RMD Season: How Retirees Can Minimize the Tax Hit Before Year-End

If you find this article beneficial, please feel free to share it with your family, friends, or colleagues.

If you are interested in learning more about our services at the Financial Consulate, we encourage you to schedule an Introductory Meeting with one of our advisors using the following Calendly link or by calling our office.

• Introductory Meeting Link: Select a Date & Time – Calendly
• Office Phone: 410-823-7283

We kindly ask you to please complete this brief survey after you read the article to provide any feedback you may have or to suggest any future topics that you would like to see us write about. Completion of this survey will enter you into a giveaway of Financial Consulate merchandise. Thank you.

Survey Monkey – https://www.surveymonkey.com/r/SNYH2VX

 

By: Madison Bennett, CFP®, CFT-I™

As fall approaches, so does one of the most important financial planning deadlines for retirees: Required Minimum Distributions (RMDs). If you are age 73 or older (or inherited a retirement account), you may be required to take withdrawals from your IRAs, 401(k)s, and other tax-deferred accounts before the end of the year. But here’s the good news: with thoughtful planning this fall, you may be able to reduce the tax impact, improve your cash flow, and better align your withdrawals with your long-term goals.

Here are some key RMD strategies and reminders to help you prepare before the holiday season and year-end rush.

Know Your RMD Amounts

Don’t wait until December to figure out what your RMDs are. The IRS calculates them based on your age and account balances as of December 31 of the previous year. Missing an RMD can lead to steep penalties – up to 25% of the amount you failed to withdrawal (though this can be reduced if corrected promptly).

Tip: If you have multiple IRAs, you can aggregate them and take the RMD from just one. But 401(k) or other company retirement plan RMDs must be taken separately.

Consider Qualified Charitable Distributions (QCDs)

If you are 70 ½ or older, you can donate up to $108,000 per year directly from your IRA to a qualified charity. Any QCDs that you make will reduce the amount you have to take out for your RMD, which in turn reduces your taxable income.

This is a win-win for reducing adjusted gross income (AGI), lowering Medicare premiums (IRMAA) and supporting causes you care about. This is a great strategy to consider if you are charitably inclined.

Tip: QCDs must go directly from your IRA custodian to the charity. Do not withdraw the funds first and then give them to the charity.

Coordinate RMDs with your Tax Bracket

RMDs are taxed as ordinary income, which can bump you into a higher tax bracket if not planned carefully. If you’re close to a bracket threshold or nearing Medicare premium surcharges, some strategies to consider are strategic partial Roth conversions and bunching your deductions or charitable gifts.

Tip: Work with your advisor to create a personalized tax projection for you to see how RMDs could potentially affect your overall picture.

Integrate RMDs with your Income Plan

RMDs are not just about taxes, they are also a part of your cash flow. If you don’t need the full RMD to fund your lifestyle, there are some other options to consider, like reinvesting the after-tax proceeds in a brokerage account, using the funds to pay for life insurance or long-term care premiums, or funding gifts or legacy plans like 529 plans, etc.

Tip: Let your withdrawals serve a purpose in your plan – not just meet a requirement.

RMDs are one of the most predictable events in a retiree’s financial year, but without proactive planning, they can create avoidable tax headaches. By addressing your strategy in the fall, you give yourself time to make informed decisions, coordinate with your financial advisor, and avoid the year-end rush to take the RMD. We assist our clients in putting together tax projections in the fall to look for any possible planning strategy.”