Taxable RMDs May Be Mandatory, but They Can Be Mitigated

Here are a couple of considerations to think about before you address RMDs: RMDs are includable in the provisional income test to determine Social Security benefit taxation and means testing of Medicare. So it’s not just taxes on RMDs—there’s more at stake here. Watch the interview with retirement consultant Bruce Bullock as he discusses a couple of tax-saving options for retirement. http://rightonthemoneyshow.com/taxable-rmds-may-be-mandatory-but-they-can-be-mitigated-bruce-bullock/ There’s a three-prong attack in reducing your tax bill triggered by RMDs: IRA conversions to Roth IRAs, stretch IRAs with spouse and children and Qualified Longevity Annuity Contracts (QLACs). 

IRA Conversions to Roth IRAs Converting IRAs to Roth IRAs after age 59½ is a tax-arbitrage strategy based on paying less in taxes today than during retirement by eliminating—or at least lowering—your RMDs at age 70½. When you consider converting taxable IRAs to tax-free Roth IRAs, you need to determine your present and future retirement tax bracket and let the math make the call. In a progressive marginal tax system, the goal of conversion is to pay taxes in your current tax bracket and not exceed it. That means you’re going to convert your IRAs over time and before age 70½ (between ages 59½ and 70½.) But that may not be enough to significantly reduce your RMDs. In that case, the next two strategies come into play.

Stretch IRAs with Spouse and Children Many IRA owners have benevolent plans for their assets, generally targeting their children and grandchildren. Instead of cashing the IRA in and paying taxes and then giving the proceeds to family, you could split the IRA into two separate IRA accounts naming a child as sole beneficiary of one account. Because there are two separate accounts, each child receives RMDs based on their individual life expectancy.

Qualified Longevity Annuity Contracts (QLACs) A QLAC is a relatively new retirement strategy that allows you to defer 25 percent of your RMDs, not to exceed $125,000 ($250,000 for married couples), until age 85 using a lifetime deferred income annuity.

These three strategies can be combined to really minimize your taxes on RMDs and may reduce your Social Security taxes and reportable income for Medicare.