Limiting Required Minimum Distributions
I well recognize that the title of this blog is a bit of an oxymoron (how do we limit something which is required???) but Investopedia recently published an article on this very topic. Not necessarily new ideas here but an interesting different perspective on this question, which we all ask nearly every day.
Four strategies are discussed by Investopedia if the money from the IRA is not needed for expenses right when the investor turns 70 ½:
Delaying retirement
Converting to a Roth IRA
Managing the timing of the initial distribution
Donating to a charity from your IRA
Delaying retirement past 70 ½ is a possible way to delay paying income taxes on your retirement account. This rule, which only applies to a 401K at your current employer, allows you to delay taking your RMD and PAYING THE TAXES on it until you actually retire. Note that this does not postpone required distributions from other retirement accounts; it only applies to a 401-K at your current employer. This is an interesting idea but I’m not really buying this one.
Converting to a ROTH IRA is a great option since it eliminates taxable required distributions forever, not only for you, but also for your heirs. The downside is that you have to pay tax on the conversion amount in the year of conversion. That obviously can be very expensive in that year. It is a possible option for investors who have the cash to pay the tax outside of the IRA and who do not need the required distributions for current expenses. Think of a ROTH IRA conversion, not only as a strategy to reduce your current required minimum distributions, but also as an estate planning tool since you are leaving a tax free asset to your heirs. I’m sure we all know one person this caveat applies to. I suggest we all get to know more!
Managing the timing of the initial distribution is another way to postpone the initial distribution. The first distribution is required by April 1 of the year following the year the retiree turns 70 ½. After that, distributions are required to be taken annually by December 31. This timing means that a retiree could have to take two distributions in the first year, which could push the retiree into a higher tax bracket. In almost all cases, we recommend going ahead and taking the initial distribution in the year you turn 70 ½.
We have talked in earlier blogs about donating to a charity from your IRA. As a reminder, you can donate your RMD up to $100,000 to an IRS qualified charity and not pay taxes on that amount. This option is only available in IRA’s, not 401K’s or other employer-sponsored retirement plans, so if you want to do this when you are 70 ½, you will need to roll over your 401K – which we can help you with.
As always, we can discuss any of these options in more detail with you!
-Lori