Published in the July 25 – August 7, 2018 issue of Gilroy Life
Most of us invest in qualified retirement plans such as 401ks, IRAs, or similar savings plans. Our intent in doing so is to afford ourselves the opportunity to live comfortably in retirement without sacrificing the lifestyle we’ve grown accustom to. Contributions to these plans are tax deductible which can help reduce your tax liability today, however, you’ll be taxed on this money and all its growth in the future.
You may access qualified retirement plan funds starting at age 59 ½ without a penalty. Since Uncle Sam eventually wants his cut (in the form of taxes), the government requires you to liquidate these accounts during the course of your lifetime starting at age 70 ½. These distributions are often called RMDs or “Required Minimum Distributions.” Since many of our clients have questions surrounding RMDs, we felt this month’s column should focus on some strategies that can help reduce RMD tax liability.
Develop a Strategy for Managing Withdrawals:
As we previously mentioned, you can start accessing qualified retirement funds at age 59 ½. Since waiting to distribute these funds could cause you to move into a higher tax bracket and increase the amount you’re taxed on social security, it could make sense for you to distribute a portion of these assets before you’re ready to retire. This can help to keep you in a lower tax bracket and allow you to defer taking social security, thus maximizing future social security payments.
Converting IRAs and 401ks to ROTHs:
This strategy is common and offers quite a few advantages. ROTHs allow for tax free withdrawals any time after age 59 ½ and ROTH earnings can be distributed tax free after five years.
In addition, ROTHs are not subject to RMDs, so you never have to worry about a tax bill on this type of account. To convert to a ROTH, you’ll pay ordinary income taxes on the amount converted. You’ll want to be careful how much you convert. Converting too much can bump you into a higher tax bracket.
Many people in their 60s whose income has declined after retirement may consider converting an amount that brings their earning up to their current tax bracket maximum. This can help provide more spendable income in future years.
Liquidate Qualified Accounts and Fund an Indexed Universal Life Insurance Policy:
This trend has grown more popular during the past decade. These policies can help address insurance needs, provide tax deferred growth at market rates, and can offer a stream of supplemental retirement income tax free.
These policies are often referred to as “Super ROTHs” because they do not have the same limitations on contributions and often have better protection from market downturn.
Work for a Longer Time Period:
Should you decide to work for a longer period, you should consider rolling some of your qualified funds into you current employers plan. You will not be forced to liquidate these funds even if you are older than age 70 ½. If your income is high, utilizing this strategy can reduce the taxes you pay on RMDs once you retire.
Implement a Qualified Longevity Annuity Contract (QLAC):
Qualified longevity annuity contracts can be appropriate for a portion of your retirement portfolio for a few reasons.
This type of annuity grows tax deferred, offers protection from market downturns, and can offer much higher payouts than other products that guarantee a lifetime income because not everyone who purchases this product lives long enough to enjoy the benefits.
These contracts can protect other assets by offering benefits that double lifetime payouts for long term care needs that statistics show affect 70 percent of retirees.
Donate your RMDs:
If you support charities, considering donating from your RMDs can help avoid taxes on the money altogether and help keep your tax bracket from increasing.
Vary your RMD Distribution:
The government does not require RMD distributions have to be taken equally. You can take all your RMDs from one account as long as they are the same type (i.e IRA, 401k, etc.).
This allows the highest appreciating assets to grow often providing for more income during retirement.
Working with a financial professional to properly utilize the strategies above is vital. Contact your financial professional or call our office or more information about plans tailored to your needs.
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