The Side Effects of RMDs

One of the biggest challenges of retirement is learning how to manage the income side of your cashflow. After receiving Social Security and any pension income, you’re left with the task of taking withdrawals from your retirement savings. Beyond the challenge of making your life savings actually last for your entire life, there are other considerations including taxes and inheritance.

Many retirees have all or most of their retirements savings in pre-tax 401k and IRA accounts, which are subject to Required Minimum Distributions (RMDs) at age 73. Retirees find that they are required to take a dollar amount that is entirely taxable. Without proactive planning, they may find themselves in a higher tax bracket than anticipated, which can have further consequences for the taxation of their Social Security and the deductions they are able to take. Having pre-tax dollars also impacts the amount of inheritance their heirs may receive.

Together, we will look at strategies to mitigate some of the “side-effects” of RMDs. Having clarity in your retirement plan can make a significant difference.

RMDs can have “side-effects” due to being counted as taxable income. Higher income may have a detrimental impact on the taxation of your Social Security and the deductions you are able to take, not to mention putting you into a higher tax bracket.

One strategy for mitigating the side-effects of RMDs is to “Maximize Your Bracket.” Each year look at how much room you have to the top of your current tax bracket and consider making a Roth conversion for up to that amount. For example, the top of the 12% bracket for married filing joint is $94,300 of taxable income. At $94,301, the tax bracket jumps all the way up to 22%. If your taxable income is $60,000, you could convert up to $34,300 of pre-tax IRA dollars to Roth IRA. This would result in increased Roth dollars, which generally create tax-free income, and you would have reduced your Traditional IRA balance subject to RMDs in the future.

Of course, there are rules and stipulations to be aware of, such as the 5-Year rule for each Roth conversion where gains remain subject to the 10% early distribution penalty for 5 years after conversion for anyone under age 59 ½. So work with your Nepsis® advisor to make sure you’re taking advantage of every strategy available and doing so correctly.

Higher income may have a detrimental impact on the taxation of your Social Security and the deductions you are able to take, not to mention putting you into a higher tax bracket. The good news is there are strategies to mitigate RMDs. One such strategy is Qualified Charitable Distributions (QCDs). QCDs are IRA withdrawals sent directly from your IRA to a qualifying 501(c)(3) charitable organization up to $105,000 per year.

Many retirees who donate to charity do not receive a tax deduction for their donation because they do not have enough itemized deductions to exceed the standard deduction, which nearly doubled in 2018. By contrast, a QCD results in a tax benefit because the amount distributed is completely excluded from taxable income. Even better, it counts toward satisfying your RMD. (An interesting note is that while the RMD age has been increased to 73, QCDs are still available at age 70 ½.)

For anyone eligible for QCDs that also plans to donate to charity, significant tax savings can be realized by simply changing the logistics of your IRA withdrawal. As with other strategies there are rules and requirements, so be sure to work with your Nepsis® advisor to ensure you follow the process correctly.

Advisory Services offered through Nepsis, Inc., An SEC Registered Investment Advisor.

Sources:

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024

https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity

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