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At age 70 ½, the IRS requires folks to begin distributing funds from tax-sheltered retirement funds. This plan forces many retirees to take RMD’s (Required Minimum Distributions) that result in a bump-up of taxable income, whether they need the funds or not. We have a possible solution.....
Delay 401k Distributions While Working
For those who are still working, you might be able to delay taking RMD’s from your company 401k, as long as your plan doesn’t force distributions by the company and you don’t own more than 5% of the company.
You can possibly employ this same strategy for your IRA money if your work 401k allows rollovers, as this would enable you to rollover money from your IRA into your work 401k to make those funds eligible for delay as well (again, assuming you meet the above requirements).
Qualified Charitable Distributions (QCD’s)
This strategy applies to folks who regularly donate money to an organization or their church. These individuals can utilize their RMD funds for contributions, rather than using savings for charity. This method requires the donations be made directly from an IRA account into the charity.
So rather than pay tax on the RMD and then donate to your charity, you can instead route the funds directly to the charity so you don’t realize taxable income on those funds. This is especially beneficial for those who don’t itemize deductions, since they aren’t realizing a net deduction for charitable donations. This can also help lower taxable income, which is a factor in determining taxability of Social Security income. You can apply this strategy up to $100,000 in funds per year, per spouse.
Another tactic is to begin converting tax-sheltered funds (like Traditional IRA’s) into Roth funds before you hit the 70 ½ RMD age. This will not only spread out the distributions and resulting taxable income, but could also lower the RMD amount you’ll have to take. That’s because by converting into Roth funds, you’re lowering the balance of tax-sheltered funds, which then lowers the corresponding RMD you’ll need to take.
Every situation is unique. Feel free to contact us regarding your distribution plan and we’ll be happy to discuss!