RMD Planning After Age 70.5

If someone is over the age of 70 & ½ and has money in pre-tax retirement accounts they will now have to take Required Minimum Distributions. Most planning for Required Minimum Distributions should be done from age 59 & ½ to age 70 & ½, but sometimes having money in pre-tax retirement accounts can’t be avoided. There are some ways to help offset what has been commonly called the “ticking tax time-bomb”.

Qualified Charitable Distributions

One of the most frequently discussed topics is Qualified Charitable Distributions. A QCD allows one to take the RMD they were required to withdraw from their retirement accounts and give it directly to a charity instead. This strategy would make sense only if one was already giving to charity. If one is already giving to charity, it would make more sense to eliminate all or part of their RMDs rather than paying taxes on RMDs and pulling money from a bank account to give to charity. It is true that one gets a tax deduction for giving to charity from a bank account, but that would only benefit those whose itemized tax deductions are higher than the standard deduction. In order to do a QCD, one must work with the institution sending the QCD to code it as such.

Utilizing a Spouse Under RMD Age

A creative option to think about for reducing taxes on RMDs is to utilize a spouse that is working and currently under the age of 70 & ½. For example, assume John is 71, Mary is 66, and Mary is still working while contributing $5,000 to her 401(k). If John is taking an RMD of $3,000 from his IRA, then it may make sense for Mary to contribute an extra $3,000 to her 401(k). By contributing an extra $3,000 to her 401(k), it will essentially offset the required minimum distribution John had to pay that year. This will all the couple to defer the taxes until later, when they will hopefully be in a lower tax bracket.

Rolling an IRA into a Current 401(k)

When severing from employment, often times folks are left with an old 401(k) or IRA. When working for a new employer, one often has the ability to roll money into that 401(k) plan. If someone is over the age of 70 & ½ and still working, the current employer’s 401(k) plan typically allows them to defer taking RMDs until severing from employment. In this case, it would make a lot of sense to roll any pre-tax money, like old IRAs or 401(k)s, into the new employer’s plan. By rolling money into the new 401(k) it will allow one to defer taking the distributions until they are finished working and most likely in a lower tax bracket than when they were working.

Rolling a Roth 401(k) over to a Roth IRA

We often hear how Roth IRAs do not have Required Minimum Distributions, but the same does not apply to Roth 401(k)s. A Roth 401(k) has the same RMDs as any other pre-tax retirement account, but this problem can easily be avoided. In order to avoid taking RMDs from a Roth 401(k), one must roll it over into a Roth IRA. This will allow the money to continue to grow tax-free without being forced to pull from the account.

Contributing to a SEP IRA

A SEP IRA is a tool for self-employed individuals to fund their retirement. A SEP IRA allows one to contribute the lesser of 25% of compensation or $56,000 in 2019. A SEP IRA is subject to RMDs at age 70 & ½ even if the individual is still working. However, a SEP IRA also allows contributions after age 70 & ½ when still working. In theory, one could take an RMD from the SEP IRA and then also contribute the same amount that was withdrawn, so it would be a wash in terms of taxes owed that year.

Qualified Longevity Annuity Contracts (QLACs)

The Qualified Longevity Annuity Contract is another IRS approved strategy to defer RMDs that is often discussed. The Annuity contract allows the owner to defer RMDs from the amount placed into the contract until age 85. The amount of money allowed in a QLAC is the lesser of 25% of one’s aggregated retirement account balances, or $130,000 in 2019. These contracts cannot be tied to market fluctuations, and therefore are used primarily as a guaranteed income source later in life. These contracts are also difficult to change after purchased and must be thought about for a considerable amount of time before deciding if it is right for a retirement plan.

Conclusion

It is best to consider all options when looking to reduce Required Minimum Distributions. One of these strategies may fit for one client’s situation, but may not be useful for another. At the end of the day, the government will receive its tax revenue, but the individual does have some tools to control the timing of these RMDs.