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4 Ways to Reduce Your RMD Tax Bite Thumbnail

4 Ways to Reduce Your RMD Tax Bite

Markets continue to climb. That is good news for your retirement account. However, there is a downside. When you contribute to a traditional IRA or a pre-tax 401(k), you make a deal with Uncle Sam. You can get a tax deduction and tax deferral on any earnings in your account. However, eventually the government is going to want its share and will require funds to come out of these accounts. That is when you must start required minimum distributions (RMDs). You may not need the money, and you may not want the tax hit. Bigger retirement account balances can mean larger tax bills. Here are some strategies that can help reduce your RMD tax bite.

4 Ways to Reduce Your RMD Tax Bite

1: Do a Qualified Charitable Distribution (QCD)

If you are planning on giving money to charity anyway, why not do a Qualified Charitable Distribution (QCD) from your IRA? For 2024, if you are age 70 ½, you may transfer up to $105,000 annually from your IRA to a charity tax-free. The QCD can also satisfy your RMD (if the QCD is made before the RMD is taken), but without the tax hit. QCDs are not available from employer plans.

2: Use the Still-Working Exception

Are you still working after age 73? If you do not own more than 5% of the company where you work and the company plan offers a “still working exception,” you may be able to delay taking RMDs from your company plan until April 1 following the year you retire. The still-working exception is not available for IRAs but if your plan allows, you can roll your pre-tax IRA funds to your plan and delay RMDs on these funds too. Just be careful. If you have an RMD for that year from your IRA, you must take it before you can roll over the rest of the funds.

3: Consider a Qualified Longevity Annuity Contract

A Qualifying Longevity Annuity Contract (QLAC) is a product designed to help with longevity concerns. Any funds you invest in the QLAC are not included in your balance when it comes to calculating your RMDs until you reach age 85. This will reduce your RMDs. SECURE 2.0 has changed the rules for QLACs by increasing the dollar limit and doing away with restrictions on the percentage of the account limits. The maximum QLAC limit is now $200,000 per person.

4: Convert to a Roth IRA

If reducing the taxation of RMDs is a top concern for you, you may want to consider a Roth IRA conversion or an in-plan 401(k) conversion. This is because you are not required to take RMDs from your Roth IRA or Roth 401(k) during your lifetime. Keep in mind you will need to take your 2024 RMD from your traditional IRA prior to converting to a Roth IRA. Also, both Roth IRA conversions and in-plan 401(k) conversions are taxable events. There is a big payoff though. You will never have to worry about the tax bite of an RMD ever again.

By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 04/03/24, with permission. https://irahelp.com/slottreport/4-ways-to-reduce-your-rmd-tax-bite/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.