Doug Famigletti, Portfolio Manager
Michael Jamison, Portfolio Manager
March 5, 2020
Congress’ recent passing of the “Secure Act” mandates that by the age of 72 retirees must begin taking Required Minimum Distributions (RMD’s) from their tax deferred savings account. While every individual’s tax liabilities vary by age and savings account balance, you are required to take yearly distributions regardless of whether you need the money or not. Failure to do so can result in a 50% penalty on the amount you should have withdrawn. In order to reduce the financial impact that RMDs can have on your wealth, following are some common strategies that can help you reduce your tax exposure.
Please note: the following strategic recommendations should be discussed with a qualified financial advisor and be acted upon within the context of your overall retirement strategy.
1. Make Withdrawals Before You Turn 72
You can begin withdrawing money from a tax deferred savings account at the age of 59 ½. Withdrawing money early will allow you to maintain oversight over how much you pay in taxes every year, while reducing your account balance and corresponding RMDs.
2. Continue Working Full-Time
If you keep working past the age of 72, you are not required to take RMDs from defined contribution plans, like 401(k)s, as long as you own less than 5% of the company. RMDs for these accounts begin the year of your retirement.
3. Convert to a Roth IRA
The IRS does not require RMD’s from Roth IRA’s so you might consider converting a portion of your tax deferred savings to a Roth IRA. However, money transferred to the Roth IRA is fully taxable that year so all potential tax implications must be calculated in order to determine the best course of action.
4. Make Qualified Charitable Distributions
Anybody older than 72 years of age can divert up to $100,000 of your RMD to a qualified charitable organization. These contributions can lower your tax liability while allowing you to meet any charitable interests in the process.
Regardless of your financial circumstances, it is very important that you spend some time understanding RMDs as you approach the age of retirement. Working with an experienced financial advisor to help you build a plan that suits the needs of you and your family can help reduce your total tax liability and help you avoid making a costly mistake.