IRA Required Minimum Distributions – Strategies to Optimize Savings and Minimize Taxation
Published December 6, 2019
At age 70 ½, an IRA owner is required to begin taking minimum distributions from their IRA(s) each calendar year. As these distributions are required each year (exception for Roth IRA’s), there are many strategies that can be used to minimize taxation to the owner of the IRA and optimize savings.
- Take only the minimum amount – By taking only the required minimum distribution amount, assets remain in the IRA and continue to grow tax free. This allows the funds to be stretched over your primary beneficiary’s life expectancy and hopefully provide more to pass on to your heirs.
- Distribute the RMD early in the calendar year – Year end is busy for most. Taking your RMD early in the year checks this off your list of things to do. Also, failure to take the required minimum distribution each year will result in a 50% penalty from the IRS, in addition to ordinary Income Tax.
- Distribute depreciated stock instead of cash – RMDs may be taken in cash or stock(s). If you own depreciated stock in your IRA, it may be beneficial to distribute it for your RMD. The value of the stock you distribute must be at least the required distribution amount for that year. The cost basis of the stock will be the value on the date of distribution. Distributions from an IRA are taxed as ordinary income. In a non-IRA account, if this same stock then appreciates and is sold after holding it for 12 months, you will pay long term capital gain taxes. Long-term capital gain tax rates are generally lower than ordinary income tax rates.
- Consider a Qualified Charitable Distribution (QCD) – Donations of up to $100,000 per person, per year are allowable as a QCD. By using your RMD as a QCD, you are excluded from taxable income. By keeping your taxable income lower, you could reduce the cost of Social Security taxation and Medicare premiums. Also, if claiming a standard deduction on your tax return, the only way to get tax benefits form your charitable donations is by doing a QCD from your IRA.
- Fund a life insurance policy with your RMD – If you do not need your RMD for living expenses in retirement, consider the IRA Maximization strategy. The goal of this strategy is to reposition assets into a more tax-efficient vehicle at death. If carried out properly, the RMD will fund the life insurance policy, helping to manage your tax liability and maximize the amount passed to your beneficiaries free of income and estate taxes.
These strategies may not work for everyone; however, it is important to understand there are options for required minimum distributions which should be considered.
If you have any questions or would like additional information regarding Required Minimum Distributions please contact MCM Manager Becky Barnett via email (firstname.lastname@example.org) or phone (502.882.4320).