You’ve made it this far in the RMD Series. And you’re tired of my telling you to just not worry about RMDs. That’s fair. There are legitimate concerns that one might want to plan to avoid.
- Tax brackets could go higher during your retirement.
- Estate rules could get even harsher for inherited tax-deferred accounts
- Your accounts could grow faster than the tax brackets inflate, landing you in a higher RMD situation in mid-to-late retirement. How horrible – you have more money. 😉
The hardest of these to plan around is the unknown of future tax brackets. They could go higher, lower, or stay relatively stable. For that reason, you will never know if you did the “right” retirement income plan to minimize taxes.
Three options to lower future RMDs
Roth Conversions
By moving money from your tax-deferred accounts to a Roth IRA, you lower the future balances of your IRA; therefore, your RMDs are lower.
This is no free lunch! You will pay taxes, at your ordinary income tax rate, on the money you convert. This takes money that may have been growing in a brokerage account and hands it over to the IRS before you need to do so.
I have run many Roth Conversion analyses over the years, and unless you model in extremely high future tax rates, Roth Conversions rarely help the retiree spend more money. They just help the heirs inherit more tax-free money.
Qualified Charitable Contributions (QCDs)
If gifting to charity is part of your plans, you can’t do better than sending money directly from your Traditional IRA to the non-profit of your choice.
Huge note: the non-profit of your choice does not count your unemployed son living in the basement. 501c3 charities only.
Starting at age 70.5 (even if your RMD start age is later), you can gift up to $100,000/year to qualified charities. The donations skip your taxes entirely and count toward your RMDs once those kick in.
Spend IRA money before you have to
Conventional wisdom told you to keep your money growing tax-deferred for as long as possible. But, by doing that, you are growing that tax-deferred account, leading to higher future RMDs.
By starting to take some money from your tax-deferred pot prior to the required start date, you are depleting the account over more years and shrinking the potential pool of money for future required withdrawals (and inheritance).
The practical way to employ this strategy is to estimate how much room you have left in your tax bracket after other incomes (Social Security, work, non-IRA investment income, pensions, annuities) are added up. Take as much IRA money out as you can to stay in your current tax bracket.
These are the most common and easy-to-implement ideas to diversify the tax treatment of your retirement income.
These are probably not the only ways to manage future RMDs. I’m sure Ed, Jeff, and Bob have extensive technical methods in their books. Available at a store near you!
Next up, putting it all in perspective.
