Required Minimum Distributions, or “RMDs”, are a part of life for tax qualified accounts like IRAs or 401ks. At age 70½, you have no choice but to start drawing a portion of the money out and paying the taxes on those withdrawals. The IRS has “called” your loan and now wants to start pulling tax revenue off the money they have allowed you to defer.
But what if you don’t need the income? What if you do not want to pay the taxes at this point? This was a question raised in the NJ Star Ledger newspaper. Ms. Mueller did a good job answering the question and giving some very good and standard answers.
There is no magic answer that will allow you to side step RMDs or the taxation that goes with it. Many advisors have offered a solution that could be a good fit for some retirees. For example, let’s assume you have an effective tax rate of 20% for simplicity. When you pull this money out, you would pocket $8000 for a $10,000 withdrawal. We can also assume that you do not need this money, or you would not be concerned about the taxation on income you don’t want or need. If this is the case, many advisors have turned to annuity and/or life policies to “pay the tax” for you. Annuities offer bonuses that can reduce or replace the money “lost” to taxation. Life policies have death benefits that can more than offset the money lost in taxation. For an advisor who can offer you a personalized solution to the RMD taxation problem, click the “Find a Retirement Income Advisor” link below.