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.