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A Retirement Strategy to Help You Keep More of Your Money

| October 28, 2021

A Retirement Strategy to Help You Keep More of Your Money

A sound retirement strategy requires a thorough understanding of the many factors that can impact your portfolio. One of those factors is the role required minimum distributions (RMDs) can have on your taxes in retirement. RMDs are the minimum amount required to be distributed out of a traditional retirement account on annual basis beginning at 72. When you reach retirement and begin collecting your RMDs, how will your tax bracket change? It could be higher or lower than it was when you were still working, which has the potential to impact your day-to-day retirement lifestyle.

It’s not unusual for retirees to find themselves in a situation where they get their RMDs, and combined with their Social Security payment, they are in a tax bracket higher than when they were working. Fortunately, there are strategies that can be used to lower your tax burden.

Traditional IRA or Roth IRA?

One of the benefits of a Roth IRA is that it does not require an RMD. Therefore, contributing to a Roth IRA or converting Traditional IRA assets to a Roth may make sense for you. The caveat when you converting your Traditional IRA is that you will be subjected to income tax any previously deducted Traditional IRA contributions and on all earnings. A conversion may place you in a higher tax bracket than you are in now. You will need cash on hand to cover the extra taxes in the year of conversion. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary, we suggest that you discuss tax issues with a qualified tax advisor. The advantage once converted is that the assets will be able to be distributed tax free. Talk to your fiduciary advisor about whether it is a good idea for you. When thinking about whether to use a Roth or Traditional consider if the following situations apply:

  • You are interested in leaving tax-free money to your family.
  • Your projected tax bracket at retirement.
  • Your projected future RMD and retirement tax bracket.

Calculate Your Best RMD Strategy

The above example is just one of the many advantages of working with a fiduciary advisor when developing your RMD strategy. Knowing when you should begin taking withdrawals is another instance where you can utilize their expertise. In some situations, it might be advisable to take withdrawals from a retirement account to fund retirement spending and delay social security. Assets from a retirement account may be withdrawn without penalty starting at 59.5.

The benefit of taking withdrawals earlier and delaying Social Security benefits is that Social Security benefits increase by 8% a year. Moreover, this strategy might lower your future RMD and therefore your future tax burden. Social Security benefits may be delayed to age 70. Consult with your advisor to see if this strategy makes sense for you.

Charitable Contributions

For those of you who do not need required distributions to fund retirement there is a strategy to meet your RMD requirement, yet not pay taxes on the distribution or have it push you into a higher tax bracket. This strategy is called a qualified charitable distribution.  

A qualified charitable distribution can be beneficial for those who want their distribution to go tax-free to an organization they’re passionate about, but there is a rule to follow: The transfer has to be made by the custodian of your IRA, because in order for it to be tax-free, you can’t “touch” the funds. Also, you’re not able to use the contribution as a tax deduction, however, this distribution does not increase your taxable income and could therefore keep you in a lower tax bracket.

At Heritage Investments, we offer a variety of financial services, including retirement planning to optimize the impact on your tax bracket from RMDs. Contact us and let’s discuss how you can reach your financial goals.