5 Strategies to Lower Your RMD (2022)

Many people can’t stand the fact that the government forces them to withdrawal taxable money from their retirement accounts at age 72.

Today we walk through 5 simple strategies to lower your RMD.

Lower Your RMD 2022


Full transcript:


Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
A lot of folks that we work with can’t stand the fact that they have to take mandatory distributions out of their IRA. And oh, by the way, also pay taxes. Today we’re going to discuss five strategies to lower your RMD requirements and retirement stay tuned.

Hey, there, it’s Alex and Anthony from One Degree Advisors. If you’re new here, we are Certified Financial Planners that help folks with all things tax, retirement, and investment related. Alright, Anthony topic of today is required minimum distributions, a lot of folks, they don’t love the fact that they have to have these forced distributions sent out to them every year. So today, we’re going to talk about some strategies to reduce and lower those required minimum distributions.

Anthony Saffer 0:44
Yeah, and right, before we get to those five strategies, I want to show you a quick example RMD example million dollars 72 year old, they would have to take out over $36,000 as their taxable distribution you can see here on the chart, and this is just based on a simple five or 5%, return average on your investments, you can see from that this light green line, the amount of RMD is going to going to increase over time, with the goal that at least the way that it’s calculated is that over time, that value of that retirement account would decrease. And you can see in this example, even at age 90, though, the account balance would still be $917,000. But the required distribution would be over $77,000 taxable at that point.

Alex Okugawa 1:27
Assuming account balances go up each and every year, your distribution rate also goes up each and every year, according to the IRS table. So it’s really a double whammy, right? If your portfolio balance grows, which you want it to, that’s a good thing. And then you also have higher distribution rates. That means again, that balance could continue to grow each and every year. So again, what we want to do today is talk about five strategies to reduce those RMD amounts as you continue to get older. So the first thing we want to bring up is, what you could do is you could keep working. And the reason why we want to talk about this is because there’s these special rules where if you’re a saver and a 401k, at your current company, and you continue working past age 72, because 72 is the RMD age now, you can’t own more than 5% of the company that allows you to actually delay taking distributions from the 401k at your current workplace until you retire, which again, this is great, because this at least delays the distributions in the early years. Yeah,

Anthony Saffer 2:32
and let’s be clear, that’s for a 401 K at the job that you’re working at. So any money that’s in an IRA, you’d still have to take those mandatory distributions. And you’re right, as far as the new RMD, age at 72. That’s kind of built into the law that helps us delay it a bit. And we’ll post a link to the video that we did talk about that more.

Alex Okugawa 2:50
Now, the second strategy here of what folks can do is they can do what’s called maybe like maxing out their withdrawals in the lower tax brackets. So for example, as you’re preparing for retirement, what you could do is take out, let’s say a little bit more from your IRA of possibly what you need, and then that kind of fills up your lower brackets before retirement. And that gets you into that lower rate.

Anthony Saffer 3:14
Yeah, I’ll put a chart up here on the screen, it gives a good example, this is a couple that’s in their mid 60s, their incomes over 100,000, you can see here, their their ordinary income for taxable event here is 76,000, they have about 6000 More at the within the 12% bracket. So that kind of becomes a no brainer, like even if I can just can, you know put a little take a little bit more out are converted to a Roth IRA, which we’ll talk about at that very low bracket, they could take more out of their taxable IRA. And then they can make the decision as you move into that mid range 22% bracket do I want to take even more out therefore limiting my or my RMD in the future?

Alex Okugawa 3:51
Now this third point here, this is kind of almost like an enhancement. Yeah, to the the second bullet point there. The third piece here is Roth conversions. So you know, in the years where you have space in those lower tax brackets, of course, you can take IRA withdrawals and just kind of keep it on the side, what might be an even better idea is to take those withdrawals and do what’s called like a Roth conversion, instead of just withdrawing it from the IRA. Again, what you do here is you pay tax in the year of the conversion.

Anthony Saffer 4:21
That’s right. And this could apply for retirees it could apply for professionals still in their working years moving money over to a Roth can help limit your RMDs in your traditional type retirement plans when you when you get there. Now a couple things I do want to point out is that if you’re doing a conversion, like you mentioned, you pay the tax in the year of conversion, you should have the cash to be able to pay that tax in that otherwise the math really doesn’t work

Alex Okugawa 4:45
out. Yeah, I’ve seen a lot of people talk about doing Roth conversions and then using the IRA to pay pay for the Roth conversions. Maybe that works out but like you said the math definitely gets a lot more murky in the benefits aren’t as clear cut When you have to use your IRA to pay for the tax on your conversion, it just kind of gets messy when

Anthony Saffer 5:06
Yeah, that’s right. We’ve talked a lot about Roth conversions too, we’ll post a video on that how to avoid costly mistakes as far as a Roth conversion. And then one more thing I’ll point out there is this could also mean contributing more to Iran doesn’t always have to come from conversion. The fourth

Alex Okugawa 5:20
piece here is asset location. And I think a lot of people that might be familiar with asset location will usually think of it in terms of like how much I put in my IRA account and how much I put in like a brokerage account. But you can also do this one other way, which is considering putting more growth investments in your Roth IRA instead of your IRA.

Anthony Saffer 5:44
Yeah, so think of it this way, if you’re going to have some conservative investments in your total investment portfolio, and then some that are more growth oriented, you want to lean the growth investments towards the Roth IRA. That way you get that tax free benefit there and limit the RMDs.

Alex Okugawa 6:00
And again, knowing that would assume you know, the tax consequence of how an IRA and Roth IRA works. But again, just knowing that the Roth IRA is great, because you get that tax free growth over time. Alright, the last piece here is qualified charitable distributions. We’ve talked about this before. But essentially, what that means is you’re giving the money directly to charity,

Anthony Saffer 6:20
money that comes from your your pre tax retirement account, like an IRA, if you give it directly to charity, it’s 100%. Tax Free, it doesn’t even show up as taxable income. Each spouse has up to $100,000 to do that after age 70 and a half. And that is key. So you definitely want to talk with your tax advisor about the specifications that that come into that we did a video previously about repositioning your giving through a qualified charitable distributions. And we actually went through an example of just how a couple basically reposition their giving, giving, they were already doing doing it from an IRA. I think in that example, saved them about $3,000.

Alex Okugawa 6:56
And that’s really interesting going through all these five points. I mean, it really does have to do largely with taxes. That is such a big piece of this. And again, looking at something like a QCD that qualify turtle the turtle distribution. That’s why it’s so important for us. We want to see our clients tax returns each and every year to see how is tax law change, and how can we maximize not only your returns, but hopefully keep your tax tax liability as low as possible. And now let us know what you think. What are you doing to lower the taxes on your required minimum distributions? Let us know your thoughts in the comments down below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.


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