Unfortunately, this is not an option. In fact, the penalty for not taking your RMD is high: 50% of what should have been distributed.
However, even though you are required to take an RMD, you are not required to spend it. In fact, it wouldn’t be uncommon for a retirement plan to be dependent upon saving your “excess” RMD for future use.
One common excess RMD strategy is to redirect the IRA distribution into a non-IRA investment account. By doing so, you are keeping your money invested in hopes of accumulating assets and savings for later.
Specifically, one could do the following:
Process a required minimum distribution by completing the required forms
Withhold a portion for taxes to make the IRS happy (RMDs will be taxed as ordinary income on your tax return.)
Direct the net proceeds into a taxable investment account
A second option for an RMD you don’t need may be a qualified charitable distribution, meaning that you simply give it to charity.
The IRS allows for a tax-free charitable distribution of up to $100,000 per year from an IRA as long as certain conditions are met. One key required condition is the direct transfer from the IRA custodian to an eligible charity.
A qualified charitable distribution satisfies the required minimum distribution. Furthermore, it keeps the account owner’s adjusted gross income (AGI) lower than it would have otherwise been. This could potentially have a positive impact on the taxability of Social Security and the cost of Medicare. However, no deduction is taken on Schedule A for the charitable contribution.
Pre-RMD Planning
Once you reach 70.5 and RMDs begin, there is little planning that can be done to materially impact your annual RMD.
Prior to 70.5 years old, there may be several options. Roth conversions are one such opportunity to lower your RMD, and I am a big fan of these.
In lieu of Roth conversions, simple saving strategies may help. If you notice all your investments are currently IRAs, it may make sense to consider saving in a Roth IRA or a non-IRA investment account prior to age 70.5. In fact, more and more employers are now offering a Roth 401(k). In the years leading up to retirement, it may make sense to contribute to a Roth in lieu of a traditional 401(k), even if you are in your max earning years.
A third strategy could be to use a QLAC. A QLAC is a qualified longevity annuity contract. Qualified longevity annuity contracts involve taking a portion of your IRA balance and giving it to an insurance company. In exchange, the insurance company will pay you an income later in life. This strategy is intended to protect against living too long.
Generally speaking, I am not a big believer in this strategy as a way to lower your RMD.
Closing Thoughts on RMDs
Required minimum distributions take tax-deferred dollars and make them taxable. Unfortunately, they are a part of life.
For some retirees, RMDs are a non-event as distributions from IRAs will need to occur as a means of supporting a retirement lifestyle.
For others—those who don’t need the income—additional planning steps may be available to lower RMDs, strategize distributions, or plan efficiently for taking income. Ultimately, it’s these planning opportunities that should be considered well in advance of retirement in order to efficiently plan for both the present and the future.
Tax services are not offered through, or supervised by Lincoln Investment, or Capital Analysts.
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
This article was republished with permission from Daniel Zajac.