In the March 2016 issue of AARP Bulletin, this article caught our attention. It’s called simply “Keep More of Your Savings” – but the subtitle is more provocative: “How to give less to the IRS after you turn 70 ½.” You can click here to read the AARP article.
What’s magic about age 70 ½? As most seniors know, that’s the age when the IRS requires people to begin taking the Required Minimum Distribution, or RMD, from tax-deferred retirement accounts. These include most 401(k) and 403(b) plans along with a host of traditional IRA’s. (The notable exception is a Roth IRA on which taxes have already been paid. Roth IRA’s are not subject to RMD rules.) Since Uncle Sam did not receive any income tax on your qualified deposits into those tax-deferred accounts, age 70 ½ is when it’s time to start paying the piper – or in this case the Tax Man.
Frequently our clients ask us about Required Minimum Distribution amounts, specifically how much they have to withdraw and when they have to do it. As to the amount, the IRS uses an RMD table to calculate your RMD based on the amount you have in your account and your age. The AARP article does a good job of explaining the basics.
But here’s the part that we found interesting, something we discuss frequently with our clients still in their 60’s: waiting until the last possible date to begin taking money from tax-deferred retirement accounts may not be your best strategy. That’s because, in the words of the AARP article, “RMDs can push you into a higher tax bracket. This occurs if you’re already on the cusp of the next bracket and the extra income from the RMD puts you over the top.”
AARP gives a hypothetical example. If your taxable income as a couple (based on present rates) is just below $75,300, that puts you in the 15 percent tax bracket. Every dollar of mandatory distribution you add to your income puts you over that threshold, and will be taxed at a rate of 25 percent. Depending on your situation, that can add significantly to the amount you send to the IRS. Again quoting from AARP, “Most people tend to delay taxes as long as possible, but this can backfire when it comes to RMDs.” The result of waiting can be a huge tax bite at a time when it’s too late to prevent it.
One way to reduce this tax risk is to begin taking out small amounts now (so long as you’re over age 59 ½ to avoid early withdrawal penalties). Depending on your situation, you could be better off making withdrawals in your 60’s and paying income taxes now rather than waiting. Another strategy many financial planners recommend is to consider converting your retirement accounts into Roth IRA’s. You’ll pay income taxes when you make the conversion, but once your funds are in a Roth IRA the rules for required minimum distribution no longer apply, and withdrawals are not taxed.
Clearly these can be complex decisions. All of this points to the need for good advice – and that’s where we come in. Here at Aging Options we have worked with clients in hundreds of different situations, advising them not only about their finances in retirement but also about their legal affairs, housing choices, health care needs and family communication plans. It’s all part of what we call a LifePlan, a customized retirement blueprint that allows our clients to protect more and more of their assets as they age. We also show our clients how to avoid unplanned institutional care, and how to ensure that they will not become a burden on their loved ones in the future.
Why not take the first step in developing a LifePlan for your retirement? Plan now to attend one of our free LifePlanning Seminars. These highly enjoyable and information-packed events are held throughout the area. Register for a seminar by clicking on the Upcoming Events tab on this website. We’ll see you there.
(originally reported at www.aarp.org)
