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.
Below we describe ways to reduce the size of your required withdrawals and, consequently, your tax bill. All involve trade-offs—paying taxes now instead of later, for example, or giving some of your savings away—so consider your options carefully.
TAP YOUR IRA FOR CHARITY
If you’re 70½ or older, you can donate up to $100,000 a year from your IRAs to charity via a qualified charitable distribution, and after you turn 72, the QCD will count toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income, which besides lowering your federal and state tax bill can also lower taxes on items tied to your AGI, such as Social Security benefits and Medicare premiums. If you don’t itemize—which is the case for many retirees—a QCD provides a way to get a tax break for your charitable gifts.
David Bayer, 89, a former Navy captain who lives in John Knox Village, a retirement community in Pompano Beach, Fla., has been making qualified charitable distributions from his retirement savings since he turned 70½. His wife, Jackie, who is 75, also started making QCDs when she was required to start taking withdrawals from her savings. The Bayers contribute to several philanthropic causes, including their church and an organization that supports orphanages in Africa. Jackie also used a QCD to set up a scholarship fund at Purdue University, her alma mater.
“We feel that we’re at a spot where we’re fortunate to be able to give back,” David Bayer says. “It’s nice to know that Uncle Sam is chipping in his share.”
The maximum amount you can donate each year through a QCD is $100,000, but you can donate less than that, and many retirees do. Randy Bruns, a CFP in Napierville, Ill., says he often advises retirees who are already making charitable contributions to channel their gifts through a QCD.
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