Nothing lasts forever, not even the tax deferral on your IRA. When you turn 70½, the government will require that you withdraw money from your IRA; those withdrawals are known as required minimum distributions, or RMDs. But what if you don’t need the money? What if you want to avoid a tax hit? Here are three strategies to help reduce your RMDs.
- Be charitable. If you’re 70½ and planning on giving money to charity anyway, consider making a qualified charitable distribution (QCD) from your IRA. You can transfer up to $100,000 annually from your IRA to a charity free to tax. The QCD will satisfy your RMD without increasing your taxable income. Be careful though — make sure your QCD is done properly.
- Go Roth. If reducing RMDs is a top concern for you, you may want to consider converting some or all of your IRA into a Roth. This is because you aren’t required to take RMDs from your Roth IRA during your lifetime. While you will pay taxes on your conversion, you can exchange the one-time tax hit for a lifetime of never having to worry about RMDs and their tax consequences. Note: your beneficiaries will need to take RMDs from the inherited Roth IRA, but these distributions will likely be tax-free.
- Do it on your own schedule. You don’t have to wait until you reach age 70½ to start taking distributions. As soon as you reach age 59½, you can start taking penalty-free withdrawals. You may want to consider transferring your IRA withdrawals into a low-turnover, taxable account. If you’re retired and your income is lower this may be the time to take taxable IRA distributions so you can reduce your RMDs later.
We highly recommend that you consult with your tax advisor before taking any distribution from your IRA.