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Taxes and Retirement - Part 2

Taxes and Retirement - Part 2

| February 14, 2024

This week, we’ll look at Required Minimum Distributions or RMDs and how they can affect your tax bracket. We’ll also look at ways to minimize their effect on your taxable income. 

Let’s start with what an RMD is. IRAs, 401(k)s, and other qualified workplace retirement savings plans are great for helping you invest for your future in retirement. Your retirement income plan no doubt includes the withdrawal of funds from some tax-qualified accounts. 

However, there will come a time, in the year you turn 73 as of 2024 when you have no choice but to withdraw funds from these accounts. These are what the IRS called Required Minimum Distributions or RMDs. It is extremely important that you plan for RMDs in your overall retirement income plan because these distributions can take a toll on your retirement nest egg in the way of taxes if you aren’t prepared. RMDs are required for accounts including traditional, SEO, and SIMPLE IRAs, 401(k), 403(b), and 457(b) plans, and profit-sharing plans.

Here are some smart strategies that may help reduce distributions and could even lower your tax bill. It is critically important to discuss any of these ideas with an advisor so that you understand their usefulness and impact on your particular situation.

  1. Draw-Down Early - Once you turn 59 ½ you can start taking money from your retirement accounts without taxes or penalties. If you plan on being in a lower tax bracket when you retire, it might make sense to take larger distributions from these accounts earlier so you can lower the account balance and in turn your RMDs later.
  2. Roth Conversions - Roth IRAs are a great retirement savings tool because withdrawals are 100% tax-free and they don’t have RMDs. To avoid RMDs you may want to convert your traditional IRA to a Roth IRA. Important to note is that you will have to pay taxes on the conversion in the year you do it but that one-time tax bill may be worth it for your future withdrawals and to avoid those potentially pesky RMDs.
  3. Use Your Beneficiaries to Reduce Your RMDs - If you're at least 10 years older than your spouse and they are the sole beneficiary of your retirement account, you can use the IRS Joint Life and Last Survivor Expectancy Table to calculate your RMDs. This will let you use your spouse’s longer life expectancy to determine how much to withdraw, it can also lower the amount. However, if your spouse is close to your age or if you have multiple beneficiaries, this won’t work for you.

Join me next week when we will talk about how to minimize taxes on your Social Security benefits.

Until next time…

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Taxes in Retirement: How to Reduce Taxes on Your Withdrawals 

This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.