How to Reduce Tax on RMDs
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also the TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2. Chris has passed the Series 65 examination, earned the Certified Estate Planner (CEP) and Chartered Retirement Planning Counselor (CRPC) professional designations.
how to reduce tax on required minimum distributions
With smart tax planning, you can secure your retirement years, minimize your tax liability, and leave a legacy to your loved ones. When set up properly, a surviving spouse who has more than enough retirement income and assets, can disclaim as much or as little of the tax-deferred retirement accounts inherited from a spouse, and pass it to the children, using IRS Gift Tax Section 2518. This specific strategy allows the surviving spouse and heirs to save on taxes since the required minimum distributions can be based on the children’s life expectancy tables, not the spouse’s.
For example, we used this specific tax strategy as part of an overall financial plan, to help a couple that has been clients of ours for about ten years. Before they retired, he was a doctor and she was a homemaker and over the years had accumulated a very nice portfolio by most peoples’ standards. As typically happens, a large portion of their investments happened to be held in their tax-deferred retirement accounts, namely, IRAs. The required distributions on their IRAs were going to create more income than they wanted. While this could be seen as a nice problem to have, the downside is that the future tax liability on these required distributions would push them into higher tax brackets and also create greater income tax liabilities on their other income sources.
By incorporating this tax strategy into their overall financial and investment plan for their retirement, they were able to save approximately $300,000 in tax liability over their retirement years. So here’s my point, this couple didn’t even know they had a tax problem, or that there was a better way to accomplish their goals of passing along their assets while addressing their concerns with taxes. So make sure your financial and tax professionals are working together to look at all aspects of your financial life and helping you to create a plan that works best for you. Because the key to making smart financial decisions is to learn the questions to ask and the problems to solve, before you move forward and make those important financial decisions.