Have you used an IRA to accumulate retirement assets? If so, you have company. According to a 2013 study, Americans hold nearly $2.5 trillion worth of assets inside IRA accounts.1 Much of those assets are held in traditional IRAs.

Traditional IRAs, 401(k) plans and similar qualified accounts are popular savings tools because of their unique tax treatment. They’re often funded with pretax dollars. Your 401(k) contributions are taken out of your paycheck pretax. If you meet income guidelines, you can take a tax deduction for your traditional IRA contributions. Also, you don’t pay taxes on growth as long as the funds stay inside the account.

You can’t avoid taxes on these dollars forever, though. At age 70½, you must begin taking required minimum distributions, also known as RMDs. The amount of your RMD is based on your age and your end-of-year account balance. Generally, your withdrawal will increase relative to your balance as you get older.

As is the case with all qualified plan distributions, RMDs are taxed as income. If you don’t plan accordingly, you could face higher-than-expected taxes. The good news is there are steps you can take to minimize your tax burden. Below are three strategies to consider as you plan for your RMDs:


Donate your RMDs to a charitable organization.

All RMDs are taxed as income. However, there’s one exception to this rule. You can donate your RMDs to a charity and avoid taxation on the distribution. The catch is that the distribution must go straight from the IRA to the charitable organization.

If charitable giving is already a part of your retirement strategy, this could be a way to meet your RMD requirements and minimize your taxable income. A financial professional could help you develop and implement a charitable strategy for your RMDs.


Consider converting your IRA to a Roth.

Not all IRAs are subject to RMD rules. There are no RMDs for Roth IRAs, primarily because Roth IRA distributions are tax-free after age 59½. Thus, the IRS has no incentive to force you to take distributions.

If you’ve used a traditional IRA to accumulate much of your retirement assets, you can convert some or all of those funds to a Roth IRA. You have to pay taxes on the converted amount. However, you won’t pay any taxes on growth or distributions once the funds are in the Roth. It could be worth it to pay the taxes today in order to avoid RMDs and taxes in the future.


Take withdrawals before age 70½.

If the whole point is to minimize your tax exposure, it may seem counterintuitive to take distributions before they’re required. However, distributions earlier in retirement could reduce your account balance, which would then reduce the amount you’re required to take via RMDs when you turn 70½.

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

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




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