How To Downsize Your RMDs
Kiplinger's Personal Finance|November 2019
You must start taking required minimum distributions from your IRA at age 70½. But you can reduce the tax bill.
Miriam Cross

After you’ve spent decades diverting a healthy stash of cash to your tax-advantaged retirement accounts, you need to start withdrawing a chunk of it each year once you turn 70½. But if you’re fortunate enough to be living comfortably off a pension, Social Security or other savings, the income from your required minimum distribution—and the tax bill that follows—may be more hindrance than help.

Your RMDs are based on the balance in your accounts as of December 31 of the previous year, divided by a life expectancy factor based on your age. Most people use the Uniform Lifetime table, Table III, in Appendix B of IRS Publication 590-B, available at www.irs.gov. The deadline to take your annual RMD is usually December 31, but you have until April 1 of the year after you turn 70½ to take your first required withdrawal. (The Secure Act, currently pending in Congress, would increase the starting age to 72 for RMDs from retirement accounts.) You’ll pay a hefty penalty—50% of the amount you should have withdrawn—if you forgo or delay your RMD past the deadline.

Bob Hite, of Asheville, N.C., turned 70 in May. Thanks to the pension he receives from his career as a petroleum engineer and Social Security benefits for him and his wife, Jane, the couple doesn’t need income from the RMD he will withdraw from his traditional IRA in November. (Jane is still two years away from taking her first RMD.) After discussing strategies with Ann Gugle, a certified financial planner in Charlotte, N.C., they plan to shift some of their charitable donations from their donor-advised fund to money from his IRA, using qualified charitable distributions (keep reading for details on how these work). They might also convert the remainder of his IRA to a Roth over the next several years. They’ll have to pay taxes on the money they convert, but once it’s in a Roth, it will grow tax-free and won’t be subject to RMDs.

Your needs will likely evolve in your seventies, eighties and beyond, and your strategies will change, too. As the end of the year approaches, it’s a good time to withdraw your 2019 RMD (if you haven’t already) and start planning how to handle distributions in 2020 and beyond.

SEND IT STRAIGHT TO CHARITY

If charitable giving is a regular habit, a qualified charitable distribution, or QCD, is a tax-efficient way to meet your philanthropic goals. Those 70½ or older can transfer up to $100,000 from a traditional IRA to charity tax-free each year, which will count as your RMD without being added to your adjusted gross income. Your charitable gift won’t be taxed, as it would be if you were to take a distribution and then donate the cash to charity. The donation isn’t deductible, but it will lower your modified adjusted gross income, which could help you avoid the high-income surcharge for Medicare parts B and D, as well as lower the percentage of your Social Security benefits that is subject to taxes.

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