Uncle Sam wanted you to save for retirement, hence your tax-free retirement accounts. But once withdrawals start, so do taxes.
Being able to decrease your income tax burden by putting money aside for retirement was a nice financial perk while you were saving for those golden years. It made saving in a 401(k) or another type of retirement plan more attractive, which is exactly what these types of accounts were designed to do. But once you retire and start taking money out of these accounts, you have to pay taxes on those withdrawals.
Kiplinger’s new article, “6 Tax-Smart Ways to Lower Your RMDs in Retirement,” says that unlike dubious foreign tax shelters, this one has an expiration date.
When you turn age 70½, the US government—in the form of the Internal Revenue Service—wants a piece of that action: tax regulations stipulate that you are required to take withdrawals from your traditional IRAs, 401(k)s and other tax-deferred plans or face a hefty penalty of 50% of the amount you should have withdrawn.
The IRS describes a required minimum distribution or “RMD” as the minimum amount you must withdraw from your account each year.
You typically must begin taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 70½, but Roth IRAs do not require withdrawals until after the death of the owner.
Because the withdrawals are taxed as regular income, those RMDs might nudge you into a higher tax bracket. This increase in your adjusted gross income could mean some other unpleasant tax consequences—including higher taxes on your Social Security benefits, a surtax on your taxable investments and a Medicare high-income surcharge.
There are a number of steps you can take to manage your new retirement tax burden. Managing your withdrawals, converting to a Roth IRA, adjusting your investments or donating your RMD are just a few suggestions. Plan for this retirement expense, and you’ll be better able to manage it.
Reference: Kiplinger’s (August 2016) “6 Tax-Smart Ways to Lower Your RMDs in Retirement”