You can delay minimum IRA distributions. This will reduce your income tax now and make you generally a much happier person.
You may not want to take your minimum IRA distributions once you reach 70 ½ if you don’t need the money. If that’s the case, why pay the tax? Most people think there is nothing you can do about it, but for the right person, there is a simple strategy that just may fix that problem.
Before we get to that, it’s important for you to understand that IRA rules are different from 401k rules.
If you have money in an IRA, you have to take your RMDs. And you have to actually start taking the RMDs by April 1 of the year after you reach 70 ½. If you don’t, Big Brother is going to get angry at you. He’ll slap you with a 50% penalty on the amount you didn’t take. Ouchie.
But that’s not the case with 401ks if you are still working. If you are still working at 70 1/2 and have your money in a 401k, you don’t have to take your RMD until April 1 following the year you officially retire.
How can you use this?
Well, let’s say you plan to work past age 70 ½ and you work for a company that offers 401k plans. Call the plan administrator and see if they will allow you to roll your old IRAs and old 401ks into the plan at work. (Read “IRA Restrictions.”)
If they do, take advantage of it. Roll all your old 401ks and IRAs to your existing 401k plan and, voila, you won’t have to take any RMDs until you officially retire.
Financial advisors don’t like this idea. They want to manage your assets and earn fees. They’ll tell you it’s a bad idea because you have limited investment options.
That’s true. You do have limited investment choices in most 401k plans. But the delayed income tax bite will more than make up for that unless your current 401k plan really stinks.
For the right person, this tactic can really help you save money for retirement. Would you roll your IRAs over to your company’s 401k? Why or why not? If you would like to do this but need the income, consider looking at tactics to increase your Social Security benefits to make up for the income reductions here. This would be a double win for you.
In situations where the person doesn’t need the RMD we sometimes use it as a funding vehicle for a family income trust and if they are in good health leverage it with a Guaranteed Universal Life Policy.
Ever try this technique? Any interest in some numbers?
Two thoughts on this.
Once you rolled the bulk of your IRA money into the 401(k), you may be left with just the Post-Tax money you deposited (you’ve been tracking this via the Form 8606, right?). This is your opportunity to convert that money to Roth with no tax due at all. Who said there’s no free lunch?
RMDs may not be all bad. In 2010, the (single) 15% bracket goes from a taxable income of $8,375 to $34,000. For those with a good pension and large retirement savings, topping off this bracket each year can make sense. For example, if your taxable income is $25,000 (remember, this is after exemption, deductions, and perhaps reflects a part time income) by taking another $11,000 in income with a combination of the RMD and Roth conversion, you avoid the risk of a higher tax in the future.