There’s one piece of the retirement income puzzle that no one likes to deal with: Required Minimum Distributions (RMDs). The withdrawals from tax-deferred plans are taxed as regular income, which means RMDs could push you into a higher tax bracket. And the increase in your adjusted gross income could trigger other unpleasant consequences, such as higher taxes on your Social Security benefits, a surtax on your taxable investments, and a Medicare high-income surcharge.

However, there are a few steps you can take to lower your RMDs and make your retirement funds work more efficiently for you.⁽¹⁾ Here are some things to consider:

How are you managing your withdrawals?

• Once you turn 59½, you can withdraw money from your tax-deferred accounts without paying a 10% early-withdrawal penalty. Over time, these withdrawals will shrink the size of your tax-deferred accounts, resulting in lower RMDs when you reach 72 and beyond.   
• If you can postpone claiming Social Security benefits by using IRA withdrawals to pay living expenses, you could significantly increase your benefit amount. Remember that for every year you wait past your full retirement age, your benefit increases by about 8% per year until age 70.

Have you converted savings to a Roth IRA?

• Remember that you can withdraw your contributions to a Roth tax-free, and once you’re 59½ and have owned the Roth for at least five years, earnings are also tax-free. 
• Roths aren’t subject to RMDs, so you can withdraw as much or as little as you need after age 72 without worrying about the impact on your tax bill.
• Be aware that you must pay taxes at your regular income tax rate on any funds you convert, so be careful that you understand the tax consequences before making this move. A large conversion could push you into a higher tax bracket and trigger the aforementioned chain reaction of unpleasant consequences. However, if you are still several years from retirement, you could convert your savings in chunks to spread the tax out over a longer period of time and minimize these consequences.

Should you consider changing your investment strategy?

• Some people may want to consider a QLAC. You can use a Qualified Longevity Annuity Contract to reduce your RMDs. You are allowed to invest up to 25% of your IRA or 401(k) plan (or $135,000, whichever is less) in a QLAC without having to take required minimum distributions on that money when you turn 72. You’ll still have to pay taxes when you start receiving payments from the annuity, but you can delay payouts until age 85.
• If you can afford smaller gains on your investments, you may consider using your tax-deferred accounts to purchase bonds. One advantage to this strategy is that bonds and bond funds are taxed at your ordinary-income rate, while stocks and stock funds in a taxable account benefit from the capital-gains rate, which is 15% for most taxpayers. Because RMDs are based on the previous year-end value of your IRA, an IRA that grows more slowly will produce smaller RMDs.

Before implementing any of these strategies, you will want to consult with a qualified retirement planning professional who can help you understand which strategies would make the most sense for your particular situation.

Want help understanding how to utilize these options? Contact our office for a free initial strategy session with one of our retirement specialists!

Sources: 1) https://www.kiplinger.com/slideshow/retirement/t045-s002-tax-smart-ways-to-lower-your-rmds-in-retirement/index.html