IRA Alert

4 ways to reduce RMD taxes

These strategies can help stave off the increase in taxes that required minimum distributions usually cause

Jun 9, 2017 @ 3:14 pm

By Ed Slott

Required minimum distributions (RMDs) usually mean an increase in taxes. Here are four ways you can reduce this RMD burden for your clients.

1. Qualified charitable distributions (QCDs)

QCDs should be in play for every IRA client 70 ½ or older who is subject to RMDs and who also gives to charity. The QCD amount is excluded from income. This can create a chain reaction of tax savings since a lower income means more of the tax benefits, like deductions, exemptions and credits that would otherwise be reduced or eliminated due to higher income can now be retained. Increased tax deductions mean less income tax. The QCD option is only available for IRAs, not company plans.

(More: How advisers can dispel the confusion between IRAs and Roth IRAs)

We just saw a tax return where the reported RMD was $107,000. The return also included charitable contributions in excess of that amount that were claimed as an itemized deduction instead of using the QCD. It turned out that over $30,000 of the charitable deduction could not be taken due to the 50% income limitation. The excess gets carried over (but only for five years). If instead, that individual had used the QCD, he could have excluded $100,000 of that RMD (that's the annual QCD limit) and lowered his taxable income by over $30,000.

2. Qualifying longevity annuity contracts (QLACs)

QLACs actually have two benefits. One is that they can reduce the RMD amount and, in turn, reduce the tax bill. But a second benefit is that when the QLAC kicks in, usually at age 85, a client is protected from outliving their IRA money, at least up to the QLAC amount.

The QLAC value can be excluded from the retirement plan (including IRAs or company plans) account balance used for calculating RMDs. There are limits though. Retirement account owners can purchase QLACs of up to 25% of the account balance up to an overall maximum of $125,000. So a client with a $600,000 IRA is limited to a QLAC of $125,000. An IRA owner with $200,000 is limited to a QLAC of $50,000 ($200,000 x 25%). In either case, that's a nice chunk to chop off of an RMD calculation, not to mention the added benefit of longevity insurance.

(More: 5 costly inherited IRA mistakes)

3. Rollovers to company plans

Not everyone can take advantage of this one, but if your client is subject to RMDs from his IRA and is also still working at a company with a 401(k) plan, a rollover to the company plan can delay future RMDs. To benefit from this roll-back to a company plan, you first have to make sure the company plan allows roll-ins from IRAs. RMDs from the plan can be delayed until retirement if the client does not own more than 5% of the company and if the plan allows this so-called "still working" exception for RMDs. Plans do not have to allow this, but many do. Before doing the roll-back to the plan, the current year RMD must be taken from the IRA. An RMD can never be rolled over. Once the IRA RMD is taken, then the balance of the IRA can be rolled over to the plan and IRA RMDs will be eliminated going forward. RMDs from the plan will be due for the year of retirement and later years, but the client may be in a lower tax bracket then.

4. Roth conversions

Roth conversions before reaching age 70 ½ will lower future RMDs, but what can you do once clients begin RMDs after age 70 ½? Those RMDs cannot be converted to Roth IRAs because a conversion is technically a rollover and RMDs cannot be rolled over. The first dollars out of the IRA are deemed to satisfy the RMD, but after that, the remaining IRA funds can be converted. That will actually increase the tax for the conversion year, but will reduce future RMDs. Over time, converting smaller amounts each year, filling up lower tax brackets, can reduce or even eliminate future RMDs.

(More: Donald Trump vs. Bill Clinton: Same age, but different IRA rules)

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

FPA's Shannon Pike: What's next for the financial advisory profession?

As we head toward 2019 and beyond, regulation and compensation will continue to dominate the headlines. Shannon Pike of the FPA explains.

Latest news & opinion

LPL rolls back recruiting policy aimed at driving more assets to its corporate RIA

LPL erases $50 million hurdle for new advisers to join so-called hybrid firms.

Don't be fooled by the numbers — the industry is in a dangerously vulnerable state

Last year's stock market gains helped advisers turn in solid growth in assets and revenue, but that growth could disappear in the next market downturn.

Divided we stand: How financial advisers view President Trump

InvestmentNews poll finds 49.2% approve of his performance, while 46.7% disapprove. How has that changed over the course of his presidency?

10 states with the most college student debt

Residents of these states have the most student debt when you consider their job opportunities.

Ex-Wells Fargo brokers sue for damages, claiming they lost business in wake of scandals

In a Finra arbitration complaint, two brokers allege that Wells Fargo's problems damaged their business.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print