Turning 73 can be considered a key milestone for retirement planning. It’s when Required Minimum Distributions (RMDs) are implemented for the majority of people. You’ll have to begin withdrawing your money from tax-deferred accounts such as 401(k) and IRAs. RMDs are taxable, so they can trigger significant tax bills. With the right strategies, however, you can reduce your RMD tax burden to help preserve your hard-earned assets.
5 Ways to Potentially Reduce RMD Taxes after Age 73
Consider these five strategies when managing RMDs:
1. Convert Traditional IRA Funds into a Roth IRA
Roth IRAs are not subjected to RMDs. This makes them an effective tool to reduce your retirement income. You may be able to reduce overall balance subjected to RMDs due by converting portions of a traditional IRA into a Roth IRA.
At age 73 you may consider converting a part of your IRA in a year where your other income is limited, for example, after completing a large home sale or another major expense.
Remember that Roth conversions will be taxable the year in which they are made. It is therefore important to estimate the tax implications in advance.
2. Make Qualified Charitable Distributions (QCDs)
Qualified charitable distributions can offer you a double benefit. You’ll be able to support causes that you care about and reduce your tax liability.
You can transfer up to $100,000 annually directly from your IRA into a qualified charity using a QCD.
For example, a 74-year old who has met their financial needs could use a QCD as a way to donate a portion or the entire RMD to their favorite charity. This would help to ensure that it does not increase their tax liability. This strategy can be very effective in reducing your taxes, without increasing your Adjusted Gross Income (AGI), which could impact other tax factors such as medicare premiums.
3. Strategically Withdraw to Manage Future RMDs
If you are over 73 years old, withdrawing strategically more money from your tax-deferred account may help reduce future RMDs and their potential tax impact. This involves taking distributions so that you stay in lower tax brackets. It prevents larger RMDs later on.
A 74-year old, for example, could withdraw funds to cover expenses in advance or reinvest them into a taxable account. This would allow maintain control over his taxable income.
Planning ahead can help you to avoid tax increases and still meet your financial goals.
4. Adjust the Investment Allocations
Your retirement account’s mix of assets can impact the size of your RMDs, as well as the growth rate of your balances. To manage the potential growth of RMD-triggering accounts, it may be helpful to shift investments that produce lower returns in tax deferred accounts but higher returns in taxable accounts or tax-free ones.
A 73-year old might prefer to hold income-generating bonds within their IRA while keeping growth-focused stocks within their Roth IRA. This could prevent the traditional IRA growing so much that future RMDs are inflated.
5. Use RMDs to pay for Qualified Expenses
For those aged 73 or older, using RMD funds to pay for essentials could reduce the need to tap into other tax accounts. For example, you could use RMD funds to cover qualified medical expenses, home modifications, or long-term care insurance premiums. These costs may qualify for tax deductions if they exceed a certain percentage of your AGI. You can use this method to offset the tax impact of your RMDs.
How to get help planning for RMDs
You can reduce the tax burden of required minimum distributions, even though they are not avoidable. You can make your retirement plan more tax-efficient by using strategies such as Roth conversions and charitable contributions.
Our Parr & Ibarra CPA firm in Keller, Texas is here to help you if you are unsure of how to manage RMDs. We help individuals to understand their options, reduce tax liabilities, and develop tailored strategies that align with long term financial goals. Contact us to receive professional advice for a more tax-efficient and smarter retirement.
