“Required minimum distributions can be the bane of many IRA owners' existence. However, there are a few creative ways to reduce your income tax burden, or that of your heirs.”
RMD season is in full swing, with the Dec. 31 deadline approaching for those who are 70½ and have IRA money that they have to withdraw or else face the 50% IRS penalty.
Kiplinger’s recent article, “3 Tax-Planning Ideas to Help Take the Bite Out of RMDs,” says that before making that withdrawal, review these three tax-planning possibilities:
- Gifting the RMDs to a qualified charity. If you’re over age 70½, a RMD isn’t counted as taxable income for federal income tax purposes, if it’s paid directly to a qualified charity. That’s referred to as a qualified charitable distribution (QCD). Currently, the limit is $100,000 per taxpayer annually.
This may be a big help to those who want to keep their adjusted gross incomes (AGIs) lower, because the withdrawal is not counted toward their AGI. That’s important because AGI impacts your ability to take itemized deductions, eligibility for Roth IRA contributions and taxes on Social Security, as well as Medicare premiums and more. IRA owners with pretax contributions receive the QCD treatment, but the non-deductible contributions aren’t eligible for the QCD. Optimally, the charity should receive the cash by Dec. 31.
- Qualified Longevity Annuity Contracts. Buying a QLAC in an IRA means that money used to purchase the annuity is excluded from the RMD calculation until age 85. Therefore, if an IRA owner has total assets of $500,000 and buys a QLAC for the maximum $125,000, that QLAC is excluded from the RMD calculation.
In that example, the RMD calculation is based on $375,000, not on the full value of the IRA at $500K. Using the Uniform Lifetime Table, the RMD for a 70 ½-year-old with a $500,000 IRA is $18,248, vs. $13,686 for the IRA with the QLAC. That’s an RMD savings of about $5K.
Thus, with this strategy you’re putting off paying income tax on a portion of your IRA money. Though the return rates on QLACs are low right now, this strategy may make sense as part of a diversified portfolio.
- Use IRA RMDs to buy life insurance. If you don’t have a current need for an IRA RMD, rather than reinvesting the withdrawal, you may think about expanding the distribution for your heirs by buying a life insurance policy.
These three ideas can help reduce the burden of required minimum distributions.
Reference: Kiplinger (November 2017) “3 Tax-Planning Ideas to Help Take the Bite Out of RMDs”
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