If you take a required minimum distribution from an IRA, 401(k), or other tax-deferred account and you don’t need the money to cover living expenses, where should you hide that money useless ?
Investors must now begin taking RMDs at age 73 or, if born after 1960, at age 75. Depending on your account balances, this distribution could represent a significant amount of money, perhaps more than you need to live on. One option is to reinvest that money, and a Roth IRA seems like a perfect choice: Withdrawals from Roth accounts are tax-free – including any gains on your investments – and you’ll never need to take any of those damn RMDs during this time. your life.
There’s just one problem: You can’t directly convert your RMDs to Roth. But for some people, there is a possible solution. For 2024, you can contribute up to $7,000 plus an additional $1,000 if you’re at least 50 years old – if you have enough. income earned.
Get matched with a financial advisor to discuss your own retirement strategy.
What is – and what is not – ‘earned income’
The IRS defines earned income as money you receive from working, such as wages, commissions, bonuses, tips, and honoraria for speaking, writing, or participating in a conference or convention. Income generated from self-employment also counts. Income that does not qualify includes taxable pension payments, interest income, dividends, rental income, alimony, and withdrawals from Roth IRAs or other tax-free retirement accounts, as well as annuities, social benefits, unemployment benefits, work accident benefits and your social security income.
Another restriction on Roth contributions is the income limit. Once your modified adjusted gross income (MAGI) reaches $146,000 for single filers or $230,000 for joint filers, your maximum Roth contribution begins to phase out up to $161,000 (single filers) or $240,000 ( joint filers). After that, you are no longer eligible to contribute.
You should also remember that you must wait five tax years after your first contribution to a Roth account before you can make withdrawals. Heirs who inherit your Roth will have to withdraw the entire balance within 10 years.
Consider speaking with a financial advisor to develop a tax-advantaged retirement strategy.
Other options on RMDs
If you are not eligible to make a Roth contribution, you still have the option to eliminate, reduce, or delay your RMDs.
Roth conversion: You can convert your IRA to a Roth account, once you have taken your RMD for the year. You’ll pay taxes on the amount you convert, so one tactic is to convert the maximum amount available without pushing yourself into a higher tax bracket. Each Roth conversion has its own five-year rule.
Charitable contribution: You can use a qualified charitable distribution to donate part or all of your RMDs to an IRS-recognized charity and you will not be taxed on the donated amount. To qualify, the money must be transferred directly from your IRA to the charity.
Continue to work: Your 401(k) account with your current employer is not subject to RMDs if you are still on the payroll. One tactic is to roll previous employer 401(k)s into your current plan so they are not subject to RMDs. However, once you stop working, RMDs are required.
Be careful: The penalty for failing to meet the RMD within the required period is steep – up to 50% of the missed RMD amount.
A financial advisor can help you manage the risks and trade-offs unique to your situation.
Pay attention to all your taxes
Structuring your retirement withdrawals to reduce your taxes means examining all of your income sources, including retirement accounts, RMDs, Social Security benefits, pensions and taxable investment income. For some people, withdrawing money from an IRA early in retirement can reduce the size of their potential RMDs. If they also delay receiving their Social Security benefits, their benefits will increase by 8% each year until age 70. Also be sure to coordinate taxes, withdrawals, and RMDs between spouses, and remember that a younger spouse’s RMDs will not need to be taken until he or she reaches the age 73 or 75 years old.
Other common retirement tax measures include investing in tax-free bonds, moving to a state with no income tax or estate tax, harvesting tax losses in taxable investment accounts, and holding taxable assets long enough to benefit from lower long-term capital gains tax rates. .
To learn more about retirement planning and how to achieve your goals, talk to a financial advisor for free.
Conclusion
How to manage your RMDs – and all the other tax issues that may arise in retirement – can be complicated. Take the time to estimate your retirement taxes before you start collecting pensions, Social Security, and making withdrawals from retirement accounts.
Advice
Balancing taxes and retirement income – and finding ways to minimize taxes in retirement – is a critical issue. A knowledgeable financial advisor can help you decide how to structure and coordinate these payments throughout your retirement.
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three licensed financial advisors who serve your area, and you can survey your advisors for free to decide which one is best for you.
Make sure you protect your cash reserves from inflation by securing them in an account earning a competitive interest rate. Leaving cash in a low-yielding checking or savings account can choke off your purchasing power over time.
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