Lower Taxes on Your RMDs

When you turn 72, you’ll have to start taking minimum distributions from your IRA and 401(k). These strategies will help trim Uncle Sam’s take.

- SANDRA BLOCK

The buoyant stock market has swelled the amount of money Americans have in their retirement savings plans, which is undoubtedly a welcome development for seniors who will need that money to live on. But most of the more than $13 trillion in savings is stockpiled in tax-deferred plans, which means retirees will eventually have to pay taxes on it. And depending on the size of the account, that tax bill could be significant.

To prevent retirees from avoiding taxes forever, the IRS requires owners of traditional IRAs and other tax-deferred accounts, such as 401(k) plans, to take minimum withdrawals based on their life expectancy and the balance of their accounts at year-end. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in December 2019, increased the age at which you must begin withdrawing money from 70½ to 72. Legislation pending in Congress would gradually increase the age for required minimum distributions to 75 by 2032 (see the box on page 60).

But unless Congress decides to eliminate RMDs altogether, which seems unlikely, you (or your heirs) will eventually have to withdraw the money in your tax-deferred accounts. And that could be a problem, because as your untapped balance grows, so does the amount you’ll be required to withdraw, along with your tax bill. RMDs are taxed as income, so a large withdrawal could vault you into a higher tax bracket. In addition, more of your Social Security benefits could be taxed, you could lose out on certain deductions and credits tied to your modified adjusted gross income, and you could pay higher premiums for Medicare parts B and D.