RMD stands for "Required Minimum Distribution," which is the required amount an IRA owner must start withdrawing from a Traditional IRA after reaching age 70-1/2. For IRA owners over 70-1/2, the RMD requires them to take income and pay taxes, when they would sometimes rather leave the money in the IRA. Several retirees over 70-1/2 have told me they were advised to spend IRA last, but wish they had spent IRA money before 70-1/2 to reduce the tax hit from the RMD.
Although I am still many years from 70-1/2, I am already looking at way I can reduce our future RMDs. First, we will try to convert as much to Roth IRAs as possible, since Roth IRAs have no RMD (or taxes on withdrawals). Second, we will spend some of our IRA funds prior to 70-1/2 when we can get a favorable tax rate. Third, I will use an NUA (Net Unrealized Appreciation) as a tax efficient way to reduce funds in my traditional IRA.
These three approaches should help reduce our future RMDs, but I expect we may still feel caught by the RMD tax trap.
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This is not financial advice. Please consult a professional advisor.
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1 comment:
Be cautious converting to a Roth. As you know, you'll pay tax when you convert. I have a friend who did a big conversion early in 2008. So he paid tax on his account, then the crash hit and his account value plummeted. So he ended up paying tax on value that soon largely evaporated. Ugly!
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