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4 Ways to Avoid an RMD Tax Surprise

Filed under: Taxes and Planning

Are you one of the millions of people using an IRA to save for retirement? According to a 2013 study, Americans hold nearly $2.5 trillion in assets inside IRA accounts.1 Most of those assets are held in traditional IRAs, which offer tax-deferred growth and tax-deductible contributions.

Traditional IRAs, 401(k) plans and similar qualified accounts are popular savings tools because of their tax-favored treatment. However, assets in those accounts don’t avoid taxation forever. At some point, the IRS wants you to take taxable distributions from your qualified retirement plans.

The latest you can defer distributions from an IRA or 401(k) is age 70½. At that point, you must begin taking required minimum distributions, also known as RMDs. Your RMD amount is based on your age and your account balance. As you get older, you usually have to withdraw a higher percentage of your account balance each year.

Again, these RMDs are taxable. If you don’t plan accordingly, you could be in for a surprise at tax time. The good news is there are steps you can take to minimize your tax burden. Below are four strategies to consider as you plan for your RMDs:


Start withdrawals before age 70½.

If you don’t need the income and you want to minimize your tax exposure, why would you take distributions before you have to? It’s possible that by taking distributions before 70½, you could reduce your account balance, thus minimizing the amount of money you’re required to take at age 70½ and beyond.

This could be an especially helpful strategy if you’re trying to keep your income or your tax rate under a certain threshold. You could work with a financial professional to carefully chart out your distributions over time. If you take out modest withdrawals before you’re required, you may have less in your account at 70½, which could reduce your RMDs.


Change your IRA allocation.

Another option is to use your IRA for more conservative asset classes that may offer little growth potential. Again, the idea here is to limit the size of your IRA balance in order to minimize your RMD amount. This strategy should be considered only as part of a larger investment plan. It’s always important to maintain a diversified allocation that’s aligned with your specific goals and risk tolerance.


Donate your RMDs to charity.

All RMDs are considered taxable income. However, there is one exception. If you are charitably inclined, you could donate your RMDs to your favorite nonprofit. As long as the RMD is transferred directly from your account to the designated organization, you don’t pay taxes on the distribution. The key is that you cannot take possession of the distribution at any point. You may want to work with a financial professional to ensure that the withdrawals are set up properly.


Convert your traditional IRA to a Roth.

Finally, you may want to consider converting your traditional IRA to a Roth. There are no RMDs with a Roth IRA. In a Roth, your growth in the account is tax-deferred. However, your contributions aren’t deductible and your distributions are tax-free, assuming you’re over age 59½ and the account has been open at least five years.

You have the option to convert your traditional IRA to a Roth. You have to pay taxes on the converted amount. Once the funds are in the Roth, however, you won’t face income taxes on growth or on future distributions. In fact, you can defer distributions as long as you want.

Ready to develop your RMD strategy? Let’s talk about it. Contact us today at Ambrose Financial & Insurance Services. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.




Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17377 – 2018/2/13