investment Adviser

President and Founder, Core Financial

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.

Most Popular

9 Great Growth ETFs for 2022 and Beyond
ETFs

9 Great Growth ETFs for 2022 and Beyond

These growth ETFs offer exposure to higher-risk, higher-reward stocks while lessening the risk of a single stock torpedoing your returns.
January 18, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022
Sweet Silicon: 5 Superb Semiconductor Stocks for 2022
stocks

Sweet Silicon: 5 Superb Semiconductor Stocks for 2022

If 2021 was a good year for the chip industry, 2022 could be downright great. Here are five semiconductor stocks if you're seeking out growth.
January 11, 2022

Recommended

Can You Claim the Home Office Deduction on Your 2020 Tax Return?
Tax Breaks

Can You Claim the Home Office Deduction on Your 2020 Tax Return?

People working from home because of the pandemic are wondering if they can get a tax deduction out of it. It depends on your employment status.
January 29, 2022
How to Handle an IRS Audit of Your Tax Return
tax returns

How to Handle an IRS Audit of Your Tax Return

Don't panic! Keys to success include being well prepared, establishing credibility right from the start, and keeping your wits about you.
January 27, 2022
12 States That Tax Social Security Benefits
social security

12 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in one of these states, your Social Security benefits may be subject to state taxes.
January 27, 2022
Calculate Your Required Minimum Distribution From IRAs
required minimum distributions (RMDs)

Calculate Your Required Minimum Distribution From IRAs

The IRS updated the uniform lifetime table, which is used to determine your mandatory withdrawals, this year. This tool can calculate your RMDs from a…
January 27, 2022