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How to Lower Your Required Minimum Distributions

Got a big retirement stash? You’ll want to start planning now so you don’t get hit with a huge tax bill later.

If you’ve stashed a lot of money in traditional IRAs or other tax-deferred plans, you can’t leave it there forever. Once you turn 72, you must start taking required minimum distributions from your tax-deferred accounts based on their value and your life expectancy.

For many retirees, this isn’t a problem: They already withdraw an amount equivalent to their RMD (or more) to pay expenses. But retirees with very large tax-deferred accounts and/or other sources of income, such as a pension, could find themselves with a large tax bill once they start taking RMDs. Withdrawals are taxed at your regular income tax rate, and increasing your taxable income can lead to other costs, such as additional taxes on your Social Security benefits and higher Medicare premiums.

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In response to the coronavirus pandemic, which roiled the stock market earlier this year, Congress waived RMDs for 2020. Congress also gave seniors a reprieve from RMDs in 2009, when the Great Recession led to a sharp stock market decline. But such waivers are rare, and the penalty for not taking an RMD in normal years is high: 50% of the amount you should have withdrawn. So even if you’re several years away from the deadline to start taking them, it’s a good idea to start planning for your required distributions.

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Convert some of your IRAs or other tax-deferred accounts to a Roth IRA. You’ll have to pay federal and state taxes on any amount you convert, but once the money is in a Roth, withdrawals are tax-free. Better yet, they’re not subject to RMDs, so you can allow the money to grow tax-free until you need it. If you leave it to your children, they’ll be required to withdraw the money in 10 years, but they won’t pay taxes on the distributions.

Buy a deferred annuity. You can invest up to 25% of your IRA or 401(k) account (or $130,000, whichever is less) in a type of longevity annuity known as a qualified longevity annuity contract (QLAC) without having to take required minimum distributions when you turn 72. You won’t avoid taxes on the money forever. The taxable portion of the money you used will still be taxed when you start receiving income from the annuity. But the tax bite will be delayed if you postpone receiving income from the QLAC until you’re in your seventies or eighties.

Donate some of your IRA to charity. Retirees who are 70½ or older can donate up to $100,000 a year from their IRAs to charity. A qualified charitable distribution, or QCD, can count toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income (AGI), which can lower your taxes on items tied to your adjusted gross income, such as Social Security benefits and Medicare premiums. You can’t make a QCD to a donor-advised fund or private foundation, so make sure the charity is eligible before you transfer the funds.

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