The goal for many investors is to put away enough money so that in retirement they can maintain the lifestyle to which they’ve become accustomed. Retirement accounts facilitate this by allowing the full amount of your savings to grow tax-deferred which prevents taxes from eating into your returns and the rate at which they grow. When you’re working towards your long-term financial goals, it’s important to employ tax-advantaged strategies that give you the best chance of success.
However, while you can delay/defer some of your tax burden, the tax man always cometh. When it’s time to take distributions from your retirement account, you’ll owe taxes on the distributions. Even if you’re like many of our clients who are fortunate enough to have accumulated sufficient wealth such that they don’t have to tap into retirement savings, Uncle Sam wants its due. That’s why the Required Minimum Distribution (RMD) exists for those over the age of 70 ½. Luckily, there are ways to mitigate some of the negative impacts of increasing your taxable income for the year from money that was already in an account that belongs to you.
A tax planning strategy if your 70 1/2 or older
If you’re in the position that you don’t need to withdraw from your retirement savings, you could consider donating your RMD to an organization that has more of an immediate need for those funds. That altruistic disposition can work to your advantage when implementing tax-planning strategies each year. Normally, people donate after-tax income to organizations and then receive a write-off for those donations to reduce their tax burden for the year.
The tricky aspect of RMDs is that you’re adding to your gross income for the year, and even if you plan to donate those funds immediately, there’s still tax and financial planning consequences to having your income exceed certain thresholds. However, by donating your RMD straight from your retirement account using a Qualified Charitable Distribution (QCD), you satisfy the requirement set by the IRS, without increasing your taxable income for the year.
This is particularly important because your taxable income helps determine how much of your Social Security benefits are taxable, as well as your exposure to the Medicare surtax. By keeping your taxable income lower through the use of QCDs, you can keep the moving parts of your financial life in sync. You’ve spent your life strategically saving to build your retirement assets, so your strategy shouldn’t stop now that it’s time to spend it. Give us a call to update your strategy.