If you have a traditional IRA or 401(k), you’ve probably been working hard and saving diligently for years. But you can’t keep your funds invested as long as you want.
What Is an RMD?
An RMD is a minimum amount that you must withdraw from tax-deferred accounts like traditional IRAs, 401(k)s, and 403(b)s each year beginning when you turn 73.If you turn 73 this year, you have until April 1 of the following year to take your first RMD. Each subsequent RMD would be due by Dec. 31 of each year.
RMDs are calculated by taking the balance of your traditional IRA or 401(k) at the end of the previous year and dividing it by a number based on your life expectancy factor.
And staying up on your RMDs is important. Missing your RMD deadline or failing to take out the required amount triggers a 25 percent tax on the amount that should have been withdrawn. The penalty can reduce to 10 percent if you swiftly correct the matter and refile your taxes.
Don’t Delay Your First RMD
It may sound like a good idea to wait until April 1 of the year after you turn 73 to take your first RMD. But you’d take a double hit.Begin Making Withdraws at Age 59 1/2
Once you reach age 59 1/2, you can begin making penalty-free withdrawals from your traditional IRA. This may be a good idea, especially if you’re in a low tax bracket. It would reduce the size of your account and therefore future RMDs down the road.But it’s important to do this strategically. You may want to choose a specific tax bracket that your distributions would keep you in. And by living off this investment income, you also may be able to delay collecting Social Security, which would increase your benefits.
Your benefits increase 8 percent for each year you wait to collect after your full retirement age. You’d get your maximum benefit amount if you wait until age 70.
Consider a Roth Conversion
Roth IRAs allow for qualified tax-free withdrawals. They also are exempt from RMDs.So to take advantage of these benefits, you can engage in a Roth conversion. This is the process of converting funds in a tax-deferred account like a traditional IRA into a Roth account.
This may make sense if you expect to be in a higher tax-bracket when you withdraw the funds.
This is because you’d need to pay income taxes on the amount you convert. Some advisers recommend you do a Roth conversion during the “trough years.” This is the time after you retire but before you begin collecting Social Security benefits and prior to hitting RMD age. During this time, you generally decide where you draw your money from and by what amount. This could give you more control over your tax situation.
But because converting a large amount could effectively push you into a higher tax bracket (the amount converted is considered income), some advisers recommend you convert smaller portions over time.
Make a Qualified Charitable Distribution
A qualified charitable distribution (QCD) allows those aged 70 1/2 or older to transfer up to $111,000 from their traditional IRAs to one or multiple IRS-qualified charities and it would count as your RMD. And because you’re donating the money, the withdrawal won’t count as your income and you won’t owe taxes on it. This could help you avoid being bumped into a higher tax bracket.The Bottom Line
Required minimum distributions mean you need to take some funds out of tax-deferred accounts like traditional IRAs and 401(k)s once you reach age 73 and every year following. The move could bump you into a higher tax bracket. But there are certain ways to loosen the blow of RMDs. These include withdrawing money from your tax-deferred account when you reach age 59 1/2, doing a Roth conversion, and making a QCD if you’re at least age 70.The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.
From The Epoch Times