How do I reduce my required minimum distributions (RMDs)?

Age 65 Total assets >4 million. Three million + in both IRA and deferred or tax free products. Current tax rate less than 15%.2.3 million in IRA.Other than roth conversions or spending IRA now, are there any other options to reduce RMD's when I am 70.5

Answers

  • 9 out of 16 people found this answer helpful

    CFP®, MBA, MSFS Irvine, CA

    Yes - consider a lifetime annuity. This would make the payments less than your RMD over your lifetime.

    There is a unique strategy some have used which can eliminate your IRA and RMD. Essentially, you would put the money into a profit sharing plan and have the plan contribute systematically, capital to a life insurance policy. 

    You remove the policy from the plan by buying it out for the appraised value. This has the added advantage of providing a significant death benefit but it also gives you the ability to take tax free income once the strategy is completed.

    RMDs are a function of the law and are calculated by a life expectancy table. So there is no way to manipulate these calculations. But you can eliminate the problem by using one of these two methods.

    Hope this helps.

    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2576 views
  • 3 out of 5 people found this answer helpful

    CFP®, JD Scottsdale, AZ

    The other straightforward answer to your question would be to have your sole beneficiary for your IRAs be a spouse who is more than ten years younger than you.  This allows you to move from a Single Life Expectancy to a Joint and Last Survivor Expectancy which results in a smaller RMD amount. How small depends on the age of your spouse.

    While this option probably isn't realistic for most people, I would pose a question back to you:  What is truly important to you about reducing your RMD amount? 

    Like Jeff mentioned in his response, I'd recommend that you sit down with an advisor, accountant, and/or estate planning attorney and figure out what your goals are, and then come up with a strategy based on those goals. For instance, strong charitable intent would lead to a different strategy than leaving money to family members.

    The other thing I would mention is that it sounds like that you aren't enamored with doing Roth conversions.  If you were my client, I'd take a closer look at this strategy as you have some room available in the 15% tax bracket and it appears plenty of non-qualified assets to pay the tax bill. The specific strategy I'd want to look at is delaying when you take Social Security and then 'filling up' your 15% tax bracket with Roth conversions so you will have lower RMDs as well as greater Social Security payments.

    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2527 views
  • 3 out of 5 people found this answer helpful

    CFP® Palo Alto, CA

    In addition to the excellent answers given by others (especially Benjamin Gurwitz), including the following options:

    Charitable Giving

    Marry a Younger Spouse

    Asset Location (low-growth in IRA, high-growth in taxable/roth accounts)

    Roth conversions (which do mean paying more taxes now, and if this pushes you into a higher current bracket, possibly not a great idea, tough estate-tax issues may become relevant and a great reason to consider pre-paying taxes via Roth conversions)

    There is one more really big way to reduce/postpone RMDs:  Keep working.  If you are working for an employer (and you/your family aren't the owners of the company), so long as you are still working there, you do not have to take RMDs from that company's 401k.  This can be a huge opportunity, especially if you have substantial IRA balances which are rollovers from a previous employer and if you can roll those balances back into this new employer's plan.

    This is a double-win, inasmuch as if you're still working, you're probably in a higher tax bracket than you'll be when you do have to start taking those postponed RMDs.

    This exception to RMDs only applies to the 401k for the employer for whom you are currently still working.  If you have money in a former employer's 401k, consider rolling it over into your current employer's plan.

    This exception does not apply if you own 5% or more of the company.

    This exception does not apply if the employer plan is a SEP or a SIMPLE-IRA.

    When you do finally retire, you will have an RMD for the year in which you stopped working, even if your last day was Dec 31, but because, for that particular plan, it's still your very first RMD, you may postpone that RMD until Apr 1 of the following year (in which case you will have *double* RMDs for that plan in that following year), which can help lower taxes a lot if you earned a lot in that last year.

    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2522 views
  • 2 out of 3 people found this answer helpful

    AIF®, CFP® Carlsbad, CA

    While I will provide a few thoughts from a wealth advisor’s perspective, I would encourage communication with your wealth advisor, CPA and tax/estate planning attorney to develop a plan to address the planning and tax implications.

    Depending on your own goals, considering charitable donations may make sense depending on the eligibility of your assets.  Many charitable planning structures exist (i.e., charitable remainder trusts, donor advised funds, etc.) that would bring you both tax benefits and perhaps help you fulfill any charitable planning desires.  The tax benefits could generate income tax deductions and partially tax free income that could help offset taxable income from future RMD’s. 

    An additional, and more subtle way to help minimize your future RMD’s, is to pay attention to how each of your accounts is currently allocated.  Say for example your overall asset allocation calls for a mix of 60% equities and 40% fixed income.  How you actually implement that 60/40 mix is referred to as a concept called asset location (different from asset allocation).

    Smart asset location planning would suggest holding any tax in-efficient asset classes, like taxable bonds, within your tax-deferred accounts.  And hold tax favorable asset classes, like equities, within your taxable or tax free accounts.  Equities are riskier than bonds and hence have a higher long term expected return than bonds.  Therefore holding the bulk of your equities in tax favorable accounts positions the bulk of your estate’s future growth to occur within your accounts with the most favorable tax treatment.  This is important both now and especially if/when you need to draw from those accounts in the future.  Holding lower expected return asset classes, like bonds, in your RMD related accounts will help keep any growth of RMD accounts in check so you do your best as to not unnecessarily grow your future RMD’s and tax liability.

    Here are a few other reasons to hold equities in taxable accounts*:

    • Preferential capital gains treatment as opposed to ordinary income taxation
    • The ability to tax-loss harvest your losses on equities to offset future gains
    • A stepped-up basis upon death
    • The ability to donate shares to charity
    • A foreign tax credit for international investments in taxable accounts that does not apply to international investments held in tax-deferred accounts   
    *Source: The BAM ALLIANCE

    So while there may not be a single magic bullet to help you reduce your future RMD’s, some combination of conversions, charitable giving and smart portfolio planning may assist.

    I hope that helps.

    Jeff

    jeff@gradneyvistica.com


    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2544 views
  • 2 out of 4 people found this answer helpful

    CFP® San Antonio, TX

    There are several ways you can reduce your RMDs over time. You have already identified the most obvious and effective (Roth and regular withdrawals). Some of the other advisors have accurately identified other minor strategies:

    ·  Charitable giving – If you were already over 70 1/2, you could make QCDs from your IRA of up to $100k. But you have several years yet and this provision must be renewed. Currently, you could offset taxable distributions with charitable giving (assuming you itemize, don’t exceed the giving limit and aren’t subject to phase outs).

    ·  Marry a younger spouse – If you spouse is 10 years or more younger you can reduce your RMD, but really, is this a practical strategy?

    ·  Asset location – place slow growth tax in-efficient assets into accounts with RMDs. This way your RMDs will be lower since the assets didn’t grow as much and growth is in Roth or brokerage accounts where taxation is more favorable.

    None of these minor solutions are as compelling as the Roth conversions you mentioned. You stare tgat you are 65 and currently in a 15% bracket. I am assuming you aren’t receiving Social Security yet, but when you are 70 you will have sizable (and increasing) RMDs, Social Security income (especially if you delay filing) and possible other sources of income you receive now. The key to minimizing your long-term tax burden is to “smooth” your annual income over time. I expect you to have several years of lower income before your tax bracket will jump. To figure out the best plan, you will need to do long-term tax projections.  By seeing what tax brackets you may be in later, you can then decide what amount of tax pain today is worth avoiding it later.

    When you do Roth conversions, you can maximize the tax savings by setting up multiple Roth accounts and funding them with different asset types early in the tax year. You then can file an extension for your personal return and undue (recharacterize) the Roth accounts which performed the worst over that particular conversion period. So as an example, you decide $100,000 conversion is your tax “sweet spot.” You convert $100,000 each into two Roth accounts ($200,000 total) in January 2013.  One account you invest in equities, the other in bonds. In September of 2014, you look at the values. The equities could be $120,000 at that point and the bonds $95,000 or vice versa. You keep the one which has the highest value and only pay taxes on the converted amount, $100.000.

    You can achieve significant tax savings through these various strategies, but it is important to consider your goals. What is the ultimate use for the $4 million you cited? What other assets do you have? What cash flows needs do you have? All of these questions can alter one’s strategy. You will need a competent planning CPA and investment manager who work together well to make this work effectively.


    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2517 views
  • 0 out of 2 people found this answer helpful

    CFP® Sherwood, OR

    An idea you can consider when you reach age 70½ is IRA to charity transfers. This allows you to transfer the RMD to a charity, but not have to pay taxes on the distribution. Granted, this is a strategy to apply once you reach 70 1/2 and congress may change the rules by then. (There was a debate before it was decided to renew it for 2013) But if you have charitable intent and have enough to live on without the RMD payment, it would be an option to consider.

    The other advantages of this strategy is allows you the flexibility of stopping the charitable contribution, should you need the income for some future expenses, such as increased medical costs. It also keeps your RMD out of your adjusted gross income, which may help you stay under the thresholds from Medicare Part B and D high income surcharges.

    Hope this helps

    Andy Tilp, CFP ®
    Trillium Valley Financial Planning, LLC


    Was this a helpful answer?

    Advisors offer free consultations to determine if you're a good fit for one another. Providing more information in the consultation request will help advisors have a better sense of what you're looking for. The advisor will contact you via email and set up a time to meet. Depending on the advisor, and your preferences, this could be an in-person or online meeting. You are under no obligation to engage them after meeting with them.
    • Embed ›
    • 2513 views

Have a question?

Get answers from our expert nerds.


chat

mail
×

Add Video

Upload

Add Video

100%

Please wait while your file is being uploaded.

Add Video

How to Save for a Mortgage

Video Uploaded

Add Another I'm Done

Preview Video

×

*Disclaimer: We try to keep information accurate and up to date, however we cannot make warranties regarding the accuracy of our information. Please verify FDIC Insurance / NCUA Insurance status, credit card information, and interest rates during the application process. Please note that NerdWallet has financial relationships with some of the merchants mentioned here. NerdWallet may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.

*Advertiser Disclosure: Many of the credit card offers that appear on this site are from companies from which NerdWallet receives compensation. The results of our “card comparison and finder tool”, card assessments, and reviews are based on objective quantitative and qualitative analysis of card attributes. They are not affected by compensation. Compensation may impact which cards we review and write about and how and where products appear on this site (including, for example, the order in which they appear). While we try to feature as many credit cards offers on our site as we can maintain (1,700+ and counting!), we recognize that our site does not feature every card company or card available on the market. Additionally, our star ratings are a mix of user feedback and NerdWallet’s independent evaluation which are independent of compensation. For a list of all of our advertising partners, click here

© Copyright 2014 NerdWallet, Inc. All Rights Reserved. Privacy Policy|Terms of Use
Nerdwallet, Inc. is a BBB Accredited Financial Service in San Francisco, CA