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5 Sensible RMD Strategies to Consider for Retirement Thumbnail

5 Sensible RMD Strategies to Consider for Retirement

By Daniel Baumgartner & Petra Peters

You’ve grown your nest egg in individual retirement accounts (IRAs) and a 401(k), but have you planned for when you take that money out? Having RMD strategies in place can help you avoid potential tax surprises in retirement.

IRAs, 401(k)s, and other vehicles allow you to save your money tax-deferred for retirement. But the federal government is guaranteed to come looking for those taxes later on through required minimum distributions from your IRA or 401(k).

While amassing your wealth, you might have thought you’d be in a lower tax bracket in retirement. However, without the proper planning, RMDs, along with your other sources of income, could push you into a higher tax bracket later or result in expensive penalties.

That makes it essential to understand RMD strategies. As an investment advisor at Terra Nova Asset Management, I can help.

What Are Required Minimum Distributions?

A required minimum distribution (RMD) is the amount of money the IRS says you must withdraw from certain retirement accounts starting at age 73.

The amount you’re forced to withdraw from retirement accounts like IRAs and 401(k)s depends on the balance you have in the account and how long you expect to live, among other things. Your RMD is calculated by dividing your year-end balance in your retirement accounts by a number the IRS derives from life expectancy and other factors.

If you had $1 million in your retirement accounts, you would have to withdraw roughly $37,736 by April 1 of the year following your 73rd birthday. The denominator continues to decrease as you age, meaning your RMD increases.

That could mean huge tax bills later. Additionally, failing to take an RMD could result in a 25% penalty.

As you can see, getting it right is crucial. Here are five RMD strategies that can help manage your distributions.

1. Stay on the Job

One of the easiest RMD strategies that can help with your 401(k) is to work past age 73. As long as you own less than 5% of the company and you’re still working, the IRS can delay the RMD for the 401(k) from your employer. This doesn’t apply to a previous 401(k) or a traditional IRA.

2. Convert to a Roth IRA

Among the RMD strategies discussed here, this one can help you manage your taxes efficiently. Roth IRAs, unlike traditional IRAs, don’t have minimum distribution requirements—money in the account can remain there and grow tax-free. You’ll have to pay taxes on the money moved into a Roth, though this still might result in savings.

3. Limit Distributions in the Initial Year

If you believe your distribution may put you in a higher tax bracket, you can opt out of taking your initial RMD. However, you must begin taking it by December 31. That means a double distribution in one year, creating a big tax bill and possibly moving you into a higher tax bracket. 

As far as RMD strategies go, this one works if you know you’ll be in a lower tax bracket later on. Otherwise, it’s best to take your initial distribution on time.

4. Donate to a Qualified Charity

Qualified charitable distributions (QCDs) let you give up to $100,000 from your IRA to a qualified charity. You don’t have to pay taxes on the money, and it meets your RMD. If you plan to support one or more charities in retirement, this can be a big win, although you can’t claim a tax deduction.

5. Consider Buying an Annuity

It’s important to note that RMD strategies that involve purchasing annuities don’t eliminate your taxes—they just delay them.

You can spend up to $200,000 from your IRA or 401(k) to purchase a Qualified Longevity Annuity Contract, thereby removing the amount from your RMD calculation. You’ll have to begin receiving your annuity payments by age 85, at which point they’ll become taxable. By then, you may be in a lower tax bracket.

Get Professional Financial Help Exploring RMD Strategies

At Terra Nova Asset Management, we have abundant experience personalizing financial strategies, including RMD strategies, to suit our clients’ goals.

Does it seem like we may be a good fit? Reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You can also contact us here to schedule a meeting and we’ll get in touch with you soon!

About Daniel

Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust. 

Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”

About Petra

Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.

Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.