RMDs are like colon cancer screenings: You thought they were only for older folks, and ignoring them now could lead to bigger problems down the road.

When you get to the current RMD age of 73 (updated in the SECURE 2.0 Act) and you're forced to take money from your traditional accounts, you're not just paying taxes on that specific RMD dollar amount.

• Your RMD amount likely makes more of your Social Security taxable
• Your RMD amount could force you to pay extra for Medicare through the income-related monthly adjustment amount (IRMAA)
• Your RMD amount could make you lose out on deductions such as the enhanced deduction for older people and the medical expense deduction
• And you could pay an extra 25% tax penalty on RMDs you don't take out on time

Here are the five biggest mistakes I see retirees make with their RMDs. Learn from these mistakes so that you can plan your RMDs ahead of time and hopefully lower their tax bite.

Mistake No. 1: Waiting until age 73 to create a plan

One of the most consistent concerns I hear from retirees is, "How bad am I going to get killed on taxes when my RMDs start?"

They have projected out their future RMD amount of $10,000, $25,000, even $100,000 in future taxable income, and they're concerned about the tax cost.

But then they stop there. They see the problem, but they figure they can't do anything about it.

Thankfully, you can. Go beyond just projecting your RMD amount, but also project your future tax brackets. Then find the tax years between now and 73 when your taxes are likely to be lowest; this is often before you start Social Security.

Then, during those lower projected tax years, do a Roth conversion at that lower tax rate, so that your future RMD is lower and the Roth money can grow tax-free.

Mistake No. 2: Failing to make use of qualified charitable distributions (QCDs)

A retired pastor came to my office for a new client meeting. He brought in his investment statements, and tax return, and he explained that he had roughly a $12,000 RMD each year and that he gave it all away.

I reviewed his tax return and saw the RMD listed as taxable income, and I saw that he wasn't itemizing his deductions — he was paying more taxes than he should have!

I asked the pastor how he took out his RMD each year to give to charity, and he said, "I want to follow the rules, so I take out my RMD as soon as I can each year and put it in the bank. Then at the end of the year, I write out checks to my church and favorite charities."

I showed him that he could do a qualified charitable distribution (QCD) instead, sending the money from the IRA directly to the charities.

I calculated that using the QCD rules on the $12,000 QCD amount to be $2,263 in income tax savings.

And here's a next-level QCD move: You can start doing QCDs at age 70½, even though RMDs don't start until 73 currently. It just might lower this year's taxes, and it will definitely lower your future RMD amounts.

Mistake No. 3: Doing the wrong tax withholding

I just met a retiree who had his first RMD distribution last year. He and his wife make $36,000 from Social Security and $36,000 from his pension.

They don't need their IRA money, which is why they hadn't taken anything out until their first RMD, which came to $40,000.

His investment company sent him the $40,000 at the end of last year, doing the 10% mandatory federal withholding and no state tax withholding because it wasn't required.

It turned out the taxes on his RMD were $6,400 for federal, not the $4,000 that was withheld, and $2,000 for state — and there was nothing withheld for that.

He had to write out two big checks, and he owed even more because of underpayment penalties.

Before you take out your RMD, do a tax projection to get the withholding right — the standard 10% is almost never the right amount.

Mistake No. 4: Not realizing how your RMD income affects the rest of your tax return

You would think that paying taxes on your RMDs is simple. If you're in the 12% tax bracket, and you take out $10,000, then you just pay $1,200 in extra taxes, right? If only it were that simple.

When you take money from your traditional IRA, especially for the first time with your RMD, you're often surprised at how much it affects the rest of your tax return.

The amount of your Social Security that is taxable is based on how much other income you have. When you have more other income from your IRA, your taxable Social Security amount goes up.

That RMD amount could push you into the next tax bracket. The IRS doesn't hand you a card saying, "You're in the 12% tax bracket forever." When your RMDs start, your income goes up, and often your tax bracket goes higher.

Or perhaps that extra income means that you get less medical deductions or less of the enhanced deduction for older people.

I often see RMDs push retirees over the edge so that they are paying extra for Medicare because of the IRMAA. You can read about those IRMAA tax brackets in the Kiplinger article Medicare Premiums 2025: IRMAA Brackets and Surcharges for Parts B and D. And you can see the 2026 brackets in this Kiplinger article.

When it comes to the U.S. tax code, more RMD income often means more other income and fewer deductions, and then you pay more in taxes than you expected.

Before you take your first RMD, make sure you understand how the new taxable income affects the rest of your income and deductions.

Mistake No. 5: Forgetting that the M in RMD means 'minimum,' not 'maximum'

All these tax mistakes add up to a lot of big surprises when you hit RMD age. Perhaps you've resolved to reduce the tax pain by sticking to just the minimum amount for your RMD. But you don't have to restrict your distribution to the minimum.

Often, the solution to your future RMD tax problems is to bite the bullet this year and do a Roth conversion at a tax rate that you're comfortable with so that your future RMDs are lower.

Also, remember that just because you're required to do RMDs at age 73 doesn't mean you can't take out money earlier. The minimum age to withdraw from your IRA without a penalty is 59½, which means you could have 13-plus years to plan for the likely RMD tax pain.

Lower your retirement taxes by creating your RMD strategy today

RMDs might seem like an annoying part of the tax code, but when it comes to retirement taxes, RMDs affect the rest of your retirement:

• Your tax bracket
• Your Social Security taxation
• Your Medicare premiums
• Your investment strategy
• Your charitable giving

The time to start planning for your RMDs is not the year you turn 73, but even before you retire. In your retirement planning, focus not just on your investment growth, but on how that growth will affect your future tax situation.

That's why I put tax planning as step three in my book, Retire Today: Create Your Retirement Master Plan in 5 Simple Steps, even before your investment planning (step four).

A tax-smart retirement gets you ready for your RMDs well ahead of time and works to minimize their tax impact even when you get to RMD age.

Related Content

• How to Calculate RMDs (Required Minimum Distributions) for IRAs
• I'm a Financial Planner: This Is How You Can Get Started With RMDs
• Required Minimum Distributions (RMDs): Rules, Deadlines, and Important Changes to Know
• Stressing About RMDs? Two Ways to Reduce or Even Eliminate Them
• New Year's Eve RMD Deadline: What to Know and What to Do

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Changes under the SECURE 2.0 Act have (among other things) shifted the starting age, introduced new rules for inherited accounts, and changed rules for Roth 401(k)s.

Then there are common RMD mistakes, like missing the deadline for your first RMD or miscalculating the withdrawal from an inherited IRA, which can trigger a penalty.

Can you confidently navigate the RMD rules that govern your retirement nest egg?

Take our quiz to identify your knowledge gaps and protect your tax-deferred savings.

Read More About RMDs

• Common RMD Mistakes to Avoid This Year
• Required Minimum Distributions: What Every Retiree Should Know
• Retirement Taxes Quiz: Test Your Knowledge

The rules that govern these mandatory retirement account withdrawals have always been confusing.

And because RMDs don't start until you're in your 70s, it can be tempting to put off worrying about their impact until other, more pressing planning decisions are made.

Most people are far more anxious about getting their Social Security and Medicare benefits squared away than preparing for RMDs.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

But putting RMD planning on the back burner can have significant consequences — especially if, like most Americans, you've stashed all or a large portion of your savings into one or more tax-deferred retirement accounts, such as a 401(k), 403(b) or traditional IRA.

Every saver should know the basics of how RMDs work. Here's a quick Q&A to help you get your planning started.

What is an RMD?

The IRS doesn't allow savers to keep the money in their tax-deferred retirement accounts indefinitely.

Once you reach the age when RMDs start (currently 73), you must begin withdrawing at least a minimum amount annually and pay income taxes on that money.

The amount you're required to withdraw each year will be based on your age and the balance of your account (or accounts) at the end of the previous year.

What accounts require minimum distributions?

The RMD rules apply to all employer-sponsored retirement plans, such as 401(k), 403(b) and 457(b) plans, as well as profit-sharing plans.

Owners of traditional IRAs and IRA-based plans, including Simplified Employee Pension Plans (SEPs), Salary Reduction Simplified Employee Pension Plans (SARSEPs) and Savings Incentive Match Plan for Employees (SIMPLE IRAs), must also take RMDs.

The RMD rules don't apply to Roth IRAs or designated Roth accounts while the owner is alive, because Roth owners have already paid taxes on their contributions. But beneficiaries of these accounts do have to abide by RMD rules.

When is my first RMD due?

For most people, their first RMD is due on April 1 of the year following the calendar year in which they turn 73.

For example, if you're turning 73 in 2026, your first RMD — based on your account balance at the end of 2025 — won't be due until April 1, 2027.

But here's where things can get tricky.

After that first withdrawal, the due date for all future RMDs switches to December 31. That means if you wait until the April 1, 2027, due date to make the first withdrawal and then make your second withdrawal by December 31, 2027, you'll pay taxes on two RMDs in the same year.

If that works for you, great. But you may find that it makes more sense to take those disbursements in two separate tax years. For this example, that would mean taking the first RMD by December 31, 2026, and the second by December 31, 2027.

Your financial adviser or tax professional can help you run the numbers to determine which is the better strategy for you, but do that planning well in advance of your first RMD.

If you don't take your RMDs at the appropriate time, or you withdraw the wrong amount, you may face a hefty penalty.

What if I'm still working?

If you're turning 73 but you're still employed, and you own less than 5% of the company you work for, the IRS will let you delay taking RMDs from your workplace retirement plan — as long as your plan allows it.

However, if you own retirement accounts outside your current workplace (a traditional IRA with your bank, for example, or a 401(k) with a former employer), you'll have to calculate RMDs for those accounts.

How do I calculate my RMDs?

Your retirement account custodian will determine your RMD amount automatically each year and provide you with that information. But it's your responsibility as the account owner to make sure the amount is correct and the distribution is made.

You can calculate your RMDs using this guide or the Required Minimum Distribution Calculator at Investor.gov.

Or you can do the math yourself and divide your previous year-end account balance by the life expectancy distribution factor next to your age on the IRS Uniform Lifetime Table.

As you age, the distribution factor will decrease, which means your RMDs may grow as you get older, depending on the size of your account balance.

Planning for that potential impact now, by converting some funds to a Roth account or employing other strategies, could help you minimize future taxes.

What if I have more than one tax-advantaged account?

As mentioned previously, you may need to calculate multiple RMD amounts each year if you have more than one account. But, depending on the types of accounts, you can be strategic with your withdrawals.

For example, after calculating the RMD separately for each traditional IRA you own, you can add up the amounts and withdraw the total from just one of your IRAs.

However, RMDs for some types of retirement plans, such as 401(k) and 457(b) plans, must be calculated and withdrawn separately from each of those accounts.

What if I don't want or need the money?

Although you're required to take RMDs every year once you turn 73, you aren't obligated to spend the money. You can always choose to reinvest those funds elsewhere.

That might mean opening or adding to a brokerage account, buying an investment property, paying down high-interest credit card debt, or contributing to a 529 plan for a child or grandchild.

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Or you could consider the tax benefits of an RMD-reduction strategy, such as a qualified charitable distribution (QCD) or a qualified longevity annuity contract (QLAC).

Again, your adviser or tax professional can help you understand each strategy's implications for your situation.

RMD rules keep evolving

Even if you think RMDs won't be an issue for you, keep them on your retirement planning radar.

The rules that govern the timing of RMDs — including the age when they begin and how they might affect those who inherit your accounts — have gone through significant changes in recent years.

These and other regulations will likely continue to evolve, so the information you rely on should be well-sourced and up to date.

You don't have to (and shouldn't) wait until you're in your 70s to familiarize yourself with the RMD rules, which can be found on the IRS website.

And if you have questions, don't hesitate to contact a financial professional, preferably a retirement specialist, for guidance.

Insurance and Advisory services are offered through Heckman Financial & Insurance Services, Inc. HFIS, Inc., an SEC Registered Investment Adviser. Heckman Financial & Insurance Services is not affiliated with or endorsed by the Social Security Administration or any government agency. CA Insurance License #OE89971

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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• Required Minimum Distributions (RMDs): Rules, Deadlines, and Important Changes to Know
• Stressing About RMDs? Two Ways to Reduce or Even Eliminate Them
• Lower Your Retirement Taxes: Seven Common RMD Mistakes to Avoid
• New Year's Eve RMD Deadline: What to Know and What to Do
• Avoid Estimated Tax Payments in Retirement With RMD Withholding

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When done right, year-end planning can reduce taxes, align finances with family goals and set the stage for greater confidence heading into the new year.

Year-end planning shouldn't be seen as a scramble for last-minute tax breaks. Instead, planning is most effective when it's proactive, tax-aware and rooted in long-term values.

Families are best served when strategies are connected to their most important goals, whether they're maximizing charitable impact, preparing for the next generation or simply confirming lifestyle stability in uncertain times.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Here are seven moves high-net-worth families should consider before December 31.

1. Charitable giving with a donor-advised fund

A donor-advised fund (DAF) is a charitable account that lets you contribute cash or appreciated assets, take an immediate tax deduction and invest the funds to grow tax-free until you decide which charities to support.

It provides flexibility to separate the timing of your tax deduction from your actual giving, allowing for more strategic philanthropy over time.

A DAF can appeal to families focused on long-term charitable planning, particularly those facing a high-income year or a liquidity event.

In 2025, deduction limits were adjusted by the OBBBA, which means contribution plans should be reviewed carefully to ensure every dollar counts.

For those over age 70½, a qualified charitable distribution (QCD) from an IRA may be an even more efficient way to give, as it can reduce taxes on required withdrawals.

Choosing between a DAF and a QCD depends on age, income and philanthropic intent.

2. Use Roth conversions to unlock tax-free growth

A Roth conversion moves assets from a traditional IRA into a Roth IRA, creating a tax bill now in exchange for tax-free growth and withdrawals later.

This strategy is most beneficial during years of lower income, such as the period after retirement but before Social Security benefits and required minimum distributions (RMDs) begin.

The key is weighing the near-term tax hit against the long-term flexibility it provides.

Converting gradually over multiple years can help avoid large spikes in taxable income while building more predictable tax-free income streams for the future.

3. Harvest losses to manage taxes

Tax-loss harvesting may help reduce overall tax liability while keeping a portfolio aligned with long-term investment goals.

When markets have performed strongly, reviewing portfolios for losses that can be used to offset taxable gains is a prudent step.

This approach is particularly relevant after a business sale or other liquidity event that triggers significant capital gains.

In some cases, it may also make sense to spread sales across two calendar years. The goal is to manage the tax impact and take advantage of the opportunity to rebalance holdings with an eye toward future needs.

4. Do not miss retirement contribution and RMD deadlines

December 31 is the firm deadline for RMDs if you are age 73 or older and for beneficiaries with inherited IRAs. Missing this date can result in significant penalties.

It is also important to understand the different deadlines for retirement account contributions. Contributions to employer-sponsored plans such as 401(k)s must be made by December 31, 2025, to count for the 2025 tax year.

By contrast, contributions to IRAs (traditional or Roth) can be made up until the tax filing deadline of April 15, 2026.

Regardless of the deadline, year-end is the time to make sure contributions are on track. At a minimum, families should contribute enough to capture any employer match, but higher contributions may make sense depending on cash flow and tax planning goals.

Acting early and setting reminders helps avoid the year-end rush and ensures opportunities are not missed.

5. Revisit estate and gifting strategies

The OBBBA permanently made estate exemptions higher, which will be set at $15 million per person beginning in 2026. Even with these higher thresholds, year-end remains an important time to consider gifting strategies.

Families may want to take advantage of the annual gift tax exclusion, which allows $19,000 per person in 2025, enabling wealth transfer to children, grandchildren or other loved ones without dipping into lifetime exemption amounts.

While not every family will face estate taxes, intentional gifting helps reinforce family values and encourages multigenerational stewardship.

6. Review liquidity and cash flow for 2026

Looking ahead to next year's goals and expenses is an essential year-end step. Identifying upcoming needs, such as tuition payments, philanthropy or large purchases, provides the opportunity to align cash flow with tax planning.

For example, it may make sense to realize gains or take distributions in 2025 to fund 2026 expenses, especially if doing so fits within current tax brackets.

This forward-looking exercise eases stress and provides clarity, ensuring families enter the new year with a solid financial foundation.

7. Business owners and executives should plan ahead

Business owners and executives often face unique year-end decisions. Concentrated stock positions, restricted stock units (RSUs) and deferred compensation all require careful evaluation.

For executives, managing the timing of RSU sales after vesting events can help reduce tax burdens while also diversifying holdings.

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Business owners nearing retirement may want to gradually reduce exposure to their own company stock to better align assets with long-term investment goals.

Those with options to defer income must weigh the pros and cons of recognizing income now vs later. Each choice should be made in the context of long-term financial security and broader life goals.

The bigger picture

Year-end planning is not just about wrapping up 2025. It's about entering 2026 with clarity and confidence.

By taking time now to align tax strategies, gifting, savings and cash flow with long-term goals, families create the flexibility to handle both expected milestones and unexpected surprises.

Closing out the year with intention lays the groundwork for financial decisions that feel less reactive and more purposeful. A thoughtful December can make the year ahead less stressful, more strategic and ultimately more successful.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Answer: The nice thing about saving for retirement in a traditional IRA or 401(k) is getting to enjoy an immediate tax break on your contributions. If you found yourself in a higher tax bracket during your career, a traditional retirement account probably made more sense for you than a Roth.

But what if you're older and are now regretting that decision because you’re on the hook for a $22,000 required minimum distribution (RMD) you don’t need?

If you don’t take that distribution by year-end, you could be looking at a 25% penalty for a missed RMD that amounts to $5,500. That’s a lot of money to throw away.

A better idea? Find a good use for that money — even if it requires you to get creative. Here are some options.

Wipe out or reduce your tax liability with charitable contributions

RMDs can sting when you don’t need the money, since you’re increasing your tax burden for what might seem like no good reason. One way to potentially cancel that tax bill is to donate funds directly from your retirement account to charity in the form of a qualified charitable distribution (QCD).

As James Hutchens, national practice lead for Wealth Advisory at Northern Trust, explains, “If you’re 70½ or older, you can make a qualified charitable distribution directly from your IRA — up to $108,000 in 2025 — to a qualified nonprofit. This satisfies your RMD and avoids adding the withdrawal to your taxable income.”

You should also know that from a tax perspective, QCDs can be beneficial because they're not itemized, but simply excluded from your taxable income. This means you can still take the standard deduction, which might be your preferred route if you’re no longer paying off a mortgage and don’t have many deductions to itemize.

To be clear, a QCD must go directly from your IRA to a registered charity, and you can't make a QCD directly from a 401(k). However, you can roll funds from a 401(k) into an IRA, then make your QCD from that account to satisfy your RMD.

Along these lines, Mark Gelbman, financial adviser and owner at Strategic Wealth Solutions, says that if you’re forced to take an RMD and are looking to donate the money, it could pay to think outside the box.

“Look at organizations that you’re passionate about and figure out if you can do some good while also minimizing your tax burden,” he says. “Maybe it’s a high school or college that you attended or a community theater that you’re passionate about. Think about those under-funded institutions that are consistently looking for resources but don’t necessarily have deep-pocketed donors.”

Gelbman also says you can look at setting up a family foundation. This generally won’t allow you to do a QCD. However, as he explains, “That could be a great opportunity to get younger generations into a more charitable mindset so they’re more likely to be charitable in their legacy planning.”

Create a living inheritance

A living inheritance allows you to transfer assets to your loved ones while you’re alive rather than bequeath them upon your death. As Hutchens explains, “Many families earmark RMDs for meaningful experiences, from multigenerational vacations to home upgrades, or use the annual gift tax exclusion to pass wealth directly to their heirs.”

If you don’t need to spend your RMD on yourself, it might bring you great joy to see that your money is being used to better a loved one’s financial situation.

Hutchens also suggests using the money to pay for a loved one's education.

"Some clients use RMDs to contribute to 529 plans for grandchildren, which can grow tax-free when used for education and may provide a state tax deduction."

Earmark the money for special experiences

If you don’t need your RMD, you might be inclined to take it as late in the year as possible. But Robert Jeter, a certified financial planner and founder at Back Bay Financial Planning & Investments, says you might want to adopt a different approach — namely, quarterly withdrawals.

“If done quarterly, it represents a special sort of income that can be spent on a really nice dinner with a spouse or a vacation every three months,” he explains.

Jeter says that while you could take the money out monthly, in that situation, “it just becomes more income to spend or re-allocate elsewhere.”

If you have a spouse or partner, you might want to sit down together once every three months to make a list of fun activities you could do with the money. If you have events or trips to look forward to, you might not resent having to take that money out of your retirement account.

Jeter also suggests talking with retired friends to see what new activities they’ve taken up since they stopped working.

“Neighbors or others in your community or retirement groups are great places to brainstorm these types of ideas or activities,” he says.

Read More

• New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More
• Year-End RMDs: Should You Invest, Spend or Donate Them?
• I'm 60 with $4 Million — Can I Have a Luxury Retirement?
• I'm 58 and Just Sold Some Stock to Lock in Gains. I Made a Killing, But I'll Have a Big Tax Bill. What's My Next Move?

1: QCDs and 401(k)

Reader Question: Can I make a qualified charitable distribution (QCD) from my 401(k) this year?

Joy Taylor, Editor, The Kiplinger Tax Letter
No, QCDs cannot be done from a 401(k) or other workplace retirement plan. A QCD can only be done from an IRA.
People age 70½ and older can transfer up to $108,000 in 2025 from a traditional IRA directly to charity. QCDs can count as all or part of your required minimum distribution (RMD), but they are not taxable, and they are not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers not itemizing because of higher standard deductions.

2: How to do a QCD

Reader Question: Someone told me that the only way I can do a QCD is for my IRA custodian to directly transfer the money from the IRA account to the charity. Is this true?

Joy Taylor, Editor, The Kiplinger Tax Letter
It depends on the IRA custodian. It is true that only transfers from your IRA directly to charity are considered QCDs, but different IRA custodians have their own procedures for complying with this. Some will require that the check go directly from the custodian to the charity. Others will, at the account owner’s request, have the check written from the IRA account and send the check to the IRA owner to forward to the charity. Vanguard, for example, allows this second approach. Both procedures work for QCDs. What is not acceptable is for the custodian to write the check to the IRA owner, who then deposits the money and writes a check from his or her own account to the charity.

3: Charitable Gift Annuity

Reader Question: I’ve been receiving requests from my alma mater about doing a QCD through a charitable gift annuity. I thought QCDs could only go to a section 501(c)(3) charity. Have the rules changed?

Joy Taylor, Editor, The Kiplinger Tax Letter
As a general rule, in a QCD, the money must generally go to a section 501(c)(3) organization. The 2022 SECURE 2.0 legislation provided an easing to this. It allows IRA owners to do a one-time (not annual) QCD of up to $55,000 for 2025 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges with charitable gift annuity programs are touting the QCD option. If you already did this in 2023 or 2024, you can’t do it again.

4: Deductible IRA Contributions

Reader Question: I am working and made a tax-deductible contribution of $3,500 to my traditional IRA in 2024. I also did a QCD that year. My accountant told me that I don’t get the full advantage of the QCD because I also contributed to my IRA. Is that true?

Joy Taylor, Editor, The Kiplinger Tax Letter
Yes. There’s a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP or SIMPLE IRA aren’t affected.
Let’s take a simple example:
A 75-year-old working man is planning to do a QCD for the first time in 2025. For 2021, 2022, 2023 and 2024, he made tax-deductible contributions to his traditional IRA totaling $23,000. In 2025, the man does a QCD and transfers $20,000 from his IRA directly to charity. He would owe income tax on the full $20,000 because it is less than the $23,000 of post-70½ tax-deductible IRA contributions. Let’s say that in 2026, he then transfers another $15,000 to charity directly from his IRA. $12,000 will be a nontaxable QCD, and $3,000 will be treated as a normal distribution.

5: What's the maximum QCD for spouses?

Reader Question: My wife and I want to max out donations from our IRAs to charity this year. What is the maximum QCD we can make for 2025?

Joy Taylor, Editor, The Kiplinger Tax Letter
$108,000 per IRA owner. Since you are married, you and your spouse can each potentially give up to $108,000 in QCDs from your separate IRAs, making the maximum QCD $216,000, provided each of you has substantial amounts in your IRAs. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your QCD cap is limited to $70,000, and your wife’s QCD cap is limited to $108,000. Your wife won’t be able to make a QCD of $146,000 to make up for the deficit.

About Ask the Editor, Taxes

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to charitable contributions, gifts and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.

Missing this deadline can result in steep penalties — up to 25% of the distribution shortfall — making it essential to understand the rules and plan strategically. (Though the penalty can be reduced to 10% if corrected through a proper filing within two years.)

Here’s more of what you need to know, beginning with a quick review of required minimum distributions.

What are RMDs?

Required minimum distributions (RMDs) are mandatory withdrawals from specific retirement accounts once you reach a certain age.

• The SECURE Act of 2019 raised the RMD age from 70½ to 72
• SECURE 2.0 increased it further to 73 for those born after December 31, 1950
• For individuals born in 1960 or later, the RMD age will rise to 75 starting in 2033

While most RMDs must be taken by December 31 each year, the first RMD can be delayed until April 1 of the year following your RMD-triggering age.

However, delaying means you’ll need to take two distributions in the same year: one by April 1 and another by December 31.

Both will be taxable on your 2025 return (typically filed in early 2026), potentially increasing your overall tax liability.

Accounts subject to RMD rules

RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k)s, 403(b)s, and 457(b)s.

Roth IRAs are exempt during the owner’s lifetime, and as of 2024, Roth accounts in employer-sponsored plans are also free from RMD requirements.

Tax strategies to manage RMD income

RMDs increase taxable income, which can push retirees into higher tax brackets, affect Social Security taxation, and even raise Medicare premiums.

Part B and D premiums are subject to an Income-Related Monthly Adjustment Amount (IRMAA), which is determined based on your modified adjusted gross income (MAGI) from the previous two years. (For 2025, the IRMAA brackets are based on 2023 MAGI.)

To minimize these and other income impacts, consider the following tax strategies.

Note: These are just a few possible strategies for managing RMD income and tax burden. Consult a trusted professional who can help you determine your best approach.

1. Withdraw strategically at age 59½

If you don’t need immediate income from your retirement accounts, you might want to consider withdrawing funds strategically starting at 59½.

Taking smaller distributions early can reduce the balance that will later be subject to RMD calculations.

For example, imagine a retiree with $600,000 in a traditional IRA at age 59½. By withdrawing $25,000 annually over the next decade (assuming modest growth), they could reduce their account balance by $325,000 before age 73.

This approach can help lower future RMD amounts and spread taxable income across more years to avoid higher income tax brackets later.

2. Use Qualified Charitable Distributions (QCDs) to reduce taxes

Individuals aged 70½ or older can use QCDs to satisfy their RMD requirements while reducing taxable income. (A QCD is basically a distribution from your individual retirement account (IRA) to a qualified charity of your choice.)

A QCD allows you to donate up to $108,000 annually directly from your IRA to a qualified charity without including the amount in your taxable income.

For instance, if your annual RMD is $15,000, but you don’t need it for personal expenses, donating it through a QCD fulfills your RMD obligation without increasing your tax liability.

3. Consider benefits of Roth conversion RMD rules

A Roth conversion involves transferring funds from a tax-deferred account, like a traditional IRA, into a Roth IRA. Roth accounts are not subject to RMDs during the owner’s lifetime and grow tax-free.

Converting funds triggers taxes on the converted amount upfront, but it can reduce future RMDs and provide long-term benefits like tax-free withdrawals for heirs.

4. Delay RMDs if still working

If you’re still working past age 73 and participating in an employer-sponsored plan, like a 401(k), you may be able to delay RMDs until retirement, provided you own less than 5% of the company.

The “still working exception” doesn’t apply to IRAs but can help defer taxable income if your plan allows it.

5. Aggregate your accounts

While each account’s RMD must be calculated separately, certain types of accounts allow aggregation for distribution purposes.

Example: If you have multiple traditional IRAs with combined annual RMD requirements totaling $20,000, you could withdraw that amount from just one account rather than taking separate withdrawals from each account.

Avoiding common RMD mistakes

In addition to not missing RMD deadlines, it’s important to avoid other common RMD mistakes.

For example, one mistake involves miscalculating the RMD amount, which can lead to penalties if too little is withdrawn.

To calculate your RMD, you need to use the balance of your retirement account as of December 31 of the previous year and divide it by a life expectancy factor from IRS tables. These tables, like the Uniform Lifetime Table or Joint Life Expectancy Table, provide factors based on your age and circumstances.

For instance, if you are 73 years old, the IRS assigns a specific factor for your age, which you use to divide your account balance and determine the RMD amount.

If you have multiple accounts, the RMD is calculated separately for each account, but you can withdraw the total amount from one or more accounts.

Note: Special rules apply if your spouse is significantly younger and is the sole beneficiary, which may result in a lower RMD calculation using different IRS tables.

Another common oversight is forgetting to adjust RMDs when inheriting an IRA. Beneficiaries often have different RMD rules and deadlines than the original account owner.

Being mindful of these and other distribution potential pitfalls can help ensure you manage your RMDs correctly and avoid unnecessary penalties or complications.

For more information, see: Seven Common RMD Mistakes to Avoid.

RMD April deadline: Bottom line

The April 1 deadline for first-year RMDs is a key milestone for retirees who turned 73 last year, but it’s also an opportunity to evaluate strategies that minimize taxes and optimize retirement savings.

Proper planning can help ease the financial burden of mandatory distributions.

Consulting a financial advisor or tax professional is essential for tailoring these or other strategies to your unique circumstances while ensuring compliance with IRS rules.

Related

• Required Minimum Distributions: What Every Retiree Should Know
• Protect Your Retiremnets; Seven RMD Mistakes to Avoid
• Your Retirement Income and the IRS

Many people who have tax-deferred retirement accounts don’t know what percentage of their nest egg they will need to allocate for taxes. And required minimum distributions (RMDs), which begin at age 73, magnify their worry.

An effective way to reduce taxes in retirement is to do a series of Roth conversions over a span of several years while you’re still working. There’s no immediate gratification from it, but the long-term benefits can be worth the effort.

With a Roth conversion, you transfer retirement funds from a traditional IRA or 401(k) into a Roth IRA.

Though you must pay taxes upfront on the money converted to a Roth — it is taxed as ordinary income — the advantage is you will be able to make tax-free withdrawals in the future (as long as you're 59½ and have held the account for at least five years).

Removing the tax burden of RMDs

A Roth conversion makes sense for investors who think they’ll be in a higher marginal tax bracket in retirement, which can happen if one has a substantial amount of money in traditional IRAs.

In such a case, RMDs can boost reportable income significantly. But whereas the IRS requires people to take RMDs from tax-deferred accounts, the IRS doesn’t require you to take RMDs from Roth accounts, because you’ve already paid taxes on the money in them.

Without RMDs to worry about and because Roth IRA distributions aren’t included in your taxable income in retirement, more money in a Roth account means a better chance of staying in a lower tax bracket.

A lower tax bracket also potentially reduces your Social Security taxes and Medicare premiums, which increase at higher income levels.

Roth rules for 2025

There are limits to the amount you can contribute to a Roth IRA: $7,000 for the 2025 tax year (those 50 and older can contribute another $1,000 as a catch-up contribution, for a total of $8,000).

It’s important to note that the Roth IRA contribution limits include the sum of all your IRA contributions in a given year.

If you put money into both a Roth IRA and a traditional IRA in the same year, the total combination can’t be over the annual limit.

How much you can contribute to a Roth IRA is determined by your tax-filing status and modified adjusted gross income (MAGI). Roth IRA income limits for the 2025 tax year are:

• If you are a single filer or someone who is married filing separately (if you didn’t live with your spouse at any point during the year) or filing as head of household and your MAGI is under $150,000, you can contribute the full amount.
• If your MAGI in one of those filing categories is $150,000 or more but less than $165,000, your contribution is reduced. A MAGI of $165,000 or more means you’re not eligible to contribute.
• For 2025, those married filing jointly or as a surviving spouse with a MAGI of less than $236,000 can make the full Roth IRA contribution.
• Those married filing jointly or as a surviving spouse with a MAGI of $236,000 or more but less than $246,000 get a reduced contribution. A MAGI of $246,000 or more means no contribution is allowed.

Estate planning: Protecting beneficiaries from the tax bomb

Contributions to Roth accounts provide long-term, tax-free growth and income, which benefits both the account holder and their beneficiaries. This approach also helps avoid passing significant tax burdens to heirs.

Spouses who are beneficiaries of a Roth account don’t have to take RMDs, while children who are beneficiaries will eventually have to take distributions — but they usually don’t have to pay any taxes on them.

Known as the 10-year rule, under the 2019 SECURE Act, most non-spousal beneficiaries must empty any inherited retirement account, including Roth IRAs, by the 10th anniversary of the original owner’s death.

Non-spousal heirs of traditional IRAs or 401(k)s must also pay income taxes on those withdrawals. But withdrawals from inherited Roth IRAs are generally tax-free.

So, one way to look at the legacy planning aspect of a Roth IRA is that the original owner is basically prepaying the taxes for their beneficiaries.

With looming uncertainties around future tax rates, starting Roth conversions well before retirement is prudent — ideally by the time someone is in their early 50s. Talk with a professional.

And make sure you know your tax rate before you start funding a Roth; if you're not careful, the amount you convert can throw you into a higher bracket.

Like many aspects of retirement planning, Roth conversions are about educating yourself and, at the same time, learning about tax implications in retirement.

For many people, funding a Roth account turns out to be the right move, allowing them to keep more of their hard-earned money in retirement.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Insurance products are offered through the insurance business Hanna Wealth Advisors.

Hanna Wealth Advisors is also an investment advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a registered investment adviser. AEWM does not offer insurance products. The insurance products offered by Hanna Wealth Advisors are not subject to investment adviser requirements. 02884275-03/25

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A newly retired couple walks into my office intrigued by my holistic approach to retirement. They have been working and saving for 30-plus years for a hopeful 20-plus-year retirement.

They have sacrificed. They have skipped vacations to save. They have even missed grandkids’ baseball games in order to work overtime.

The plan was to grind it out and provide for their family. They were intentional about saving to ensure they could spend more time with family and enjoy the freedom to travel throughout retirement.

Yet, they find themselves distraught and losing sleep as their looming tax burden becomes a reality in April. They are filled with regret, feeling they have traded memories for uncertainty.

And when I ask them, “What is your biggest expense?” they will tell me it’s their mortgage. Or their travel budget. Or their health care. And then I ask, “What about taxes?”

Sound familiar?

A costly piece of the planning puzzle

People come to me overwhelmed by the burdensome thought or circumstance of outflowing tax dollars invariably crushing the spirit of what was intended to be a “happily ever after retirement.”

Have you ever considered that how much you have saved could be a cause of sleepless nights? It absolutely is. I see it almost every day.

I’m here to tell you it is never too late to kick Uncle Sam to the curb, or at least make him the low man on the totem pole. Many retirees can often do this in their lifetime, and they can most certainly help their heirs do so in theirs.

You see, the root of the problem is planning, or the lack of planning. It is journeying from “hope” as a plan to the certainty of a tax-efficient plan — an often-ignored piece of the robust retirement planning puzzle.

All of us have been sold a “bill of goods,” and it goes something like this: “Put as much money away into your 401(k)/IRA as you can, because when you retire you will be in a lower tax bracket.” If you haven’t saved any money for retirement, that is true.

If you have saved, especially in tax-deferred accounts, it is a lie. Every penny you take out of your tax-deferred accounts is taxable. And, of course, there is also the risk of taxes going up and changing tax brackets.

Do not mishear me. I am not against saving money. If I were, then my list of people seeking financial advice could be written on the back of a matchbook. You simply need a plan so that your savings are taxed at the lowest possible rate. My preferred rate is zero. And, yes, you can do that, too.

So, start effective tax planning today. It’s not too late, I promise.

Shifting from a micro to a macro mindset

There is one significant problem when delving into the issue of “lifetime taxation.” Nobody talks about it. When meeting with accountants, the focus is almost always looking to last year, talking about this year and maybe planning for the next.

It is what we call a “micro” look at tax planning. It is all about what can be done in the near term.

The focus needs to be widened. Taking a “macro” look at taxes over a lifetime will help in planning for the future. Why is it so important to plan for in the future? How about taxation on Social Security?

Up to 85% of your Social Security benefit can be taxed if your income is above a certain threshold. Believe me, those thresholds affect nearly everyone.

The snowball effect of RMDs

What about required minimum distributions? Yes, the infamous RMD. Currently, RMDs begin at age 73, rising to age 75 in 2033.

The percentage you have to withdraw starts at about 3.8% and continues to increase every year — until you die, or your money runs out. For people who have saved, RMDs are probably the biggest concern when it comes to lifetime taxation.

These distributions are required from any deferred account, including traditional IRAs, 401(k)s and 403(b)s. A deferred account is an account in which the funds have been added without paying any tax on them. The tax has been “deferred” until distribution. So, when distributions happen, they become taxable as ordinary income.

Yikes. You can begin to imagine the snowball effect this can have if you have significant savings. It can place you in a higher tax bracket and keep you there and/or climbing for the rest of your life. That stings.

Luckily, for now, the marginal income tax brackets are near an all-time low. However, that could very well change with the sunset of the current income tax laws set to occur at the end of 2025.

Given our national debt, spending and other economic factors, I am persuaded to believe in a high likelihood that taxes will increase in the near future.

Even more, there is a strong possibility that our heirs will be significantly affected.

Speaking of heirs, what about legacy planning for tax purposes? Though it may not be our focus here, it can cause a significant and costly burden.

Roth IRAs to the rescue

A good tax-efficiency plan takes all of this and much more into consideration. There are several tools that can be used to reduce lifetime taxation. The one we will focus on is the Roth IRA.

Others could be varying forms of life insurance and trusts created for a similar goal. The Roth IRA is an account where funds are added after tax has been paid. The funds in the account can grow tax-free. The gains made in the account are tax-free. The distributions in retirement are tax-free.

It is easy to see why these accounts can be a significant advantage to retirees. Yet, there are a couple of hindrances when trying to save for retirement in a Roth IRA.

They have low contribution limits and income phaseouts. You are only allowed to contribute $7,000 ($8,000, if you are 50 or older) per year in 2025. Unless you start very early in life, $7,000 per year is not going to solve most needs in retirement.

Also, if your income is too high, then the amount you can contribute is reduced or even eliminated if you make over a certain threshold. However, some tax-free money is better than no tax-free money.

That does not sound like a good tool, does it? But wait, there is more. You can convert a traditional IRA to a Roth IRA by simply paying the taxes at the time of conversion.

This is the Roth conversion you have probably heard so much about. Conversions can be done at any time, as many times as you want, and any amount that you want.

In my experience, the earlier the better. However, these strategies can take advantage of maximizing certain tax bracket thresholds over a few years. There is a real art to crafting the perfect strategy.

You don't have to be a tax expert

As you are probably beginning to realize, there are a lot of factors in play when doing tax planning. Many we have not even spoken about. Honestly, there are too many to list. But, deciding to plan is the key.

Using a fiduciary financial adviser with a comprehensive approach to planning to help you make decisions in your best interest will unlock a wealth of informed decisions about retirement and tax planning.

You will know the cost of each decision you make, both now and in the future. Knowing how these decisions will affect you now and over your lifetime is critical. This is the case, especially with Roth conversions.

Your goal from the beginning has been clear. You have worked so long and hard to save for a joyful retirement. Sacrifice has happened. Reap the rewards of your labor. It is not too late to enjoy the retired life. Now, let’s get to planning.

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• Six Custom Tax Planning Tips for High-Income Individuals and Families
• Roth Conversions: Convert Everything at Once or as You Go?
• What’s the Difference Between a CPA and a Tax Planner?
• A Roth Conversion Alternative That Addresses Long-Term Care

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The good news: The better understanding you have of what to expect with taxes in retirement, the better your chances of reducing your tax bill. I am not a CPA, so I don’t give tax advice.

But I can share with you some tax topics that you should ask about the next time you meet with your tax planner or CPA, so that the two of you can discuss strategies for keeping what you owe Uncle Sam to a minimum.

Here are the top 10 tax topics retirees should know about:

1. RMDs

If the money you’ve saved for retirement is in tax-deferred accounts, you eventually will be subject to required minimum distributions (RMDs). An RMD is an amount you must withdraw from your account each year, whether you want to or not. Keep in mind: You pay taxes on that amount.

If you fail to meet the RMD, you can face a 25% penalty, so it’s important to know when your RMD kicks in. The age used to be 72, but now for those born between 1951 and 1959, the RMD starting age is 73. For those born in 1960 and later, the age is 75.

2. Social Security benefits

Sometimes people look surprised when I tell them that, depending on their income, Social Security can be taxed. The Social Security Administration reports that about 40% of people who get Social Security must pay taxes on their benefits.

A married couple filing jointly could pay income tax on up to 50% of their benefits if their income is between $32,000 and $44,000. If their income is more than $44,000, up to 85% of their benefits may be taxable.

3. Healthcare costs

One of the largest expenses retirees incur is healthcare. In some cases, those expenses are tax deductible, so be sure you understand the rules for which medical expenses can be deducted.

4. Tax strategies for retirement income

When you have multiple retirement accounts, it’s important to have a tax-efficient plan for making withdrawals. Typically, you want to draw from taxable accounts first, then tax-deferred accounts (such as a traditional IRA or 401(k)), then, finally, tax-free accounts, such as a Roth IRA.

5. State income taxes

If you plan to move in retirement, one factor to consider when choosing your new home is state income taxes. Most states have an income tax, but a few don’t.

For example, California’s tax has nine brackets ranging from 1% to 12.3%. Florida, in contrast, has no state income tax.

6. Tax credits and deductions

Make sure you take advantage of any tax credits or deductions coming to you. When you are over 65, the standard deduction is increased on your income taxes, so be sure to check the correct box.

Additionally, there is a tax credit for older people or the disabled, which is available to those aged 65 and older or who are permanently disabled. There are income limits on that credit, though.

7. Estate taxes

Understand the tax implications related to passing on wealth to your heirs. You want to do this in the most tax-efficient way.

Most people aren’t affected by estate taxes because in 2025 the first $13.99 million is exempt. But that amount could be drastically reduced if the 2017 tax cuts, set to expire at the end of 2025, are not extended.

8. Changing tax laws

You may have noticed by now that tax laws aren’t static. Lawmakers often change them. The potential big change coming soon is the previously mentioned sunset of the 2017 Tax Cuts and Jobs Act.

Be sure to work with your CPA to make sure you are aware of any changes that affect you.

9. Taxation on investments

Not all investments are taxed the same. If you make a withdrawal from an IRA, that money is taxed as ordinary income. If you sell stock or real estate, your profit is taxed based on the lower capital gains tax rates.

Roth IRA withdrawals aren’t taxed at all (as long as you are 59½ or older and have had the account for at least five years).

It’s important to be aware of all this when you are deciding where to withdraw money.

10. 529 plans for education

Many retirees want to help pay for their grandchildren’s education costs and do so by contributing to a 529 plan specifically earmarked for education. There are limits on how much you can contribute, though, so be aware of that.

Otherwise, you could be subject to the gift tax if you go over the limit. Worth noting: One recent rule change allows the beneficiary of the 529 to roll over unused funds into a Roth IRA without penalty.

As you can see, the more you know about taxes, the better you can plan for how to get the most out of your money in retirement.

But always check with your CPA or other tax professional to make sure you are paying the least amount possible while still staying within the rules.

The more you can keep in your pocket, the better your retirement will be.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Insurance products are offered through the insurance business Endependence Financial. Endependence Financial is also an Investment Advisory practice that offers products and services through AE Wealth Management LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Endependence Financial are not subject to Investment Adviser requirements.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 2802562 12/24

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Myth No. 1: You can’t retire until you reach age 65

One of the biggest retirement misconceptions I have seen is that you have to wait until age 65 to retire. For many years, 65 was the traditional retirement goal. But today, retirement can happen at any age, as long as you plan for it the right way. Many people may choose to work until 65, either because they need to continue building their savings or simply because they enjoy their career.

Try not to focus on your age when thinking about retirement. Focus instead on your income and whether you can fully rely on it for the rest of your life. Finding the right savings strategy for you and your family and creating a solid financial plan can help you reach your dream retirement.

Myth No. 2: I should plan for a 10-year retirement

If you’re lucky, your retirement will last many years and be filled with relaxing days and time with family and friends. But how do you plan for retirement when you’re unsure how long it will last? Americans are living much longer than they were decades ago. According to the Social Security Administration, the average life expectancy for a man reaching age 65 on April 1, 2024, is 84.2. For women, it’s 86.8. Many people could live past those ages, into their 90s or even 100s. This means that if you retire at age 60 and live to 100, you could have a 40-year retirement. That could be as long as your career was!

While it would be much easier to plan if we knew exactly how long we were going to live, it doesn’t work like that. When planning for your retirement, it is always good to plan for too much rather than too little. You don’t want to get toward the end of your retirement and have to start working again because you ran out of funds. This is why I tell my clients that the sooner you can start saving for retirement, the better.

Myth No. 3: Medicare will cover all of my health care needs

Despite what many people think, Medicare doesn’t always cover all of your medical needs. While it can provide valuable health insurance for retirees, it wasn’t designed to cover everything. It does not cover all medications or forms of care, such as nursing homes and long-term care. It also does not cover vision or dental, an essential part of most retirees' medical needs.

As retirees age, their medical costs will get more expensive. The 2024 Fidelity Retiree Health Care Cost Estimate found that a 65-year-old will spend an average of $165,000 on health care expenses in retirement. To help prevent yourself from having to tap into your savings for medical costs during retirement, there are a few options you can utilize. Start contributing to a health savings account (HSA). You can use these funds for many insurance premiums in retirement. Planning for long-term care and other medical expenses not covered by Medicare is an important part of a comprehensive retirement plan. Consider purchasing long-term care insurance. For many retirees and their families, having a long-term care plan can help with some of the financial, emotional and physical burden of providing and paying for care.

Myth No. 4: Expenses will decrease in retirement

While many expenses, like gas or work clothes, may decrease in retirement, some expenses will actually increase. Are you planning on traveling during retirement? Those expenses could easily go up because you have more flexibility and time to travel. As I mentioned above, your medical costs may increase as well since Medicare will not cover everything. Health care could become one of your highest expenses in retirement if you don’t plan for it. Also, when you plan for retirement, make sure you factor inflation into your expenses. A good rule of thumb is to overestimate your expenses wherever you can, so you can put aside more than you think you need. Having extra is always better than not having enough.

Myth No. 5: I’ll be in a lower tax bracket when I retire

Your income may decline when you enter retirement, resulting in a lower tax bracket. However, if you have a lot of money in tax-deferred retirement plans subject to required minimum distributions (RMDs), then you could actually see your income increase. This could result in higher income taxes, which you need to plan for. Most retirees will stay in the same tax bracket when they retire, and if they do move to a lower tax bracket it’s usually only by a few percentage points.

Retirement planning doesn’t have to be confusing or hard. Believing these retirement myths could set you down the wrong path. By taking the time to separate fact from fiction, you can approach your retirement with confidence. It’s important to sit down with a financial adviser who will be able to answer any questions you may have.

Drake & Associates is an independent investment advisory firm registered with the U.S. Securities & Exchange Commission. This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may view this report. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. The information cited is believed to be from reliable sources, Drake & Associates assumes no obligation to update this information, or to advise on further development relating to it. Past performance is not indicative of future results. Registration as an investment adviser does not imply a certain level of skill or training.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Unlike your working years, your income streams are a bit different in retirement. In this phase of life, you’re likely going to be living off of a combination of Social Security benefits, retirement account savings such as a 401(k) or IRA, and maybe even an annuity or pension. Regardless of where your income is coming from, managing taxes on those funds is crucial to preserving your savings while maximizing your funds. Fortunately, there are several different strategies to help you reduce or eliminate taxes in your golden years.

Utilizing tax-advantaged accounts is one of the most efficient ways to manage taxes in retirement. If you have a Roth IRA, any withdrawals made after age 59½ and a five-year holding period, are tax-free. In other words, any growth in your investments can be taken out without incurring taxes, potentially reducing your taxable income significantly.

Traditional IRAs work a bit differently. Although distributions from these accounts can be taxed as part of your annual income, you can manage when and how much you withdraw to minimize the tax bill. One example is to consider taking out less from these accounts during the years you’re expecting to fall into a lower tax bracket. It’s important to note, though, that required minimum distributions (RMDs) must be taken from these accounts once you reach age 73, and those are considered taxable income.

Consider delaying Social Security

Delaying Social Security benefits is another option. If you wait until age 70 to claim your benefits, you can increase your monthly check significantly. Waiting until this age to claim Social Security may also help you avoid higher taxation on those benefits during your go-go years when you might be reliant on other sources of income.

If you have investments outside of your retirement accounts, you’re no stranger to the capital gains tax. This tax is due after an investment is sold. For the 2025 tax year, long-term capital gains tax rates can vary from 0%, 15% to 20% of the profit depending on your individual income.

However, holding investments for more than a year will allow you to benefit from lower, long-term capital gains rates when compared to short-term rates.

If you have investments that are underperforming, you may even want to consider tax-loss harvesting. This method allows you to sell investments that have lost value to offset gains made from other investments, therefore reducing your taxable income.

What if you're nearing or just entering retirement?

While these strategies are helpful for folks entering or nearing retirement, you don’t have to wait that long to figure out how you’re going to manage taxes once you retire.

As you are planning for retirement, it might be a good idea to invest in a tax-free plan such as a Roth IRA. Funds in this account are made from post-tax contributions, which are contributions that are paid from an employee’s paycheck after it’s been taxed. Funds in a Roth IRA grow tax-free, but it’s important to note that the contributions made to these accounts are not tax-deductible. This carries several different advantages.

For example, these plans have no RMDs, and your withdrawals will be tax-free as long as certain requirements are met. And since you pay taxes upfront on the money you contribute, there’s no penalty if you withdraw those earnings.

This kind of plan may be a good option for people who expect their retirement tax bracket to be the same or higher than their current bracket. By paying taxes on those contributions upfront, you get the benefit of being taxed at a lower rate, which puts more money in your pocket in the long run.

Taking a tax-advantaged approach when planning for retirement is key if you want to keep more of your money in your pocket. And with proper planning, you can implement some of these strategies even if you’re decades away from retirement. With the new year well underway, this is a great opportunity to invest in your future — especially if you’re planning on retiring later this year.

The views and opinions expressed herein are those of Joel Russo and do not necessarily reflect the views of CoreCap Investments, LLC or CoreCap Advisor, LLC, its affiliates, or its employees. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Under current law, once a pre-tax account owner is age 73, they’re required to begin taking required minimum distributions (RMDs) for life or until the account is depleted. As a financial adviser since 1996, I’ve typically seen one of two scenarios unfold: Some individuals withdraw funds, pay their taxes and spend the money. Others invest the withdrawn funds in another tax-deferred or taxable account, which either increases their own taxes or defers additional taxes for their heirs. I refer to this as The Tax-Deferred Disconnect.

For those who don’t need the income, there are strategies and techniques available to leverage the required minimum distribution to offset the tax burden on these accounts. Today, I’m writing about one such strategy.

Become informed

Let’s review a hypothetical example:

George, age 65, has a $500,000 IRA and does not need to withdraw or spend these funds to support his family’s lifestyle. His wife, Gayle, is 64, and they have two children.

At age 73, George begins taking his RMDs and pays his taxes on those distributions each year. At age 80, George passes away, and Gayle, now 79, inherits the IRA. Assuming modest annual growth and continued minimum withdrawals, the account value should grow while Gayle owns it.

At age 90, Gayle passes away, and the children inherit the IRA, which has grown, hypothetically let’s say, to $600,000. Each of the two children inherits $300,000, which they could either take as a lump sum or withdraw over a maximum of 10 years, paying taxes on each withdrawal. If the children have had successful careers and are in higher tax brackets already, these distributions could push their taxable income higher and possibly make everything else on their tax return more expensive.

Think differently

If George and Gayle won’t need the income, they could consider alternative strategies that avoid passing a large tax burden to their children. For example, they could donate the IRA to a favorite charity at death and replace the taxable IRA with a tax-free life insurance policy of equal value for their children to inherit. 501(c)(3) non-profit corporations are tax-exempt and they would receive the IRA funds tax-free. Here’s how it could work: Withdraw a small amount annually from the IRA, pay the taxes, and use the after-tax funds to pay the premiums on a $600,000 life insurance policy. Life insurance benefits are typically tax-free, so the children inherit $600,000 tax-free, and your favorite charitable organization would inherit $600,000 tax-free.

The Tax-Deferred Disconnect happens when account holders fail to realize that they could be leaving their heirs with a substantial tax liability, significantly reducing the value of their inheritance, in lieu of discovering planning strategies to mitigate the future tax liability of qualified retirement accounts.

Possible next steps

Proactive planning helps ensure your wealth benefits your loved ones and your values while mitigating unnecessary tax costs.

• Review your beneficiary designations. Ensure your IRA and retirement accounts have up-to-date beneficiaries.
• Reevaluate your insurance options. Discuss the potential of leveraging life insurance to replace taxable dollars with tax-free dollars. A financial professional could help design a plan that aligns with your legacy goals.
• Implement a Roth conversion strategy. Consider gradually converting portions of your traditional IRA or 401(k) into a Roth IRA. Though this requires paying taxes on the converted amounts in the year of the Roth conversions, the funds grow tax-free and could be withdrawn tax-free by your heirs, reducing their future tax liability.

The bottom line

You don’t have to accept the Tax-Deferred Disconnect as inevitable. With proactive and thoughtful planning, you could maximize your legacy while reducing tax liability. By leveraging strategies like charitable donations and tax-efficient life insurance planning, you could turn potential tax dollars into meaningful contributions and tax-free inheritance for your loved ones.

Imagine leaving behind an efficient transfer of your qualified assets to your heirs and also a legacy that funds causes close to your heart — whether that’s supporting a cancer hospital, funding scholarships or simply reducing the tax burden to your heirs. It’s not just about managing taxes — it’s about taking control of your financial legacy.

Insurance products and services offered by Jim Sloan & Associates, LLC. Investment advisory services offered through MariPau Wealth Management, LLC an SEC Registered Investment Advisor. Please note that the use of the term “registered” to refer to our firm and/or our associated persons does not imply any particular level of skill or training. Melton & Company, LLC and MariPau Wealth Management, LLC are not affiliated entities. While the processes mentioned in this article have been designed with care, financial outcomes can never be guaranteed as investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained in this article shall constitute an offer to sell or solicit any offer to buy a security or any insurance product. Insurance may be subject to fees, surrender charges and holding periods which vary by insurance company. The information and opinions contained in this article are provided by the author and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. This article is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Jim Sloan and Jim Sloan & Associates, LLC do not give tax or legal advice. Tax laws are subject to change and can affect results. The firm is not affiliated with the U.S. government or any governmental agency. Hypothetical examples have been provided for illustrative purposes only and should not be construed as advice designed to meet the particular needs of an individual’s situation.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As a business owner, it’s less straightforward, but tax professionals can help you develop a routine. Regardless of your path to retirement, paying taxes in retirement is sure to throw off your routine.

Some of your funds will have taxes withheld, as happened when you were working. Some will not and will have to be accounted for in the aggregate amount you pay.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

I believe that most retirees who come to us and have an accountant think they must pay quarterly taxes. But it depends.

Below is a three-step framework to simplify your tax life in retirement.

1. Withhold taxes where you can

Income from pensions, retirement plans, deferred compensation and Social Security can and should have taxes withheld. The mistake I see most people make with the first three income streams is that they stick with whatever the plan’s default is. If that matches your tax liability, it’s dumb luck.

When it comes to Social Security, withholding taxes seems to be the exception because it is not required when claiming. To withhold taxes from Social Security, you must fill out a W-4V. You may think you are withholding taxes based on the amounts that are deducted for Medicare premiums before the money hits your bank account. Unfortunately, that misconception may result in an unpleasant April surprise.

There are two advantages to withholding taxes: First, it’s easier. If you’ve ever written a quarterly estimated tax payment, you know that withholding is just an easier way to get your money to the IRS.

The second is important and less known. Taxes paid via withholding are considered to be pro-rated across the calendar year.

Therefore, you don’t need to worry about quarterly deadlines and the penalties associated with missing them.

2. Run a projection based on total liability

We rely on a suite of technology to project current and future tax rates for our clients. I am fully aware that running a tax projection, given the complexity of our tax code, is not simple.

That said, the IRS has a few tools, as does DIY tax software. If you use an accountant, they should be able to do this for you.

Most tax preparers will base your quarterly estimates on last year’s liability. They want to “penalty-proof” your payments. This is a way to avoid underpayment penalties assessed by the IRS. You can do this by paying:

However, making sure you don’t pay a penalty is not the same as running a tax projection. In an ideal world, you can make an estimate that says, “This year I expect to pay about (fill in the blank) in taxes.” With an emphasis on “about.”

If you want to access a free version of the planning software we use, which has a tax module, it’s available here.

3. Pay the difference in quarterlies

If you can say, “I think my total tax liability will be $45,000, and I’ve already withheld $25,000,” then you are going to pay the $20,000 gap via estimated payments.

However, taxes in the U.S. are on a “pay-as-you-go” system, so you may not be paying $5,000 per quarter. You would make the quarterly payment in the quarter that income was received. Each quarter has a due date for the associated tax liability.

Due dates for federal estimated payments:

It’s important to note that estimated payment due dates vary by state and will not always line up with the federal due date.

Most retirees are in the habit of paying by check, but the IRS has made the online process fairly straightforward.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

All the information above is tactical in nature. It is simply a framework to make sure you aren’t writing a big check, unexpectedly, in April. None of it is strategic.

A strategic plan entails not only making sure that your bills are getting paid but also looking at current tax rates vs future tax rates to come up with a plan to minimize your lifetime tax bill. You can learn more about that in my article Three Keys to Keeping More of Your Money in Retirement.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

This deadline shouldn't be overlooked by those who have reached the age at which the IRS requires them to begin withdrawing from their tax-deferred savings.

So, here’s what you need to know (and do) if you have an RMD due in the coming days.

RMD rules 2024

RMDs are mandatory withdrawals from tax-advantaged retirement accounts that individuals must take once they reach a specific age. These accounts typically include traditional IRAs, 401(k)s, and similar accounts that allow funds to grow tax-free over time.

Note: The rationale behind RMDs is that the government wants to ensure that retirement savings, which have benefited from tax deferrals, don't continue to grow indefinitely without being taxed.

Who’s impacted? Recent legislative changes have shifted the age at which RMDs start.

As of 2024, individuals who have turned 73 are generally subject to RMD rules. (It's worth noting that this age requirement is set to increase again to 75 in 2033.) Also, inherited IRAs have their own complicated RMD rules.

Year-end RMD deadline

While the first RMD can be postponed until April 1 of the year, following which you turn 73, subsequent annual RMDs must be taken by December 31 each year.

This end-of-year deadline is critical since failing to withdraw the correct amount by this date can result in substantial penalties.

• The amount you must withdraw is calculated based on your retirement account balance as of Dec. 31 of the previous year and your life expectancy factor, as determined by IRS tables.
• Failing to withdraw the required amount by the deadline can result in a penalty of 25% of the amount not taken.

While this penalty has been reduced from the previous 50% due to changes in the SECURE 2.0 Act, it is still a substantial hit that can significantly impact retirement savings.

RMD: What to do now

• Review your account: Identify all retirement accounts subject to RMDs.
• Calculate your RMD: Determine the total amount you need to withdraw across all applicable accounts.
• Plan your withdrawal: Decide which account(s) you'll use to satisfy your RMD.
• Consider taxes: Understand how your RMD will affect your overall tax situation for the year.
• Take the distribution: Ensure the funds are withdrawn from your account(s) before the December 31 deadline.
• Keep records: Document your withdrawals for tax reporting purposes.

Note: When planning which account(s) to withdraw from, Kelly Regan, vice president and Certified Financial Planner™ with wealth management and advisory firm Girard, offers some insight.

“You can aggregate RMD distributions, meaning if you have two IRAs, you can withdraw the total RMD from one of the accounts — as long as the total RMD is taken, it is satisfied,” Regan says.

Also, with RMDs, you'll want to remember the following special circumstances.

Still Working Exception: If you're still employed past age 73 and don't own more than 5% of the company you work for, you might be able to delay RMDs from your current employer's retirement plan until retirement.

However, this “still working exception” doesn't apply to IRAs or plans from previous employers.

First RMD: For those who turned 73 this year and are facing their first RMD, remember that you have until April 1, 2025, to take this initial distribution.

However, delaying until April means you'll need to take two distributions in 2025 — one for 2024 and one for 2025 — which could have significant tax implications.

December required minimum distribution: Bottom Line

The December 31 RMD deadline is a key date for many retirees. You can meet your obligations and avoid unnecessary tax penalties or common RMD mistakes by understanding the rules, planning, and taking timely action.

Consulting a tax professional or financial advisor can help navigate the complexities of RMDs and optimize your retirement income strategy.

Related

• Required Minimum Distributions Guide
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But, like all things related to money, there are ways to optimize the cash that makes its way back into your checking account after an RMD.

RMDs, of course, are mandated by the Internal Revenue Service (IRS). “You cannot keep retirement funds in your account indefinitely,” the IRS says. You generally must start taking these mandatory withdrawals when you reach age 73 (unless you inherited an IRA). RMDs apply to retirement accounts, such as IRAs (excluding Roth IRAs, which don’t require RMDs) and employer-sponsored 401(k)s, 403(b)s and 457(b)s. The amount of your RMDs, due each year by Dec. 31, is calculated based on your account balance from the end of last year and your life expectancy. The RMD withdrawal amount gets taxed at your ordinary income tax rate. So, what are smart ways to make the best use of an RMD payout?

1. Use RMDs to make ends meet

If you need more money to pay the bills each month or need a lump sum to pay for a large expense, such as a car down payment or roof repair, RMD dollars can pay for these one-time or unexpected expenses. Remember, it’s better to pay bills from money that’s already been taxed, rather than, say, make another withdrawal from a taxable retirement account that results in a second taxable event.

2. Pay off expensive debt

High interest credit card debt is the enemy of personal finance. So, if you have a high balance on plastic, use all or part of your RMD to put a dent in your debt. The average credit card rate is 24.43%, according to Lending Tree. So, for every $1,000 you pay off, you can save yourself $244 per year. If you knock out $4,000 in credit card debt, you can avoid $1,000 in interest.

3. Save for a rainy day

If you’re one of the two-thirds (62%) of Americans who told Bankrate.com that they “feel behind on emergency savings,” bulk up your rainy-day fund with a cash infusion from your RMD.

Even though the Federal Reserve has cut its key borrowing rate by three-quarters of a percentage point to a range of 4.5% to 4.75% since mid-September (and might cut rates again later this month), the cash you can earn on your money in the best high-yield savings accounts and certificates of deposit (CDs) still outpaces consumer price inflation (CPI), which measured 2.7% in November. A review of Bankrate.com shows 1-year CDs yielding as high as 5.25%, and high-yield savings accounts fetching 4.5% and above.

4. Reinvest the money

If you don’t need the cash to cover everyday expenses, pay off debt, or bolster your emergency fund, consider reinvesting the money. Why leave it in a checking account, earning less in interest than the rate of inflation? Instead, you can funnel the money back into a taxable brokerage account. You can also fund a Roth IRA if you have earned income equal to or greater than the RMD amount you contribute to the Roth IRA, according to American Century Investments. Once the dollars are invested in a Roth, you won’t have to distribute any more RMDs on the amount for the rest of your lifetime.

Another tax-saving tip is to invest proceeds into a low-cost and tax-friendly ETF, which typically throws off lower capital gains and dividends to shareholders than traditional mutual funds.

5. Reinvest RMD money to save on future taxes

Not every investment is a tax-smart one. “One of the biggest mistakes we see people make with RMDs is reinvesting them the wrong way,” said Kris Whipple, president and financial advisor at Kristopher Curtis Financial.

Since you’re already paying taxes on your RMD, if you don’t need the money, it makes sense to invest the money in a way so that it’s not taxed again, advises Whipple. If you invest in a non-retirement account, you fall into the trap of paying taxes twice, as you will be taxed later on any gains. “You’re creating something nobody wants: more taxes,” said Whipple.

A smarter approach is just to pay the tax once on your RMD money. “Reposition those funds where they’ll never be taxed again,” said Whipple. One way to do that is to use RMD dollars to fund a life insurance policy. The upside to that strategy? “You can create a tax-free benefit for your heirs,” said Whipple. “You’re ensuring that the impact of taxes stops (when you pay Uncle Sam the taxes on your RMD).”

And while life insurance premiums are expensive for folks over 73, there’s a way for married couples to lower their premiums. You can invest in a Second-to-Die Guaranteed Universal Life policy. This policy only pays out after both parties have passed. “Because of this,” said Whipple, “the premiums are typically lower” than if you buy two single-life policies with the same combined death benefit.

6. Contribute to a college savings plan (529)

Even though you’ll get taxed on your RMD, you can shield the distribution from taxes going forward and help pay for your grandchildren’s educational expenses by using the funds to contribute to one of the best 529 college savings plans, said Addison Schubert, a financial consultant with American Century Investments. “A 529 allows your gift to grow tax-deferred and withdrawals for qualifying educational expenses are tax-free,” Schubert explained.

Tip: The 529 grandparent loophole allows you to contribute to your grandchild's college fund without harming their chances for a scholarship. You could also benefit your grandchild's retirement; if they don't use all those funds on education, your grandchild could roll over funds from a 529 to a Roth IRA.

7. Gift RMD proceeds to heirs

Using RMDs to pass on wealth to heirs is a way to leave a legacy while you’re still alive.

“A frequent comment by retirees regarding RMDs is that they don’t need the money,” said Rick Miller, financial planner and investment advisor at Miller Investment Management. “I advise many of them who have children that gifting them the RMD money up to the gifting limit is a way of passing on your estate sooner rather than later.” The annual gift tax exclusion for 2024 is $18,000 and will increase to $19,000 in 2025.

8. Donate proceeds to charity

If you don’t need the cash, but need a tax deduction, consider giving your RMD to a charity, such as an arts foundation, volunteer fire department, or non-profit focused on fighting cancer. “Normally, distributions from a traditional IRA are taxable when received,” the IRS said. “With a QCD, however, these distributions become tax-free as long as they're paid directly from the IRA to an eligible charitable organization.” The maximum annual amount that can qualify for a QCD is $105,000 per person ($108,000 in 2025), per calendar year.

9. Pay income taxes

If you expect to owe taxes to the IRS come April 15, your RMD might be a good source of capital to make the payment. So, don’t rule out using these freed-up funds to pay Uncle Sam at tax time.

10. Treat yourself!

If you don’t need the money to pay taxes, buy groceries or fix the car, there’s nothing wrong with using your RMD for an indulgence. You could fund a dream trip to Rome, buy a new couch you’ve been eyeing or finally spring for new stainless steel appliances to spruce up your kitchen. Or go on a shopping spree! The world's your oyster.

Read More

• Protect Your Retirement: Seven RMD Mistakes to Avoid
• How to Manage Longevity Risk in Retirement
• How to Convert a Traditional IRA to a Roth After 60
• How to Calculate RMDs for IRAs

Some of the following items may be applicable to you, while others may not be. The key is recognizing the opportunities that exist in this environment so you can make informed financial decisions and stay focused on what is important as you enter 2025.

Investing considerations

1. Overall allocation. Does your investment mix of stocks, bonds, alternative investments and cash still make sense based on your goals? If your situation has changed, it may impact your portfolio.

2. Rebalancing. Though the S&P 500 is up meaningfully this year, that return has been driven primarily by several large technology stocks. Meaning there are areas of the market, such as REITs, international stocks and investment-grade bonds, that have meaningfully underperformed the S&P 500. Many investors’ asset allocation is probably out of whack, and it may make sense to rebalance your portfolio to ensure your allocation is brought back to its appropriate risk tolerance.

3. Investment policy statement (IPS). One way to stick to a disciplined plan is by developing an IPS. An IPS helps define an investors’ goals, risk tolerance and other considerations to ensure they are on track to achieve their objectives. Most important, it will help investors ignore the noise and the slick salespeople trying to sell them something imprudent. Speaking to your financial adviser today to set up an IPS before the New Year is a great way to start 2025 on the right financial foot.

4. Review your cash position. In today’s world, cash doesn’t need to earn nothing. Money market yields are now paying around 4%-plus. Proactively moving cash from accounts paying 1& to 2% to those paying about 4% is prudent. On the other hand, yields are much lower than they were last year. This may impact how much cash you should have on hand.

Considerations for required minimum distributions (RMDs)

5. Don’t forget to take your RMDs from your retirement account. RMDs apply to folks who are 73 and older. If you are subject to RMDs and don’t take them before the end of the year, there will be a penalty.

Considerations for charitable giving

6. Qualified charitable distributions (QCDs). Individuals who are 70½ or older can donate all, or a portion, of their RMD directly to charity via a QCD. Regardless of the amount of your RMD for the year, you can give up to $105,000 to charities from your IRA as QCDs.

7. Deduction for cash contributions. Under the Tax Cuts and Jobs Act, the deduction for cash contributions directly to charity, including gifts to a donor-advised fund, increased from 50% of AGI to 60%. The limit will revert to 50% after the sunset of the TCJA at the end of 2025, so donors should consider maximizing their cash gifts today.

8. Donate appreciated stocks. Many investors may have long-held or concentrated stock positions with large imbedded unrealized capital gains. These folks should consider donating these highly appreciated securities directly to charity, which helps avoid capital gains tax that would otherwise need to be paid when selling the security. It also facilitates minimizing a large position, which helps derisk a portfolio.

9. Utilize a donor-advised fund (DAF). A DAF is an account where you can deposit assets for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and still has the ability to control how the funds are invested and distributed to charity. A DAF can be extremely useful if you hold a security with no cost basis, a highly appreciated stock or a concentrated position. In all these scenarios, the tax liability can be circumvented by moving that position to a DAF. A DAF may be particularly useful when “bunching” your charitable contributions, which involves donating several years’ worth of charitable contributions all at once, which is done for tax planning purposes.

Considerations for Roth IRA conversions

10. Roth IRA conversions. A Roth IRA conversion is the process of transferring retirement funds from a traditional IRA, SEP or 401(k) into a Roth account. There is no early withdrawal penalty on this conversion amount. Since a traditional IRA is tax-deferred, while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the converted funds at the time of conversion. This is typically done to avoid a potentially more onerous tax liability later or for estate planning reasons.

Considerations for beneficiary designations

11. Beneficiary updates. Retirement accounts and insurance policies have beneficiary designations that pass outside of one’s will. Therefore, even if you did estate planning, it’s important to review your various beneficiary designations to ensure that your money is passing according to your wishes. It is not unheard of for assets to pass to the wrong party, such as an ex-spouse, because beneficiary designations were not updated.

Considerations for estate planning

12. Changing family dynamics. If a family member passed away this year, you may want to reach out to your estate planning attorney to review and update your planning/documents such as a will, power of attorney, health care proxy, etc.

13. Aligning your financial plan with your investments. If you update your estate plans or have a trust, make sure that your investment accounts reflect your estate plan (i.e., the trusts should be funded and accounts titled correctly).

14. Take advantage of the high federal unified estate and gift tax exemption. The federal unified estate and gift tax exemption for 2024 is at an all-time high of $13.61 million for individuals and $27.22 million for married couples. It’s going up next year (to $13.99 million for individuals and $27.98 million for married couples). However, while the incoming Trump administration may extend this high exemption amount, they are still scheduled to expire after December 31, 2025. At that point, the amounts are scheduled to revert to the pre-2017 level, which is about half of what they are today. Depending on a family’s assets, it may be a great opportunity for large lifetime gifts to capitalize on the historically high exclusion amount today to remove assets from their estate.

Considerations for 529 plan contributions

15. 529 plan contributions. A 529 plan is a tax-advantaged college savings account. It may provide an opportunity for immediate tax savings if you live in one of the 30 or more states offering a full or partial deduction for your contributions to the home-state 529 plan. This is a nice option for using the annual gift tax exclusion, if you haven’t already used it. You can gift up to $18,000 a year tax-free per person in 2024 (in 2025, it’s $19,000). The annual exclusion recycles on January 1, so make sure to use your 2024 gift allowance by then so you don’t lose it.

16. “Superfunding” 529 accounts. In this strategy, you can spread a tax-free gift to a 529 account over five years for gift tax purposes. So, a married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $180,000 in 2024 to a 529 plan for each child and, with the election, not run into gift tax problems.

Considerations for tax loss harvesting

17. Tax-loss harvesting is the process of selling securities at a loss to offset a capital gains tax liability. In addition to offsetting any capital gains for the year, the loss can also be used to offset up to $3,000 of your ordinary income.

Considerations for company retirement accounts

18. Assess contributions to employer retirement plans. Review how much money you contributed to your 401(k) or 403(b) this year. If you are financially able, it’s worthwhile to max out those accounts every year. In 2024, maximum contribution limits are $23,000 before any company match or $30,500 if you are 50 or older.

19. Plan for next year’s 401(k)/403(b) contribution limits. For 2025, the contribution limit increased to $23,500. Catch-up contributions will remain the same at $7,500 for those 50 and over. Interestingly, in 2025 the IRS will now permit an additional catch-up for employees ages 60 to 63 of $11,250, instead of just $7,500. Don’t forget to make the required tweaks within your plan to ensure you are making the maximum contribution for the upcoming year.

20. Roth IRA vs traditional IRA. It’s important to decide whether to make Roth IRA or traditional IRA contributions. As a rule of thumb, if you think you may have a high-income year, then a traditional IRA makes more sense since you’ll get an immediate tax deduction. However, if you anticipate a low-income year, then a Roth IRA makes sense. In that scenario, you’ll pay a more modest amount in taxes now and not have to pay tax on the withdrawals years later.

21. Review your 401(k)/403(b) investment lineup and current portfolio. Determine if it is sensible to make any investment changes in your plan. This is especially applicable if your firm switched 401(k) providers recently, if you rolled over an old 401(k) or if you are approaching retirement. In any of these scenarios, tweaking your investments may make sense.

Considerations for other tax-advantaged accounts

22. Health savings account (HSA). Consider maxing out your HSA, which allows you to save and pay for qualified medical expenses with tax-free dollars. In order to contribute to an HSA, you have to be enrolled in an HSA-eligible health plan. You can only contribute a certain amount to your HSA each year, but all contributions roll over from year to year. In 2024, you can contribute up to $4,150 for yourself, or $8,300 if you have coverage for your family. In 2025, you will be able to contribute up to $4,300 for yourself or $8,550 if you have coverage for your family.

23. Flexible spending account (FSA). FSAs allow you to contribute pre-tax money, up to a certain amount, to an account that can be used to pay for eligible out-of-pocket health care expenses or eligible dependent care services, such as childcare. However, FSA funds typically are “use it or lose it,” meaning you generally can’t roll the full amount into the next calendar year. To avoid losing any unspent funds, make a plan to use the money before December 31.

Considerations for your budget

24. Sufficient emergency fund. Make sure you have adequate funds in your checking account. Three to six months’ worth of expense money is a good rule of thumb for those who are working. For retirees, this number should be sufficient to mitigate sequence of returns risk, which may require having a year’s worth of cash readily available.

25. Reflect on your expenses and plan ahead for next year. This is especially important for retirees who must evaluate how much cash they will need in the year ahead to ensure they are able to meet their cash flow needs. Since prices on many items skyrocketed this year, it’s imperative to ensure you have adequate cash on hand to meet these expenses.

Reviewing the aforementioned strategies with your loved ones and financial adviser can help ensure that your financial house is in order. It will also help lay the groundwork for a financially successful year ahead.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures.

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• 10 Retirement Moves to Make Before 2025
• Six Ways to Optimize Your Charitable Giving Before Year-End
• New Rules for Retirement Savings Taking Effect in 2025

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Here are seven strategies to consider as you think about optimizing your finances before the end of 2024.

1. Maximize retirement contributions

One of the most impactful steps you can take is to review and maximize your retirement contributions. For traditional IRAs and Roth IRAs, contributions for 2024 must be made by Tax Day, which is April 15, 2025. For business owners, you can create and fund most employer-sponsored retirement plans through your tax-filing deadline, which includes extensions.

The SECURE Act 2.0 introduced several changes to the contribution rules for IRAs and employer-sponsored retirement plans. You should consult your financial adviser and tax professional to determine how these changes might affect you and work with them to plan for your retirement contributions.

2. Take required minimum distributions (RMDs)

If you're 73 or older, you must take your RMDs from retirement accounts by December 31, 2024, to avoid penalties. You can defer your first RMD until April 1 of the year after you turn 73. Subsequent RMDs, however, must be taken by December 31 each year. So, if you turned 73 in 2024, you could defer your first RMD to as late as April 1, 2025—but then you’d have to take your 2025 RMD by December 31 of 2025, and there can be some downsides to taking two RMDs in one year.

Recent IRS regulations have also clarified RMD requirements for inherited IRAs. Starting in 2025, certain beneficiaries will need to take annual RMDs in addition to withdrawing the entire IRA by the end of the 10th year after the original owner’s death, so it’s important to discuss these complex rules with your adviser and tax professional.

3. Harvest your investment losses

Tax-loss harvesting can be a valuable strategy to offset capital gains taxes: By selling investments at a loss, you can reduce your taxable income. It’s important, however, to be mindful of the wash sale rule, which disallows the deduction if you repurchase the same or a “substantially identical” security within 30 days before or after the sale. Consulting a tax professional can help you navigate the nuances of these rules effectively.

4. Make year-end gifts

The annual use-it-or-lose-it gift tax exclusion for 2024 allows you to give up to $18,000 per recipient ($36,000 for married couples) without incurring gift taxes. If you exceed this amount, you can still make aggregate lifetime gifts up to $13.61 million ($27.22 million for married couples) without triggering gift or estate taxes, as of 2024. Note that under the terms of the Tax Cuts and Jobs Act of 2017, the unified credit for gift and estate tax will revert to pre-2018 levels at the end of 2025, so planning your gifts in advance can be advantageous.

5. Donate to charity

Charitable contributions can be a tax-efficient way to support causes you care about while reducing your taxable income. If you itemize deductions, you may be able to deduct charitable contributions up to a certain percentage of your adjusted gross income. Contributions of appreciated assets and securities can be particularly beneficial for some people, as you can deduct the fair market value and avoid capital gains taxes.

For those over 70½, making a qualified charitable distribution of up to $105,000 from an IRA can potentially be a tax-efficient way to meet RMD requirements while supporting charitable organizations (although note that you aren’t required to begin RMDs until you turn 73 if you were born between 1951 and 1959). These distributions are not income tax deductible, but the amount of your qualified charitable distributions (QCDs) that year is not included in your income.

6. Review your stock options

If your employer offers incentive stock options (ISOs) and you will not be subject to the alternative minimum tax (AMT) in 2024, consider exercising vested in-the-money options, which is when you purchase your company’s stock at a discounted rate, and therefore, are purchasing it at a profit. This can be a potentially tax-efficient move with little or no federal income tax consequences, depending on your specific situation. A tax adviser can help you determine the appropriate course of action.

7. Consult with advisers

Year-end planning can be complex, and the strategies that are right for you will depend on your individual circumstances. Consulting with a financial adviser or tax professional can help you navigate these decisions and set yourself up for success in the coming year.

The bottom line

The end of the year is an excellent time to review your financial situation and make strategic moves to check in with your goals. By considering these seven strategies and consulting with professionals, you can position yourself for financial success in 2025 and beyond.

JPMorgan Chase & Co., its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member FINRA and SIPC.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

By applying a logical, data-driven approach, you can create a retirement tax strategy that maximizes your income and minimizes unnecessary tax burdens.

Tax planning: Why it’s essential in retirement

The tax landscape changes as you transition from earning a salary to drawing income from different sources, such as Social Security, pensions, retirement accounts and investments. Without a solid plan, taxes can eat away at your retirement income, leaving less for your lifestyle and goals.

Here are the key elements of tax planning as you approach retirement:

• Managing tax brackets. As your income sources shift, it’s critical to understand how to stay within favorable tax brackets. Drawing too much from tax-deferred accounts, such as a 401(k) or traditional IRA, can push you into a higher tax bracket, leading to a larger tax bill. Strategic withdrawals can help you optimize your tax liability.
• Timing of withdrawals. Deciding when to tap into different accounts is a central component of tax minimization. For example, delaying withdrawals from tax-deferred accounts until later years could make sense if you expect your income to decrease in retirement, reducing your tax liability. Alternatively, you may want to start drawing on those accounts earlier to manage your taxable income.
• State taxes. State income tax laws vary widely. If you plan to move in retirement, consider the tax implications of your new location. Some states have no income tax, while others may tax retirement income at higher rates. Accounting for state taxes in your retirement plan could save thousands over time.

Tax minimization strategies for retirement

Several strategies can help minimize taxes in retirement. These techniques ensure that you’re not only reducing your tax burden today but also extending the longevity of your savings for years to come.

1. Roth conversions

One of the most effective tax-minimization strategies is converting a portion of your tax-deferred accounts, such as a traditional IRA or 401(k), into a Roth IRA. Unlike traditional retirement accounts, withdrawals from Roth IRAs in retirement are tax-free. The key is to strategically convert these funds during low-income years — such as right after retirement but before required minimum distributions (RMDs) begin at age 73.

• Why it works. Roth conversions allow you to pay taxes upfront while in a lower tax bracket. The funds then grow tax-free and can be withdrawn tax-free in retirement.
• Strategic timing. The years between retirement and age 73 (when RMDs kick in) often present a golden “tax window” where your income may be lower, making it an ideal time to convert funds without pushing yourself into a higher tax bracket.

2. Harvesting capital gains

As you approach retirement, managing investments in taxable accounts becomes crucial for tax minimization. One technique is tax-loss harvesting, which involves selling investments that have lost value to offset gains from other investments. Additionally, strategically selling appreciated assets during years when your taxable income is lower can help minimize the capital gains taxes you pay.

• Long-term gains. For individuals in lower tax brackets, long-term capital gains may be taxed at 0%. This is especially beneficial during retirement, when your income is likely lower than in your peak earning years.
• Capital losses. If you have investments that have declined in value, selling them to realize a loss can offset gains elsewhere in your portfolio. This reduces your overall tax liability.

3. Tax diversification

Tax diversification means having different types of accounts — tax-deferred (e.g., traditional 401(k) and IRA), taxable (e.g., brokerage) and tax-free (e.g., Roth IRA) — to draw from in retirement. By having a mix of accounts, you can strategically choose which to withdraw from each year based on your income needs and the tax implications of each type of account.

• Tax-deferred accounts. Traditional IRAs and 401(k)s provide a tax deduction when contributing, but withdrawals are taxed as ordinary income in retirement. These accounts are great for reducing taxable income while working, but without a strategy, you could face higher taxes when withdrawing in retirement.
• Taxable accounts. These are brokerage accounts that offer flexibility. Only the capital gains are taxed, and you can manage when to realize gains. This flexibility allows you to control your taxable income in a given year.
• Roth accounts. Roth IRAs and 401(k)s are powerful tools because they offer tax-free withdrawals in retirement. Contributing to Roth accounts during your working years (especially if you expect to be in a higher tax bracket in the future) can provide significant tax savings down the line.

4. Required minimum distributions (RMDs)

At age 73, the IRS mandates that you start withdrawing a certain amount from your tax-deferred accounts, known as RMDs. These withdrawals are taxed as ordinary income. Failing to plan for RMDs can lead to a sudden spike in taxable income, pushing you into higher tax brackets.

• Mitigate RMDs. To avoid being hit with a large tax bill, you can start taking strategic withdrawals before age 73, and you could perform Roth conversions. Both strategies would reduce the balance in your tax-deferred accounts before RMDs hit.
• Qualified charitable distributions (QCDs). If charitable giving is part of your retirement plan, consider using RMDs to make charitable donations. QCDs allow you to donate up to $100,000 per year directly from your IRA to a qualified charity, satisfying your RMD requirement while avoiding taxes on the distribution.

5. Health savings accounts (HSAs)

For those who have access to a health savings account (HSA) through a high-deductible health plan, this tool can play a key role in retirement planning. HSAs offer a triple tax advantage: Contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are also tax-free.

• Saving for medical expenses. Medical expenses can be a significant cost in retirement. By building up an HSA balance during your working years, you can cover health care expenses in retirement without incurring taxes.
• Post-65 withdrawals. After age 65, HSA funds can be used for any purpose, though non-health care withdrawals are taxed as ordinary income (similar to an IRA).

The key to successful tax planning is understanding the variables and optimizing outcomes. By taking advantage of strategies like Roth conversions, tax diversification and tax-efficient withdrawal sequences, you can minimize your tax burden and make your savings last longer.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When you feel the future is in doubt, it can be tempting to make financial decisions based on what you fear will happen. Particularly in close elections, as the 2024 race is predicted to be, investors can become extremely nervous about the outcome and the impact it will have on their finances.

If you believe one candidate will harm the economy and also think that candidate is likely to win, it’s hard to resist the urge to protect your finances by divesting yourself of assets you feel will be at risk when the new president takes office in January.

Conversely, if you’re confident your preferred candidate will win and will be a boon to the economy, you’d be tempted to shift your investments toward assets you think are likely to prosper under that candidate’s presidency.

Election-year stock market impacts

Historically, while the stock market often displays some volatility in the months leading up to an election, once that election is in the rearview mirror, market volatility tends to calm. Within a few months of the new president taking office, the market is usually right where it would be expected to land had the election never taken place.

In short, despite common assumptions that they will either rout or boost the markets, elections don’t tend to have much impact, regardless of which party’s candidate wins the Oval Office. This can be unfortunate for those who assume otherwise and make financial decisions based on that assumption.

Prudent financial moves during election season

Whether an election year or otherwise, it’s crucial to have a solid financial plan tailored to your individual situation and risk tolerance. A financial adviser can help you devise a plan designed to grow your money in a balanced portfolio that has appropriate levels of investment risk. If you have such a plan, the prudent move during an election is to stick to that plan.

A properly designed plan is already set up to take advantage of good times and weather bad times. History suggests that making major portfolio changes in response to election uncertainty can cause more harm than good.

Apolitical financial planning

One aspect you could consider, however, is taxation. Regardless of which party wins in November, it’s likely we are currently enjoying the most favorable tax environment we will see for years to come. To fund the government and service existing debts, at some point the country will likely have to increase its income, which means higher tax rates.

The Tax Cuts and Jobs Act set our current tax rates and brackets, but it is due to expire at the end of 2025, barring congressional action — an action that most electoral scenarios deem unlikely at this time. Once it expires, we will return to the higher tax environment the TCJA replaced. This means any action you can take to lower your future tax burden is likely to save you money in the long run.

One common way to accomplish this is to consider converting your tax-deferred retirement accounts to their Roth equivalents. You will pay taxes on them now, at current tax rates, but will not have to pay taxes on withdrawals or gains in the future. Plus, while tax-deferred accounts have required minimum distributions (RMDs) that you must take whether you need the money or not, Roth accounts do not.

Those RMDs are considered income when you take them, and if you have other sources of income in retirement that cannot be paused, such as pensions, Social Security or annuities, they could move you from a lower tax bracket to a higher one.

Roth conversions don’t make sense for everyone, and like investing, the wisdom of converting to Roth accounts depends on your individual circumstances. It’s important to sit down with a financial adviser to devise a financial plan that’s right for you.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you’ve been able to make significant pretax contributions over many years and you’ve received generous matching and/or profit-sharing contributions (in addition to the benefits of compounding growth), chances are you’ve built a sizable nest egg.

Now, many people say you can never save too much money for retirement. But is there a risk if your traditional IRA and pretax 401(k) accounts get too big?

Possibly. Especially if you won’t need all of that money to live on.

That’s because at age 73, you’ll have to start taking required minimum distributions (RMDs). (This age will increase to 75 in 2033.)

RMDs for a given year are calculated as a percentage of the value of your account at the end of the previous year. This percentage gradually rises each year.

These distributions count as taxable income. If the value of your pretax account is very large, a single RMD, in combination with taxable income you receive from other sources — such as Social Security — could dramatically increase your yearly tax bill.

Let’s look at a hypothetical example.

Jane could pay the price for her savings success

Jane, 72, is a senior executive with a large company. She started contributing to her 401(k) plan in 1990, when she was 38. Every year she made the maximum allowable contribution on a pretax basis, including additional catch-up contributions when she turned 50 in 2002. Over the years, her employer was very generous with matching and profit contributions.

Now Jane is about to retire. Because her account posted strong average annual returns over the years — much of it due to the exponential increase in the value of the company stock she invested in — her pretax 401(k) account was worth approximately $5 million at the end of 2023.

Since divorcing her husband 15 years ago, Jane has always lived frugally and doesn’t plan on changing her ways once she retires. She paid off the mortgage on her home several years ago. She has no debt and could live comfortably off her monthly Social Security checks, payments from a previous employer’s pension plan and dividend and interest income from her bank and taxable investment accounts.

She had always planned on using RMDs from her 401(k) to support her favorite charities and leave whatever was left in the account to her two adult children when she passed on.

A tax surprise

Jane never knew exactly how much her annual RMD would be, so for planning purposes, she made a trial run at figuring it out. With one year left before she’ll be forced to take RMDs, she finally got around to calculating what her first RMD would have been in 2024 if she had taken it. She was shocked.

Based on the RMD rate calculated using the IRS Uniform Lifetime Table, her distribution would have been $188,679. With her investments continuing to do well in 2024, her first real RMD is likely to be even higher when she takes it at age 73 in 2025.

Not even counting Social Security, this amount alone could put her in the 24% federal tax bracket — the same tax bracket she’s been in as an employee.

What’s even more concerning is that once she retires, she’ll receive at least $50,000 in additional yearly taxable income from her defined benefit plan payments and bank and brokerage accounts. If this combined amount pushes her adjusted gross income above $191,950, she could be elevated to the 32% federal tax bracket.

This higher income could have other unanticipated consequences. She was already paying taxes on 85% of her Social Security benefits, which she started taking at age 70. And once she enrolls in Medicare (which she delayed doing because she was covered by her employer’s health plan), her Medicare income-related monthly adjustment, or IRMAA, could raise her monthly Part B premium to $559, compared with the baseline premium of $174.

Fortunately, Jane will have enough money to pay these higher tax bills and expenses. But it wasn’t a burden she was expecting as a retiree.

A potential tax quagmire for her heirs

Even more worrisome, her 401(k) nest egg could become a huge tax liability for her two adult children, who are the beneficiaries of the account.

That’s because they’ll have to empty out the account within 10 years of inheriting it. And the IRS will require them to take annual RMDs during that 10-year period. This could hypothetically result in $100,000 or more in additional taxable income for each of them every year.

What about a Roth IRA conversion?

Distributions from a Roth IRA are tax-free as long as the owner is over 59½ and has owned the account for at least five years. If children inherit the account, they’ll still have to empty out the account within 10 years, but they won’t have to pay taxes on these distributions. And they won’t have to take annual RMDs during that period.

Because of her high income, Jane was never able to contribute to a Roth IRA when she was working. However, once she retires she could roll over some or all of her 401(k) money directly into a Roth IRA — but of course she’d have to pay the taxes she owes on the amount that she is converting.

These Roth IRA conversion amounts wouldn’t count toward meeting her RMD. In fact, she would have to take the RMD from the 401(k) account before she could make one-time or annual Roth IRA conversions.

So, if she completed a partial Roth conversion every year, this amount, combined with her annual RMD, could create an even larger tax burden. She would essentially be taking a huge tax hit today to reduce her (and her children’s) potential tax liability later on.

Now, there are certain steps Jane could take to lower her future tax bills.

She could donate the amount she receives as an RMD to a qualified charity and receive a charitable tax deduction.

And if she rolls over her 401(k) into a traditional IRA, she could use an annual qualified charitable deduction (QCD) to directly donate up to $105,000 from the IRA to her favorite charities. The QCD amount would reduce, but not eliminate, her annual RMD.

What could 'future Janes' do?

Unfortunately, the size of Jane’s 401(k) account makes it difficult to significantly reduce its value without creating substantial tax burdens for her now or for her children later.

But her situation at least offers a lesson for “future Janes”: Defined contribution plan participants of any age who make significant annual pretax contributions need to consider whether they’re at risk of amassing a taxable nest egg that may be larger than they really need.

The solution? Take advantage of an option that wasn’t available when Jane started contributing to her plan — the Roth 401(k).

Like Roth IRAs, Roth 401(k) contributions are made on an after-tax basis. So, while they won’t lower your taxable income today, any distributions you take from your Roth 401(k) are tax-free if you’re over 59½ and have owned the account for at least five years.

And, like a Roth IRA, you’ll never have to take RMDs from a Roth 401(k). If your children inherit your account, they’ll still need to empty it within 10 years, but they won’t have to pay taxes on the distributions.

And, starting in 2024, your employer can deposit vested matching contributions into your Roth 401(k) account (before 2024, employers had to deposit all matching contributions into pretax accounts). Keep in mind that matching contributions made to a Roth 401(k) are treated as taxable income, so you may owe taxes on them when you file your federal and state returns.

Making most or all of your own eligible contributions to your Roth 401(k) account may prevent pretax retirement assets from creating tax issues later on. If you plan right, you could conceivably use RMDs from your pretax account to provide income during retirement, while only tapping your Roth 401(k) for special occasions. Or don’t touch it all if you want to pass it on tax-free to your beneficiaries.

Look for other pretax opportunities

You may also want to see if you can take advantage of other benefits funded through pretax deductions.

For example, companies can take pretax deductions from your paycheck to pay for certain commuter expenses, such as subway passes and parking fees.

Premiums for group term life insurance and long-term disability insurance and vision plans can often be paid through pretax deductions as well.

And if your company offers a health savings account (HSA), you can make pretax contributions of up to $4,150 in 2024 if you’re the only person covered by your health plan or $8,300 if your family is covered, plus an extra $1,000 if you’re 55 or older.

Pay more taxes now — or save them for later?

Figuring out whether it makes sense to reduce pretax contributions and increase Roth 401(k) contributions today to avoid possible future tax liabilities isn’t a cut-and-dried process.

That’s why, you may want to speak with a tax professional or financial adviser before changing your contribution strategy.

This is a case study and is for illustrative purposes only. Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This case study does not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As with anything involving the IRS, the RMD rules are notoriously (and unnecessarily) complicated. You don’t need to become an expert on every nuance, but there are a few key things you must understand to avoid costly mistakes — and possibly even reduce the amount you owe.

So, let’s demystify RMDs by cutting straight to the essentials. Here’s what you need to know about the what, who, why, when and how of RMDs.

What are RMDs?

Think of RMDs as a rite of passage in retirement. It’s the amount you must start withdrawing from your retirement accounts annually once you hit age 73.

RMDs were introduced when IRAs were first established in the early 1970s, designed to ensure the government eventually collects income tax on your tax-deferred accounts. Thanks to the SECURE 2.0 Act, the age to begin taking RMDs was bumped up from 72 to 73 in 2023, with another increase to 75 scheduled for 2033.

Here’s the gist: You must withdraw your RMD by December 31 in the year you turn 73. However, you can delay your first withdrawal until April 1 of the following year. For instance, if you turn 73 on October 1, 2024, you have until April 1, 2025, to take your first RMD. Keep in mind, though, if you delay, you’ll need to take two distributions in 2025 (the second one by December 31, 2025).

RMDs apply to pretax employer-sponsored retirement accounts, such as 401(k), 403(b) and 457(b) plans, as well as traditional IRAs and IRA-based plans like SEPs, SARSEPs and SIMPLE IRAs. Roth IRAs and Roth 401(k)s do not have RMDs.

Now the math: Your RMD is determined by dividing the balance in your account at the end of the prior calendar year by your life expectancy, as determined by the IRS. While you need to calculate the RMD for each retirement account individually, you can choose to withdraw the total amount from one account or a combination of accounts.

Who’s impacted?

While RMDs are a big deal for some retirees, the reality is that many people withdraw more than the required minimum each year. For those who follow the common 4% withdrawal rule to make their savings last through retirement, the IRS’ RMD rules may not even be a concern. They’ll simply withdraw, pay the tax and move on.

However, for those who prefer to take out as little as possible, paying attention to RMD rules becomes crucial, and that’s where tax planning comes in.

If following the IRS Uniform Lifetime Table, RMDs start at a manageable 3.6% of your retirement account balance at age 73, but the percentage ramps up over time, reaching about 5% at age 80, 6.3% at age 85 and 11% by age 95. It’s important to note this applies to unmarried account owners, those whose spouse is not their sole beneficiary or those whose spouse is their sole beneficiary and not more than 10 years younger. Different tables may apply for those who do not fit into these categories.

Inheriting a retirement account adds another layer of complexity. If you’re a spouse inheriting an IRA, you generally have the same flexibility as the original account owner, including the ability to roll the account into your own IRA.

However, if you’re a non-spousal beneficiary, things are different. Non-spouse heirs must adhere to the 10-year rule. Under this rule, the account must be fully depleted within 10 years of the original owner’s death. RMDs are mandated for inherited traditional IRAs (and likely inherited pretax 401(k)s) if the account owner died after 2020 and had begun taking RMDs or reached the age when they should have started. But if the owner passed away before starting RMDs, the 10-year cleanout rule still applies, but RMDs are not required. Additionally, RMDs are not necessary for inherited Roth IRAs under any circumstances.

There are exceptions for eligible designated beneficiaries (EDBs), a special class that includes surviving spouses, minor children of the account owner, disabled or chronically ill individuals and beneficiaries who are less than 10 years younger than the deceased. These EDBs can still stretch distributions over their lifetime, keeping the old rules intact.

But, say you inherit an IRA or 401(k) from a parent or grandparent. You’ll want to be sure to review your own estate plan and consider the financial situations of your beneficiaries. Sometimes, it may make sense to pass on IRA dollars to a lower-earning beneficiary while leaving Roth or brokerage assets to a higher-earning one. This strategy that advisers often suggest can help minimize the tax impact for your heirs.

Why you need to know

The penalties for getting your RMDs wrong are steep. If you miss taking the required amount, the IRS imposes a hefty penalty — 25% of the amount you should have withdrawn, which could be reduced to 10% if you correct the RMD within a certain timeframe.

Each retirement account you own requires its own RMD calculation, but you have some flexibility in how you withdraw the total amount. While 401(k) plan sponsors will calculate and communicate the RMD for that account only, IRA custodians will calculate RMDs for each separate IRA held with them. If you own multiple IRAs, you can decide how much of the total IRA RMD to take from each account, allowing you to withdraw more from one and less from another. However, it’s important to note that RMDs taken from 401(k) accounts cannot offset RMDs required from IRAs — they must be calculated and taken separately.

Be aware, though, that if you don’t proactively manage your withdrawals, your financial institution may step in and do it for you. Some banks will automatically transfer the necessary percentage into your checking account if they don't hear from you by a certain date.

This level of oversight ensures you meet your obligations, but it’s much better to be in control and avoid any unwelcome surprises.

How to manage RMDs

Planning your RMDs effectively helps not only avoid penalties but also optimize your overall retirement plan. Here are some ways fee-only tax advisers say you can approach it:

The best advice for getting all the details right is to seek out tax planning guidance from a highly qualified, fee-only adviser. This ensures you’re making informed decisions tailored to your specific financial situation.

Keep track of year-end statements. Terry Savage, a nationally syndicated personal finance columnist and author of The Savage Truth on Money, advises: “Remember to keep your year-end statements from all your retirement accounts, the ones from last December. That total is the basis for your RMD. Calculate the amount in January and have it all in cash. Then you can take distributions from one or more IRAs throughout the year. And be sure to have at least 20% withheld from each distribution for income taxes.” (Note: 401(k) distributions must be taken separately from IRA accounts.)

Explore RMD-reduction strategies. One often overlooked strategy is a qualified charitable distribution (QCD), which is particularly valuable for those in higher tax brackets.

Kendrick Mattox, CFA, Senior Wealth Adviser with Edge Capital Group, says: “For many of our clients, they do not need the income from their RMD, so we often recommend they consider making charitable gifts from their IRA in lieu of taking their RMD. They do not have to pay taxes on QCDs, as they are not taking it as income. This is especially beneficial in years where a client is claiming the standard deduction because their income is lowered by not taking the RMD and by claiming the standard deduction. It’s a win-win situation.”

Just keep in mind that while QCDs can be a great option for reducing your taxable income, they can replace your RMD only up to the QCD limit of $105,000 in 2024. If your RMD exceeds this amount, you will still be required to take the difference as an RMD. Additionally, remember that QCDs cannot be treated as charitable deductions.

Strategically manage inherited IRA withdrawals. Skipping or delaying RMDs from an inherited IRA may lead to significant future tax issues, especially if the account is large. To minimize your tax burden, consider spreading withdrawals over the full 10-year period, which can help keep your income in lower tax brackets.

Depending on your financial situation, such as nearing retirement or moving to a lower-tax state, it might be beneficial to time larger withdrawals when your income is lower.

When it comes to RMDs, there’s no free lunch — unless you plan carefully. Whether you’re taking your first RMD or managing an inherited IRA, a well-thought-out strategy ensures that you stay in control of your financial future, serving yourself the best possible outcome at the retirement table.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The end-of-year tax planning we do for our clients typically starts on October 1. Here are five of the December 31 deadlines we are evaluating.

1. Required minimum distributions (RMDs)

This is essentially Uncle Sam sticking his hand out, demanding you pay the tax bill you’ve been deferring for 50 years. RMD rules and ages have become very complicated since the SECURE and SECURE 2.0 Acts. Those acts shifted the starting age from 70½ to 72, 73 or 75, based on your year of birth. You must take your first RMD by December 31 of the year you hit that age and by December 31 of every subsequent year.

First-year exception: In that first year, you are allowed to delay your distribution until April 1 of the following year. For example, if I hit 73 this year, I could delay my distribution until April 1, 2025. Here’s the catch: I’d have to take another by December 31, 2025. Taking two RMDs in one year doesn’t make sense in most situations, unless you see a significant income drop in that year.

2. Roth conversions

The sweet spot for most retirees doing Roth conversions is between their retirement and when they start Social Security and RMDs. It’s like seeing a yellow sale tag on your tax bill. However, unlike Roth (and traditional) IRA “contributions,” Roth “conversions” have a December 31 deadline.

This can be quite a complicated calculation if done properly. You should be considering current vs future income tax brackets, capital gains brackets and Medicare IRMAA (income-related monthly adjustment amount). However, the actual conversion should be fairly easy if you have a traditional IRA and Roth IRA at the same custodian. If the accounts are with different institutions, it’s better to get an early start.

If you’re trying to figure out whether a conversion makes sense for you, you can use a free version of our planning software.

3. Realizing losses and gains

As of this writing, 2024 has been a very good year for the stock market. But for all you stock pickers out there, you likely have some losers. Maybe you bought Nike before it admitted that cutting out many of its retail partners was a bad idea. Or perhaps you bought Amazon before it announced the consumer economy was softening. The silver lining is that you can realize some of those losses. This will help to offset the gains from all those winners you picked.

For retirees, there can be significant opportunity if you are no longer earning an income. Those in the 10% and 12% income tax brackets pay a 0% capital gains rate. For our clients in this situation, we calculate how much they can sell to stay in this bracket.

4.  Charitable giving

With the doubling of the standard deduction under the Tax Cuts and Jobs Act (TCJA), also known as the “Trump tax cuts,” and the TCJA’s caps on state and local income taxes, very few retirees itemize deductions these days. However, that does not mean there isn’t any tax benefit to giving. If you’re 70½, you can realize a tax benefit by giving directly from your IRA. Regardless of age, you can give multiple years at once using a donor-advised fund, to get above the standard deduction. You can also give shares of appreciated stock to avoid capital gains taxes.

Regardless of the strategy you use to give, the deadline for all charitable giving is December 31.

5. Rollovers take advantage of IRA RMD aggregation and QCDs.

This one definitely doesn’t make most of the December 31st lists. However, it is important if you want to simplify your RMDs in retirement. IRAs generally allow for aggregation for RMD purposes. However, employer-sponsored plans do not.

Example: You have $2 million across three IRAs and one 401(k). You calculate your total RMD to be $80,000. You can take the IRA portion from any of the IRAs. However, the portion from the 401(k) must come separately from that account based on that balance. If your money was in four IRAs, you would be able to take just one RMD from any of the accounts. Not only does this simplify the process, but it allows you to defer distributions on accounts where the investments are down that year.

As mentioned in the charitable giving section, you can give money directly from your IRA to charity via a qualified charitable distribution (QCD). You cannot do this from an employer-sponsored plan. If you want to do this in 2025, the plan must be rolled into an IRA by December 31, 2024. You can learn more about QCDs in the article When RMDs Loom Large, QCDs Offer a Gratifying Tax Break.

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• Don't Wait: Make Your Year-End Money Moves Now
• Before Doing a Roth Conversion, Evaluate These Three Thresholds
• Donor-Advised Funds: A Tax-Savvy Way to Rebalance Your Portfolio
• How to Optimize Your RMDs in Retirement
• The Three Biggest Retirement Planning Gaps I See Among DIYers
• Five Thoughts About the Election From a Financial Planner

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That surprises a lot of people, especially those who anticipate their tax bill will go down once they stop working. Unfortunately, Uncle Sam is just as interested in you in retirement as he was in your working years — in some ways even more so.

Often, a good chunk of retirement savings is in tax-deferred accounts, such as traditional IRAs or 401(k)s. The IRS allowed you to make contributions to those accounts over the years without paying taxes on that income.

Eventually, though, the “deferred” part of “tax-deferred” comes into play, and the IRS wants the money you postponed paying. When you retire and start withdrawing money from those accounts to live on, the withdrawals are taxed as income. Plus, when you hit age 73, required minimum distributions (RMDs) kick in, and the federal government requires you to withdraw a certain percentage each year, whether you want to or not. As you can see, there comes a point where the IRS loses patience with waiting for its money.

Why tax-efficient strategies are important

RMDs are just one of the many reasons tax-efficient strategies should be a significant part of your financial planning. Sadly, for many people, this doesn’t happen at all. Or, if it does happen, it may consist almost entirely of tax-loss harvesting, a strategy that consists of reviewing investments at the end of the year with an eye on the winners and losers. The idea is to sell stock that is worth less than when you paid for it. The loss you take can help offset gains you made with other investments, reducing your overall tax bill.

It’s a strategy that works well for some people, but one strategy put into action at the end of the year hardly constitutes a tax-efficient strategy. Ideally, this happens year-round as you and your financial adviser stay aware of the tax implications of all your financial moves and are always on the lookout for opportunities to pay less to Uncle Sam and keep more in your pocket.

What might such strategies include? Here are a few examples:

1. Setting up a qualified charitable distribution.

This strategy, commonly referred to as a QCD, goes hand-in-hand with RMDs. Here’s how it works: When you withdraw money from an IRA, instead of moving the money into a personal account, you can transfer the funds directly to a nonprofit or a church. In that case, the money is not taxed. You keep your tax bill lower, while at the same time contributing to a favorite cause. A bonus is: You don’t have to itemize deductions to take advantage of the QCD.

Even if you use the standard deduction, the option is there. QCDs do come with rules, including you must be at least 70½ years old, so it’s important to understand the details. A financial professional who has worked with QCDs can help you find your way around any difficulties.

2. Making Roth conversions.

Roth conversions have become one of the most popular ways to lower your future tax bills. The conversion involves moving your money from a tax-deferred account, such as a traditional IRA or 401(k), to a Roth IRA. The money is taxed when you make the conversion, but it then grows tax-free. When you make withdrawals in retirement, you pay no taxes.

One misconception people have is if they are in the highest tax bracket — 37% — then it doesn’t make sense to consider a Roth because the taxes on the transfer would be too high. But the conversion can still pay off, even in the higher tax bracket. Plus, for those who don’t anticipate that they will need to spend the money in the IRA, a Roth is a more tax-efficient way to leave a legacy to your beneficiaries than a traditional IRA.

3. Preparing for a potential tax increase in less than two years.

While some people hope their tax bill will drop in retirement, we all could be looking at higher taxes in less than two years. That is because the Tax Cuts and Jobs Act of 2017 expires at the end of 2025. Unless Congress passes legislation to change things, the tax brackets are scheduled to go up as of January 1, 2026, returning to where they were before the act was passed.

Right now, many people aren’t paying attention to that looming jolt to their tax bill, but they could be in for a rude awakening. The return of tax brackets to their pre-2017 level is one more important reason why tax-efficient strategies are needed. QCDs and Roth conversions can help, but there are other strategies to consider as you get ready for 2026.

The main thing, though, is to be aware of the pending increase and to have a plan in place to try to counteract it.

As you can see, planning for taxes can be even more important than the rate of return on your money. You don’t want to grow your money only to see Uncle Sam arrive with oversized pruning shears to snip that growth away.

The good news is you don’t have to do your planning alone. A financial professional with a good understanding of taxes can help you plot a course of action that will work best for your needs — and keep your tax bill as low as possible in the process.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 2446435 07/24

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The end of the year marks an important time for retirees: 401(k) contributions are due, required minimum distributions (RMDs) must be taken and tax strategies like charitable donations or Roth conversions must be submitted.

Unfortunately, many retirees wait until the last minute to get their finances in order, which can lead to costly mistakes as the end of the year approaches. Thinking proactively about your tax strategy and other year-end financial moves gives you enough time to make the right decisions, rather than rushed decisions.

Why plan ahead?

Everyone’s financial goals and needs are unique, which means the strategies that might work for one person may not be the best fit for another. Thinking about year-end money moves now, instead of late November or December, gives you time to research strategies and go through various scenarios. For example, a financial planner can run models to confirm if doing a Roth conversion this year will save you money in the long run or if it makes more sense to wait until you’re in a lower tax bracket.

Thinking proactively about year-end financial planning helps you meet deadlines, as well. The processing times for RMD requests and Roth conversions have increased post-pandemic. Even if you get your request in by December 1, some companies operate on a “best effort” to have the request completed before the end of the year, but that isn’t guaranteed. Why wait and put yourself through the stress of potentially missing the year-end deadline?

It’s especially important to think proactively this year because of the upcoming election and the potential for federal interest rate reductions. When will the Fed cut rates? Many are predicting as soon as September, which could have a major impact on investors and savers who have been benefiting from higher-than-normal interest rates.

Elections also bring the possibility of policy changes, from taxes and trade regulations to fiscal spending. For instance, taxes are expected to increase in 2026 unless Congress extends the current tax cuts. If taxes go up, you may benefit from leveraging certain tax-saving strategies in 2024 and 2025, and you’ll want to give yourself enough time to determine the right moves for your unique situation.

Year-end money moves to consider:

1. Tax strategies

Roth conversions are a common way to lower your long-term tax liability by converting money in a 401(k) or traditional IRA into a Roth IRA. You’ll pay taxes on the converted funds at your current tax rate, but those dollars can then grow tax-free and be withdrawn tax-free in retirement. Run the numbers now to see whether you’ll save money in the long run by paying taxes today. A CPA might be able to help you with this, but they are commonly concerned with lowering your tax liability for the current year. Instead, consider meeting with a tax planner who thinks about long-term strategy. Our firm has a tax attorney on retainer to ensure we offer the highest level of expertise as our clients consider the pros and cons of a Roth conversion.

Another common tax-saving strategy is to give to charity, which allows you to help the causes you care about and lower your taxable income. If donating to charity is a priority for you, consider opening a donor-advised fund (DAF). Most people don’t think about giving to charity until the holidays roll around, but it can take several weeks to set up a DAF, so it’s best to start the process sooner rather than later.

2. RMDs

Retirees who have reached age 72 or 73, depending on the year they were born, must take their RMDs by December 31. Some financial advisers might tell you to wait until later in the year to claim your RMDs to give your account as much time to grow as possible. However, waiting until the last minute can lead to delays and mistakes. Millions of retirees will be submitting their RMD requests in November and December, and you don’t want to be competing with them for attention.

Claiming your RMDs earlier in the fall can help you strategize your tax situation. Withdrawing a large sum of money at the end of the year could unintentionally put you into a higher tax bracket, but you can plan for the extra income if you work proactively. It’s also important to avoid taking withdrawals when your accounts are down, and the election could lead to a wake of volatility at the end of the year. Thinking proactively about your RMDs will help you find a more optimal time to withdraw.

3. Investment changes

With the Federal Reserve expected to lower interest rates this fall, many investors are facing renewal rate risk. If you’ve been benefiting from the current high-interest-rate environment, those same returns may not be available to you toward the end of the year, but there are ways to decrease renewal rate risk. For example, you may have bought a one- or two-year CD that’s been performing well, but it’s maturing this fall. If you work proactively, a financial planner may be able to help you lock in your current rate of return for another 18-36 months.

You also may want to consider rebalancing your portfolio if you’re taking on more risk than necessary. While Wall Street tends to perform well in the long term following election years, investors may experience some volatility in the short term leading up to November. Now is a great time to look at your portfolio and make sure you have a long-term strategy designed to withstand market fluctuations.

Good financial planning is all about being proactive instead of reactive. Instead of having a set-it-and-forget-it approach, consider reviewing your plan now, again at the end of the year and again in another six months, at minimum. This will help you avoid the end-of-year rush and help you create a comprehensive plan designed to protect you from the inevitable ups and downs of the economy.

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• Six Custom Tax Planning Tips for High-Income Individuals and Families

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

RMD stands for required minimum distribution, three seemingly simple words that are fraught with financial implications. What is their significance? Simply this: Once you reach a certain age, the IRS will require that you begin withdrawals from your tax-deferred retirement accounts, such as traditional IRAs or 401(k)s. You will have to make those withdrawals annually even if you keep working, don’t need the money and even if the markets are down and you prefer to wait for a recovery to regain losses. Failure to take your RMD will result in a stiff excise tax penalty.

The reason for these forced withdrawals? Very simple. You haven’t paid ordinary income tax on these accounts — and Uncle Sam is tired of waiting around. For years, even decades in many cases, you’ve been allowed to defer the tax on these accounts, resulting in compounding interest. That was advantageous for you, but at the same time that you were constructing a nice nest egg for retirement, you were also building up an IOU to the IRS. After all, the tax bill on that money was deferred, not eliminated. Once you retire, any money you withdraw from these accounts is taxed at current ordinary income tax rates.

Once you are of RMD age, you are required to take annual distributions. Failure to complete your mandated annual distribution will result in a 25% excise tax penalty. And all this time, you thought these accounts belonged 100% to you. You forgot that you have a “silent partner” in these accounts with you. Although, your “silent partner” doesn’t remain silent forever.

Like it or not, if any of your retirement savings are in a tax-deferred account, then the RMD will affect you at some point. That’s why it’s important to understand RMDs, how they work, what to expect from them and what you can do to soften the blow to your wallet.

Three key pieces of information you should be aware of are:

1. The age when your RMDs begin to apply.

The magic age for RMDs is fully dependent on when you were born. The RMD age is 70½ for those born before July 1, 1949; 72 for those born between July 2, 1949, and Dec. 31, 1950; 73 for those born between Jan. 1, 1951, and Dec. 31, 1959; and 75 for those born on or after Jan. 1, 1960.

Understanding and being prepared for when you are required to begin your RMDs is a crucial component of a successful retirement. Unfortunately, many are caught off guard and, consequently, suffer large and unnecessary tax burdens.

2. The withdrawal percentage rises with each passing year.

Many people, even when they know about RMDs, are surprised to learn that the percentage amount you must withdraw is not static. It increases each year through age 90.

Just a few examples: At age 72, the withdrawal percentage is 3.65%; at age 75, it is 4.07%; at age 80, it is 5.16%; and at age 90, it is 8.77%. This becomes especially frustrating when you are watching the balance in the account go down while the percentage you must withdraw increases each year.

3. Lack of an RMD strategy could prove costly.

As with nearly everything in retirement, it’s important to have a plan for your RMDs. We see many folks who take their RMDs and don’t need the income. So, in their attempt to be savvy, they reinvest the net proceeds into a taxable vehicle to continue on the path of growth.

The problem with this? As that money grows inside of that taxable vehicle, it is taxed again at capital gains tax rates, thus unknowingly giving Uncle Sam a second bite. This is where it comes in handy to have a tax-efficient financial professional in your corner who understands tax planning and can help you come up with strong solutions.

What are strategies you can use to help limit the amount you pay Uncle Sam?

One unique strategy is to break up the IRA into two IRAs, with IRA No. 1 invested in the market and IRA No. 2 kept out of the market. This way, if the market is down, you can withdraw the full RMD amount from IRA No. 2. If the market is doing well, you can withdraw the RMD from IRA No. 1.

Another strategy is to consider a Roth conversion. This can be a more sophisticated strategy, so be sure that your adviser is knowledgeable and experienced in helping their clients complete this. The idea here is to break off a specific amount of your IRA and convert or reposition that amount to a Roth IRA. Be advised that whatever amount that you do convert will be subject to your specific ordinary income tax rates, for that calendar year. For many, this can be an effective long-term strategy.

Ideally, you don’t want to wait until you are already in retirement before you start planning how you will handle the RMDs — and the other aspects of your retirement. It’s a good idea to seek guidance from a financial professional, so you get everything organized well in advance.

It’s about planning and being proactive, not being reactive.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Divecha Financial.

Insurance products are offered through the insurance business Divecha Financial. Divecha Financial is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Divecha Financial are not subject to Investment Adviser requirements. AEWM and Divecha Financial are not affiliated companies.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. 2425983 07/24

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• The Best Way to Defer RMDs (and Their Tax Bills): QLACs

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

You must start taking RMDs from your IRA, 401(k) plan or other qualified retirement plan when you reach age 73. The only good way to defer some of them is to transfer a portion of your retirement plan assets to a qualified longevity annuity contract (QLAC). The money in a QLAC is excluded from plan assets on which RMDs are calculated.

A type of deferred lifetime income annuity that meets IRS requirements, a QLAC lets you keep more of your retirement plan intact and tax-deferred longer. Under the SECURE 2.0 Act, an individual can place up to $200,000 in a QLAC. You must start taking income payments from a QLAC at 85 but may begin sooner.

To purchase a QLAC, you’ll transfer funds from your IRA, 401(k) or other eligible retirement plan to an annuity with a life insurer. This single premium funds the QLAC. Because the transfer is from one plan custodian to another, it’s tax-free.

Lifetime guaranteed income reduces financial risk

Many people run the risk of running out of money if they live to a ripe old age. A QLAC reduces that risk because its payments, just like pension-plan income, are guaranteed to continue at the same level no matter how long you live, even if it’s past 100.

QLACs have an accumulation phase where interest earnings are held and reinvested by the insurance company, and a payout phase, also called annuitization. Future income is guaranteed. You’ll know what the guaranteed payout will be before depositing your funds.

You choose when to start receiving a stream of monthly lifetime income, but it must be by age 85 at the latest. Like other retirement plan distributions, the income will be fully taxable then. But you’ll have gained a number of years of valuable deferral of income taxes.

You don’t have to invest $200,000 all at once. You could start with, say, $75,000 in one QLAC and place $125,000 in a second QLAC later on. You could stagger the income start dates, with the first QLAC paying out when you reach 80 and the second one staring at 85, for example.

The QLAC limit of $200,000 is the current lifetime limit. The amount will be adjusted for inflation in future years.

Delaying RMDs isn’t the only benefit. More important, you’ll create a larger stream of income you can’t outlive. You can buy a QLAC at any age. The earlier you buy a QLAC, the longer you get to build up principal and the bigger payout you’ll ultimately receive.

Because you’ll have a new source of future guaranteed income, you may be comfortable taking more market risk with other assets in your plans and potentially getting higher returns.

A look at your payout options

As with any deferred income annuity, you’re no longer in control of the principal with a QLAC. You’ve deposited it with an insurer in exchange for a contract for future income.

You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse under IRS death-transfer rules. Most married individuals choose the joint option so that their spouse will still get lifetime payments if they predecease him or her.

With the cash-refund option, beneficiaries will get a lump-sum payout for any of the initial deposit premium not yet paid out at the death of the annuitant(s). Most insurers reduce future monthly payments if you choose this option.

Shop around for the best deal on QLACs

QLACs are offered by many life insurers. The market is competitive, and payouts and contract provisions vary considerably.

If you consider products from only one or two insurers, it’s unlikely you’ll get the best deal. An annuity agency that offers products from many insurance companies should give you expert advice and help you make apple-to-apple comparisons.

The agency earns a commission, but it’s paid by the insurance company, not the buyer. All of your deposit goes to work for you immediately.

Review the insurer’s financial strength, as judged by AM Best and other credit rating agencies, because you’ll need a company that can deliver on its promise for many years.

QLACs aren’t for everyone. If you need all of your RMDs for living expenses, you won’t be able to afford to defer some. But many retirees can benefit from this product that’s designed to give you a bigger future stream of income for your life or the life of your spouse.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Think about it — during what I call the Dynamic Decade+, the period between ages 62 and 75 — there are consequential decisions associated with retirement that should be made. That includes deciding when to stop working, choosing when to claim Social Security, starting Medicare, planning for required minimum distributions (RMDs), considering when to start withdrawing money from your retirement accounts — and more.

What’s more, these decisions are intimately connected, with one decision affecting the next like a row of dominos falling. These decisions are also closely correlated to your tax situation. Essentially, the decisions you make before and during retirement about these issues will likely set your taxes at a certain level for the rest of your retirement, barring major changes in federal tax laws.

These are not decisions that you want to make without a good deal of thought, because they can be so consequential and complex. While complexity can be annoying, it also creates opportunity. If you’re like many pre-retirees or retirees, you may have little idea about how complicated these matters are until you start investigating them.

In this article, you’ll gain an appreciation for the opportunity that retirement creates to control your financial destiny and tax situation through the decisions I’m going to walk you through — some that are irrevocable. These are all decisions that you’ll need to make between ages 62 and 75.

The Dynamic Decade+

Briefly, here are some of the major milestones you’ll hit in the Dynamic Decade+ and their financial implications:

Quitting employment. At some point, you — and your spouse if you have one — will stop working. The average retirement age in the U.S. is 62. When you stop working, you’ll need to either begin Social Security, draw on your retirement savings or both, unless you have an alternative method to generate income.

Enrolling in Medicare. Initial Medicare enrollment begins three months before you turn 65 and ends three months after the month in which you turn 65. Medicare Part B costs $174.70 each month in 2024 — costs will increase if your income reaches certain levels. From there, you can select a Medicare Advantage plan or a Medicare supplemental plan, each with their own specific premiums, copays and deductibles. Medicare Part D, which is prescription drug coverage, also has costs, which can also vary based on income. You can change Medicare Advantage, supplemental and Part D providers once a year during open enrollment, which occurs yearly October 15 through December 7.

Claiming Social Security. The earliest age to claim Social Security is 62, and the latest is 70. If you claim at 62 in 2024, your benefit will be about 30% less than if you waited to claim until your full retirement age of 67. In contrast, if you delay claiming past full retirement age, you will receive 8% in additional income for each year you wait. Up to 85% of your Social Security may be taxable if your individual income is above $34,000 a year. If your income is between $25,000 and $34,000, up to 50% may be taxable.

Receiving a defined benefit pension. When you stop working, you will need to decide when and how to take your defined benefit pension, if you have one. Most entities offering a defined benefit pension will allow you to take it either as a lump sum that you can roll over into an IRA, or you can receive monthly income instead. If you are married, you will have to decide whether to take a joint or single payout; the joint payout is less, but the single payout would mean your pension dies when you do. Defined benefit pensions are taxable at your household marginal tax rate.

Taking retirement distributions. The SECURE 2.0 Act further delayed the point at which you must take distributions from your traditional retirement accounts. If you turn 73 after Jan. 1, 2023, you will be required to take RMDs at age 73. However, if you turn 75 after Jan. 1, 2033, you must take RMDs by age 75. Traditional retirement benefits are taxable at your individual marginal tax rate.

Deciding how to invest retirement savings. At some point during this journey, you must decide how to invest your retirement savings to meet your retirement-specific needs. You can, of course, continue to invest the same way you did when you were working. However, considering that you need to replace the income that you no longer have from working, it’s worthwhile to consider a different approach. Many individuals find their risk tolerance is reduced in retirement, which is another consideration.

Determine distribution strategies

Embedded in all of these decisions is the challenge of creating a sustainable income that will cover your expenses for the rest of your retirement, regardless of how long that lasts. You must take into account your projected expenses and income, which will flow from all of the decisions you’ll make between ages 62 and 75. If you’re like many people, you’ll want to make sure that you can maintain your standard of living throughout retirement.

You’ve also spent decades saving for this moment in time — the moment you retire. You likely have assets in a variety of different accounts. Additionally, they may be subject to different types of taxation. You and your spouse may have traditional IRAs, taxable brokerage accounts and a Roth IRA. You’ll draw monthly income from Social Security, but odds are that Social Security won’t be enough to pay all your bills and give you the standard of living that you want to maintain in retirement.

How taxes fit in

In the absence of an intentional plan, taxes can take a big bite out of your distribution strategy. As I mentioned above, Social Security is taxed for most people, as are defined benefit pensions and distributions from traditional IRAs. You must take those distributions when you turn 73 or 75, regardless of whether you need that money on or not. While delaying RMDs from 70½ to 72, 73 and ultimately 75 can seem like a gift, there’s also a downside. That’s because RMDs are calculated based on life expectancy, and when you are older, your life expectancy is shorter, which means higher RMDs. Higher RMDs mean more taxes.

Then there is the expense side. If your taxable income increases past a certain level, your Medicare Part B premiums can increase. For example, if you and your spouse have modified adjusted gross income greater than $206,000 and less than or equal to $258,000, your premiums would rise by $69.90 a month per person. That’s not unimaginable for many affluent individuals preparing to retire. If you have a joint Social Security benefit of $6,500 a month, bond income of $3,000 a month from a taxable brokerage account and a $2.5 million IRA with distributions of about $100,000 a year, you could easily hit that level. 

But what if, instead, you engaged in intentional tax minimization planning so that you converted at least some of your traditional IRA to a Roth IRA before you turned 75 so that your RMDs were significantly reduced? This might involve retiring but waiting to claim Social Security so that you can have reduced income one year and convert funds from your traditional IRA at a lower tax rate. This is possible if you have money saved in a taxable brokerage account or cash in the bank that you could live on without tapping other sources of income.

This is just one potential strategy you could avail yourself through learning enough about the tax laws and potential distribution strategies or by partnering with a knowledgeable and tax-savvy retirement income financial planner.

However you do it, don’t wait. Many of the decisions you’ll make during the Dynamic Decade+ are irrevocable and time-sensitive. Before you get to the point of making a mistake that might create tax headaches for you later in retirement, investigate your options so that you can, to the greatest possible extent, optimize your retirement for taxes and sustainable income.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The old rule was you had to begin RMDs at 70½ years old. The SECURE Act updated the age for RMDs to 72. The SECURE 2.0 Act updated the age to 73. The raise in RMD age lets retirement assets build longer, but there are still many paths you can take with current RMDs and future RMD planning. It all depends on where you are in your financial journey.

Let’s say you are in your 20s or 30s and have a 401(k) at work. You are contributing to a pre-tax vehicle, taking full advantage of the employer match and plan on working there for decades. When you retire, you will have accumulated a large pre-tax retirement nest egg. Would you rather have six figures in a pre-tax retirement account or six figures in a Roth? Most would prefer the latter.

A potential way to reduce the RMD requirement later in life is to switch your deferral from pre-tax to Roth now, as Roth IRAs do not have the RMD requirement. While employer matching contributions still need to be invested pre-tax, maxing out your Roth contributions will minimize your RMDs.

You might consider a Roth conversion

As it is uncommon to stick with the same employer for decades, one strategy clients can utilize when switching jobs is a conversion. A Roth conversion is when you take a pre-tax account, such as a traditional IRA, and move all, or a partial amount, to a Roth. This creates a taxable event (federal and sometimes state), which may increase or decrease your tax bill or refund.

For readers who are 73 and older — I work with a client who is self-employed and is adding to her Simplified Employee Pension (SEP) plan IRA while being paid out RMDs. She consistently adds hundreds of dollars each month to her IRA and has her RMD scheduled to pay out at the end of the year. Because of her age and high balance, the RMD is significant, making it difficult for her to build her retirement savings.

That said, it still made financial sense for her to continue to add to her SEP. We just needed to figure out a way to stay invested.

Ultimately, we set up a non-retirement account at the SEP-IRA custodian. Each year, her SEP RMD is automatically calculated and paid to her non-retirement account. She utilizes the same mutual fund in her non-retirement account and SEP account, so when the RMD occurs, it satisfies her RMD requirement and keeps her invested. I utilize this same strategy for people who have an RMD requirement but do not need the RMD to supplement retirement income.

Even if you are RMD age, it is not too late to do Roth conversions. They’re a great way to reduce future RMDs, since Roth IRAs do not have an RMD. The year you do the conversion, you must take your RMD first, and then you can convert any amount to a Roth. While there will be taxes owed on the RMD amount and also on the conversion amount, if we can keep someone in the same tax bracket, that is a win. If the conversion sends some of their income into the next tax bracket, they did too much.

Look at your tax rates

Most people between ages 40 and 70 have already accumulated wealth in a pre-tax 401(k) or traditional IRA. If you only have a 401(k) and are adding to the pre-tax position, I recommend looking closer at your tax rates. You may find it beneficial to reduce the pre-tax 401(k) addition and increase the Roth 401(k) contribution. Maybe there is an old 401(k) from a previous employer or a traditional IRA you could convert, if it doesn’t send you into the next tax bracket. Or you could do partial amounts over time to stay in the same tax bracket.

I work with a married couple — one of them is still working, and the other is retired. For the retired one, we convert the same amount of their former W-2 wages to a Roth. The household income for the year is the same, even though only one spouse works. They remain in the 12% federal tax bracket. This strategy works great if the couple can live off the W-2 wages, or they have extra cash in savings to supplement income.

I worked with a single client who was also in the 12% tax bracket. She strategically retired a few months into the year and wanted to convert most of her traditional IRA in the first year of retirement. Her conversion amount plus her partial year earned income equaled her previous year’s income, so taxes were similar for her. She lived off her savings account and completed another conversion the year after.

The best course of action for all is to team up with a savvy tax preparer and a financial adviser. There are many options, but I would recommend someone you trust and enjoy working with. Feeling educated and informed on the choices around RMDs will help you make the best decisions for you and your finances.

Case studies may not be representative of the results of all clients and are not indicative of future performance or success.

The opinions expressed are those of the author and do not necessarily represent those of the employing firm. Case studies may not be representative of the results of all clients and are not indicative of future performance or success.

*These examples provided are hypothetical situations based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. CBSI-6487050.1-0324-0426

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

We do this with smart tax planning to help ensure you do not have to pay more taxes than absolutely necessary. Do you ever feel like you are overpaying in taxes each year? Our goal is to change that.

The reason tax planning with pensions can be difficult, and why most people with pensions pay more in taxes than others, is because pensions push your income higher — and that’s without factoring in Social Security income and required minimum distributions (RMDs). RMDs are when you are forced to take out money from your tax-deferred investments at either the age of 73 or 75.

When you combine all these items, you will quickly find yourself in what's called the Social Security tax torpedo, which will decrease the amount you receive from Social Security and force you to pay more in taxes.

What is the Social Security tax torpedo?

The Social Security tax torpedo occurs when your income is high enough that it starts to force your Social Security to be nearly fully taxable. Our goal is to keep our clients out of that torpedo by reducing their RMDs in the future so they can potentially receive more of their Social Security tax-free. Unfortunately, for those who have larger pensions, this may not be possible, and your Social Security may automatically be fully taxable.

Medicare premiums could go up

With a larger pension and RMDs, you also risk forcing yourself into higher Medicare premium tiers, which means you have to pay more for the same Medicare coverage as the person down the street who doesn’t have as much retirement income as you do. It's important to plan so that you pay your fair share of Medicare premiums and nothing more. (Read more about this Medicare surcharge in the article Four Things to Know if Medicare’s IRMAA Kicks In.)

With tax rates expected to increase due to our debt crisis, increased spending, and struggles with Social Security and Medicare funding, this has become a timely and important topic. So if you have a pension, the time to start planning is now to ensure you can pay lower taxes and allow yourself to be in a lower income tax bracket in the future.

Now, I’m not here to tell you to live on a lower income in the future. I'm telling you to be tax-smart and be able to pull from tax-free investments so that you can still live on the amount you want but show a lower income when reporting your income for taxes. I’m suggesting that you implement tax strategies today, to avoid paying more than your share in the future.

How do we fix this?

Fixing this requires tax-smart planning, which involves strategies such as a Roth conversion, where you pay taxes on those tax-deferred investments now and move them to a Roth IRA. This is a very popular strategy right now to take advantage of current low tax rates — especially considering most people will not likely be in a lower tax bracket in the future.

For many people, learning that they may be in a higher or the same tax bracket in the future may be a shock, because all your life you've been told that you'll be in a lower tax bracket in the future. That is true for some people, but when you have a pension and you've been a diligent saver and have the majority of your savings in tax-deferred investments, that's likely to mean that your income is going to be higher in the future than most.

Which, again, is why it's important for you to have tax-smart strategies now. This is also why we recommend you work with financial planners who understand pensions and the ramifications for them down the road. If you work with a planner who does not work with pensions, then your strategy could be lacking.

On the other hand, congrats

To end this article on a positive note, I do want to make it very clear that because you have a pension, you are in a better place than most. In one of the videos on our YouTube channel, I discuss how valuable a $5,000-a-month pension is over time. Under specific calculations, it could mean the same as having nearly $1 million right now if you live for around 20 years or longer.

You can also learn more about tax planning with pensions by reading my book, I Hate Taxes.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But what I’m seeing almost as much these days are people who have been preparing for retirement for years and yet have no idea how they’ll turn their nest egg into the income they will need to get by.

They’ve focused on step No. 1 (saving and investing), but never moved on to step No. 2 (creating a reliable retirement paycheck).

They are in for a surprise because, without a proper income plan, these conscientious accumulators — who should be able to make a smooth transition into retirement — are instead likely to make some costly mistakes.

In my last article, I offered some do’s and don’ts — and one never — for those who are nearing retirement. Here are five more points to think about as you close in on that important day when your paycheck goes away:

1. DON’T rely on conventional wisdom when claiming Social Security.

There’s no one-size-fits-all answer here, so tune out the noise and run the numbers to see what’s best for you.

Most of the guidance I see urges retirees to maximize their Social Security benefits by waiting as long as possible to file. And that may make perfect sense for you (and your spouse, if you’re married). But it may not.

People often talk about their Social Security benefits as though that money is in some special silo, separate from the rest of their assets, when it should be part of a holistic income plan. Before you make the critical — and difficult to undo — decision about when to file, I urge you to do your research with your specific needs and goals in mind.

Some things to consider include:

• How will your various income streams hold up against inflation during a long retirement? In other words, what’s the best way to keep your money growing?
• How might a significant or lengthy market downturn affect your retirement withdrawal strategy? Having to sell stocks at a loss can have a lasting impact on the longevity of your nest egg.
• Do you hope to leave behind a legacy for your loved ones? Keep in mind that your adult children can’t inherit your Social Security payments when you die. (Only your spouse or an adult child with a disability can receive Social Security benefits based on your record after you pass.)

2. DON’T forget there will be tax implications for any income decision you make.

No one wants to see their hard-earned savings eaten up by taxes. But if you’re planning to pull a large amount of your retirement income from a tax-deferred 401(k), traditional IRA or similar plan, you could be looking at a burdensome tax bill every year. And you’ll likely end up paying taxes on a portion of your Social Security benefits as well.

To minimize the bite, your plan should be set up in a way that helps you manage your tax bracket from year to year based on your income needs.

3. DO make dealing with required minimum distributions (RMDs) an important part of your income plan.

Whether you need the money or not, at some point the IRS is going to force you to start taking distributions from your tax-deferred retirement accounts. The age when those RMDs must start is now 73, and it will eventually creep up to 75. But that day will come faster than you think.

Knowing what you plan to do with those mandated withdrawals could help you reduce your taxes and provide more opportunities to keep that money growing.

4. DO pay attention to how your retirement withdrawals might affect your asset allocation.

The risk in your portfolio can change — a little or a lot –– based on what happens to your various investments throughout the year. And selling certain holdings for income also can affect your mix. Rebalancing can help you keep your asset allocation in line with your risk tolerance as you move through retirement.

5. NEVER go into retirement without an income plan.

It’s preferable to work with a professional to draw up your income plan. If you thought accumulating those assets for retirement was tough, wait until you start using those funds. I often liken it to ascending and descending Mount Everest. We pay far more attention to what it takes for climbers to reach the peak, but in reality, coming back down is more treacherous.

Think of your retirement adviser as a sherpa who is dedicated to getting you safely and comfortably through the second half of your journey.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

These withdrawal requirements, called required minimum distributions (RMDs), mean that rising account balances lead to larger withdrawals and, in turn, greater taxable income. This can push people over the age of 72 into a higher income tax bracket or trigger the net investment income tax of 3.8% on returns from interest, dividends and capital gains. Such thresholds can come as an unwelcome surprise — especially for retirees who have more income than they need.

If this sounds like you, there is good news. Working with your own qualified tax professional, here are some ways to consider for allocating the extra income, including strategies that allow you to leave money to loved ones or causes that matter most to you.

Options to consider:

1. Make qualified charitable donations (QCDs).

With the passage of the federal SECURE 2.0 Act of 2022, individuals over the age of 70½ are eligible to transfer up to $105,000 from an individual retirement account (IRA) to a charity tax-free each year. Referred to as qualified charitable distributions (QCDs), these donations can be leveraged to avoid paying taxes on extra personal income. Eligible charitable organizations, typically 501(c)(3) organizations, also receive tax breaks on QCDs.

Still, you should be mindful of timing in light of the “first-dollars-out rule,” which states that the first dollars withdrawn from an IRA in any year are deemed to satisfy the RMD. Consider taking QCDs at the beginning of the year — before any RMD income is withdrawn — to offset taxable income. Unfortunately, RMD income can’t be offset by a QCD done later in the year.

This option can be suited for those who truly don’t need additional income and are already accustomed to making charitable contributions every year, especially since QCDs are irreversible once they’ve been transferred.

But the returns from QCDs extend beyond financial gains; philanthropic endeavors can advance the causes you care most about, help others in need and set a positive example for your children and grandchildren.

2. Convert pre-tax retirement accounts to Roth IRAs.

If you have retirement accounts with pre-tax contributions that are subject to income tax upon distribution — 401(k)s, traditional IRAs, 403(b)s and other similar plans — you might consider converting them to Roth IRAs, which offer after-tax contributions and qualified tax-free distributions. By doing so, you create an asset that is no longer subject to taxation under RMD requirements.

If appropriate for your individual set of circumstances, there are other benefits from taking this route. For one, all of the growth you see after a Roth conversion is truly yours — meaning you’ll spend less time trying to plan out withdrawals based on current tax policy. And you gain full control over the timing and amount of your own distributions.

The downsides? Well, for any Roth conversion, you’ll have to pay taxes upfront, which can leave you with thousands of dollars less. However, this move can be worth it in the long run.

Keep in mind that it’s important to consult and work closely with your qualified tax professional in determining and carrying out any course of action.

3. Use a life insurance policy to build intergenerational wealth.

If you’re in your 70s, now may be a good time to create as much opportunity for your grandchildren as possible. One way to do that is to take out a life insurance policy on your children that pays out a death a benefit to their children (your grandchildren).

You can start by setting up a trust that serves as the owner and beneficiary of the policy. That trust could then require that certain sums of money be used for specific purposes, such as college tuition or living expenses.

One advantage to considering a permanent life insurance policy is the potential for you to build leverage over time. Since a permanent life insurance strategy oriented around the death benefit hinges on the age and health of those being insured, it’s important to work with an insurance-licensed financial professional in seeking a suitable permanent life insurance policy.

Once a life insurance policy has been established, you won’t be able to withdraw from it like a bank account. So, before you divert your excess income to a life insurance policy, consider whether you may need that money later in life.

Your financial runway should match your needs

It’s easy to see the downsides of outliving your retirement income. But rarely do we expect our money to outlive us — which is what could happen if you save more money than you end up spending.

If you are unsure where you stand at the top of this year, take the time to assess your situation and consider working with financial and tax professionals to see if your nest egg is more than you may need. These strategies can guide you in putting extra funds toward planning your legacy.

This article, which has been obtained from an outside source and is provided as a courtesy by Stephen B. Dunbar III, JD, CLU, Executive Vice President of the Georgia Alabama Gulf Coast Branch of Equitable Advisors, LLC, does not offer or constitute, and should not be relied upon, as financial, investment, tax, legal advice. Your unique needs, goals and circumstances require the individualized attention of your own tax, legal, and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its affiliates do not provide tax or legal advice or services, nor do they endorse, approve, or make any representations as to the accuracy, completeness, or appropriateness of any part of any content linked to from this article. It is not possible to invest directly in an index. Stephen B. Dunbar III offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC. Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. GE-6363158.1(02/24)(exp.02/26)

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

2024 is no exception, with ongoing concerns about inflation and interest rates coupled with a presidential election. Given the complexities of the year ahead, it’s essential to draw upon expert insights to make well-informed decisions.

I am fortunate to have curated a network of 230 highly qualified registered investment advisers (fiduciaries) whose expertise spans various key areas, including maximizing savings and investments, minimizing taxes and ensuring robust estate planning.

So, leveraging my Wealthramp network, I tapped into five leading retirement planning experts, asking them about their current strategies to best prepare their clients for the challenges of 2024. Here’s what they said:

Consider the advantages of Roth conversions

“Roth IRAs offer benefits for both investors and their heirs,” explains financial adviser Katherine Brown of Joss Brown Wealth Advisors.

The allure of Roth IRAs lies in their provision for tax-free withdrawals. Recognizing this advantage, Brown advises individuals age 55 to 72 to consider converting smaller amounts of your traditional IRA to a Roth while in a lower tax bracket before required minimum distributions (RMDs) and Social Security benefits begin.

This strategy is particularly beneficial for those planning to leave an inheritance. By opting for a Roth IRA, heirs have the option to defer withdrawals, avoiding the necessity to deplete the account within 10 years and facing hefty taxes, a common scenario with traditional IRAs.

Brown emphasizes the importance of timely action, especially regarding backdoor Roth IRA conversions, a strategy often used by high-income earners who are ineligible to contribute directly to a Roth IRA. They can instead contribute to a traditional IRA and subsequently convert it to a Roth. “Many investors are contributing after-tax dollars into traditional IRAs, and the money is sitting in accounts that can be converted to a Roth IRA without double taxation,” she advises.

She further clarifies, “As long as there aren’t other rollover IRAs involved, it may be best to convert already-taxed money before regulators eliminate this loophole. If you have pre-tax funds from a previous rollover, transfer those to your company 401(k) prior to conversion to mitigate the tax implications on the pre-tax IRA funds.”

Brown also points out a commonly overlooked opportunity: after-tax money in company retirement accounts. “Many investors don't realize that these can be rolled over into a Roth IRA, rather than being cashed out,” she says.

Rebalance your portfolio

“Rebalance, rebalance, rebalance,” is the mantra Marc Lieberman, portfolio manager at Shorepine Wealth Management, stresses. He believes that while it might seem like routine advice, the act of fine-tuning your investment portfolio can yield significant benefits. Lieberman underscores the importance of this process, especially after several years marked by high market volatility.

He observes that many investors’ portfolios have likely drifted away from their intended allocations. “For example, fixed-income returns have been negative since July of 2020,” he notes.

With the possibility of the Federal Reserve reducing interest rates, Lieberman anticipates a positive turn for fixed-income markets. He warns that many investors might find themselves underweight in this asset class. “If you haven’t properly rebalanced your portfolio recently, now is a great time to do so,” he advises.

Lieberman also cautions investors to brace for heightened volatility in 2024. “In a year where we will see a presidential election, the Federal Reserve likely pivoting from raising to cutting rates, softer labor markets, weaker corporate profits and consumers running out of excess savings, I would expect markets to be volatile.”

To navigate this volatility, he suggests diversifying with gold and short-term Treasuries: “Gold can serve as a stabilizer in turbulent times, and the Treasuries could yield 3% to 5%, offering a safe harbor while waiting for more favorable conditions.”

Explore private debt for enhanced return potential

Eric Hutchens, president and chief investment officer at Allodium Investment Consultants, spotlights private debt as a key retirement income idea for 2024. “This type of fund offers attractive yields with great diversification benefits,” he asserts. Hutchens notes that private debt funds, by holding their loans to maturity, are not as susceptible to the market volatility that affects publicly traded stocks and bonds.

He elaborates on the variety within private debt funds, ranging from lower to higher risk profiles. "There is a wide spectrum of private debt funds, from less risky to more risky, and finding a high-quality private credit manager can add significant diversification and returns beyond traditional stocks and bonds," Hutchens explains.

However, he also highlights a potential trade-off in this asset class. “Investing in this asset class typically involves giving up some liquidity since the managers are holding the loans to maturity. However, the investors are compensated by an ‘illiquidity premium,’ which can add to their returns over time.”

Utilize high rates with a laddered approach

Financial adviser Melissa Walsh from Clarity Financial Design observes a growing preference among retirees and those nearing retirement for low-risk income options. “My first tip is to go ahead and lock in today’s attractive interest rates. Certificates of deposit and municipal bonds are both still appealing right now,” she advises. Currently, FDIC-insured CDs offer yields between 4% and 4.75% for maturities ranging from one to five years.

Walsh also highlights the tax benefits of municipal bonds for those anticipating a higher income tax bracket during retirement. “For those who expect to be in a higher income bracket during retirement, special consideration should be given to high-quality municipal bonds because interest from these bonds is exempt from federal tax,” she explains.

For managing investments and retirement income, Walsh suggests a “bucket approach.” She details this strategy:

“By segmenting funds for near-term needs and long-term investment, you’ll be better prepared to stick with your plan and withstand inevitable market volatility. In the first bucket, keep funds needed to cover your living expenses for the next 12 months and your emergency reserve funds in conservative interest-paying investments, such as a high-yield savings account or money market fund.

“In the second bucket, plan for near-term cash needs, such as those occurring in the next one to five years, by laddering CDs or high-quality bonds that mature when you expect to need the cash. Lastly, invest the remaining retirement portfolio in a diversified mix of stocks and bonds that suits your risk tolerance.”

Navigate changing tax laws without attempting to time Congress

Robert Carroll, managing director at Carnegie Investment Counsel, advises caution and strategic planning in light of evolving tax laws. “This year, avoid the urge to ‘do something,’” he firmly states.

With the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025, Carroll acknowledges the flood of strategies likely to emerge in response. However, he cautions against reactionary moves based on speculations about congressional actions. “The reality is no one knows for sure what will happen. For example, will the current provisions such as increased standard deduction limits be continued?”

Carroll argues that Congress often addresses issues closer to deadlines, suggesting there will be ample time to understand and adapt to any changes. He advises, “Take time now to better understand your tax situation. Do you itemize or take a standard deduction? What is your effective tax rate? Marginal tax rate? These variables provide important context for developing your tax planning strategy as any proposed policies are developed.”

He also highlights a significant opportunity for higher-income or net-worth families. With income limits sometimes restricting the ability to fund a traditional Roth IRA, Carroll points out, “More company retirement plans allow participants to make Roth contributions. The SECURE 2.0 Act, passed in 2022, expanded this feature, and now some plans offer the ability to contribute a certain amount of after-tax dollars and perform ‘in-plan’ conversions to a Roth.”

Carroll emphasizes the importance of integrating any Roth funding strategy into an overall financial plan, ideally with the guidance of a qualified tax professional.

Of course, not every move mentioned above is right for every person. You’ll want to consider your own circumstances and consult with a fee-only financial adviser to determine what adjustments are right for your situation, ensuring that the actions taken align with your specific financial goals and circumstances.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

This was a big moment for him, and he had done a great job up to this point. He was certainly ready to retire; he just needed a better plan to ensure he could enjoy retirement.

But I had to tell him, “You don’t have $1 million.”

He started to raise his voice as he said, “Yes, I do. Look at my statement. You’ll see a balance of $1 million.”

He was getting defensive, and rightly so; after all, he had spent the last three decades working to accumulate that amount.

The problem? He was missing something: The guy had $1 million saved, but not all of that $1 million was his, because Uncle Sam expected a cut of that money. My new client needed a tax-smart plan to kick Uncle Sam to the curb before he was forced to take that money out of his 401(k) in the form of required minimum distributions (RMDs).

Why is tax planning so important for those with $1 million or more in their 401(k)s or IRAs? Because you likely won’t be in a lower tax bracket in the future. (You can read more about this in my article Will You Pay Higher Taxes in Retirement?)

You’re probably thinking, “I’ll be in a lower bracket in retirement because I will no longer be working. That’s what I’ve been told all my life.” I’m sorry to break the news, but if you have significant money saved in your retirement accounts, your taxable income will include Social Security benefits and also withdrawals from your investments. (Even if you don’t want to take money from your retirement accounts, the IRS will force you to take them as RMDs once you hit the required age.)

What can wreak havoc on your retirement

The combination of Social Security benefits plus withdrawals from tax-deferred accounts can wreak havoc on your retirement. Your Social Security income will most likely be fully taxable if you have $1 million or more in tax-deferred accounts like a 401(k) or IRA and must take RMDs. You’ll be pushed into what I call the “Social Security tax torpedo,” where you could pay a 40% to 50% tax rate by taking extra withdrawals from your tax-deferred investments.

Is there anything you can do to avoid the “tax torpedo”? Fortunately, you don’t have to sit and hope for a better retirement. And you certainly don’t have to put your trust in Uncle Sam. Here are some tax-smart planning strategies for those with $1 million or more saved in an employer-sponsored retirement plan or traditional IRA.

Strategy #1: Consider a Roth conversion.

A Roth conversion is the top strategy I think you should be looking at right now. Roth conversions can result in lower RMDs and allow you to pay taxes at your current tax rates, which could be lower than what they will be in the future.

Why do we think tax rates will rise in coming years? To start, tax rates are set to go up in 2026, following the expiration of the Tax Cuts and Jobs Act. Unless Congress acts before then, taxes will revert to 2017 levels, which were higher than they are today. (Read more about this in my article What You Can Do Now to Avoid Paying Higher Taxes in 2026.)

Also, our country has a spending problem and a massive amount of debt — both reasons why tax rates could increase even more in the coming years. How will the government come up with the revenue to cover our debt crisis? Higher taxes seem to be the obvious answer.

Strategy #2: Avoid paying higher Medicare premiums.

Another strategy we look at for our clients with $1 million or more in tax-deferred accounts is to prepare for increased Medicare premiums. Known as the Medicare income-related monthly adjustment amount (IRMAA), this is an extra amount you pay for Medicare if your income exceeds a certain level.

The IRMAA look-back period is two years, so you’ll want to start thinking about how it could impact your Social Security benefits as soon as you become eligible to receive them. We’ve talked with people who are getting little to no Social Security income because they are paying surcharges on their Medicare premiums.

To reduce your taxable income and potentially avoid Medicare surcharges, you may want to get strategic with which accounts you take withdrawals from and in what order. You don’t want to do a great job of saving just to pay more for health care in retirement.

Strategy #3: Avoid the 'Social Security tax torpedo.'

Taxes were not charged on Social Security benefits before the 1980s. It used to be that if you were owed $2,000 in monthly income from Social Security, you would receive a check for the full amount.

Today, you likely won’t see that full $2,000 deposited into your bank account because of taxes unless you plan appropriately. Uncle Sam will get his share first, and you will get the rest. But it doesn’t have to be this way! Social Security benefits do not have to be taxable. Many of our clients pay no taxes on their Social Security income because we have implemented a plan to successfully lower their income in retirement by positioning their investments correctly.

Taking advantage of these strategies takes smart planning, and it must start today. My biggest advice is to get help from someone who specializes in working with people who have $1 million or more saved in retirement accounts. Your plan is more complex and will need more diligence than those who haven’t saved as much in their 401(k)s or IRAs as you have.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you’ve been saving in a 401(k) or other employer-sponsored retirement plan, a traditional IRA or other IRA-based plans, Uncle Sam will eventually come knocking for the tax revenue in the form of required minimum distributions (RMDs). An RMD is the minimum amount you must withdraw annually to avoid a tax penalty. The account owner is taxed at their income tax rate at the time of the withdrawal on the amount of the withdrawn RMD. The income from your RMD will be added to all your other taxable income to determine how much income tax you must pay for the year.

RMDs can hit you hard in retirement when you have to start withdrawing those funds annually, especially if you have a pension or other forms of taxable income that you already must consider when calculating your annual tax bill. The age at which you must start taking RMDs is 73, after Congress raised it in 2022 from 72. It will increase to age 75 in 2033.

Taking RMDs can:

• Push you into a higher tax bracket
• Cause your Social Security to be taxed at a higher rate
• Result in increased Medicare premiums
• Increase net investment income surcharges
• Raise your alternative minimum taxes

Managing your RMDs is the key to advanced tax planning and may save you significant taxes in retirement. Here are some strategies to help reduce or eliminate your RMDs:

1. Roth IRA conversion

Converting even a portion of your traditional IRA or retirement plan to a Roth IRA may offer significant financial advantages, partly because the money that is in a Roth IRA is not subject to RMDs. Any money you convert from a traditional 401(k), IRA or 403(b) to a Roth IRA or Roth 401(k) is not subject to RMDs and all of the growth on the account from the day of the conversion and all withdrawals from the Roth by you or your heirs will be completely tax-free. Withdrawals from a Roth IRA are tax-free as long as you are age 59½ or older and the account is at least five years old.

The rationale for doing a Roth conversion is that you want to pay the tax now (on the amount converted in a given year) rather than later in retirement when tax rates may be higher. Converting now allows you to take more control of your taxes. Wouldn’t you rather pay taxes at today’s known tax rates on the amount you convert, rather than pay taxes on larger account balances later in retirement at unknown future tax rates?

With advanced tax planning, you may be able to convert just enough of your traditional plans to Roth IRAs so that the new, lower RMDs won’t push you into a higher income tax bracket.

A key to understanding Roth conversions: valuing wealth in terms of purchasing power instead of total dollars.

When we think about money, we usually think in terms of having more dollars is better. Right? We all want our account balances to be as high as we can get them. I’m going to challenge that belief by suggesting to you that having “the most money” is not the best way to measure your affluence or wealth. I believe that the best way to measure wealth, or affluence, is by assessing your total purchasing power, not your total dollars.

Let’s say you have $1 million in a traditional IRA. Even though you have that amount in dollars, you do not have $1 million in purchasing power. This is because the money in the traditional IRA or 401(k) is tax-deferred, not tax-free, and you will have to pay income tax when you take money from that IRA.

So, even though the total dollar amount of your IRA is $1 million, you may have far less than $1 million available to you to spend and enjoy. You have a big fat IOU to the IRS on that IRA that must be paid before you can reap the benefits from that account. Understanding the concept of purchasing power is crucial to truly understanding the benefits of a Roth IRA conversion.

2. Qualifying longevity annuity contract (QLAC)

In July 2014, the Treasury Department relaxed the RMD rules, reflecting the government’s desire to encourage individuals to prepare financially for retirement. The new rules allow you to buy a longevity annuity with your IRA money and not have to worry about including the value of that IRA qualifying longevity annuity contract (QLAC) in your RMD calculations from age 73 up to 85.

Tax-deferred plans are exempt from RMD rules as long as the plan participant does not use more than $200,000 to buy the longevity annuity. For a couple, that means up to $400,000 could be placed into QLACs, removing that money from the RMD calculations. The couple can then defer RMDs on that $400,000 up until age 85. Removing the $400,000 from the RMD calculation until age 85 could result in substantially less RMD payments during that time, while also providing an additional source of income later in life.

An important thing to know about QLACs is that they are available within 401(k), 403(b), governmental 457, 401(a) and individual retirement accounts. Roth IRA accounts are not eligible, nor are inherited IRAs or accounts already in RMD status. It is also important to note that the decision to purchase a QLAC is irrevocable, and the annuity generally cannot be surrendered for its cash value.

3. Charitable lifetime planning with IRAs

Frequently, my clients take RMDs from IRAs not because they need them but because they are required to take them. Sometimes, they deposit the money in their bank account and then write a check to their favorite charity or religious institution. Another option is for them to take advantage of a qualified charitable distribution (QCD), which works particularly well for high-income earners. It allows IRA owners to specify that a payment of up to $100,000 from their RMD be sent directly to a qualified charity.

The owner electing the QCD option is still required to take the RMD, but the amount of the distribution sent directly to the charity gets excluded from their gross income. This provision gives taxpayers a convenient and tax-savvy way to benefit a charity, while also saving themselves potentially thousands of dollars in taxes. 

This is especially effective for high-income taxpayers who at tax time are subject to adjusted gross income limitations as well as phaseouts of their itemized deductions.

Donating IRA distributions directly to charity may minimize the amount of taxable Social Security benefits because you are excluding that money from your income. A lower income may also help you lower your Medicare premium. Also, the charitable IRA rollover provision gives non-itemizers a way to deduct their charitable contributions.

Converting your RMD to a direct donation can make a lot of sense, but there is an additional benefit that most people, including financial advisers, rarely think about. A donation of this type frequently results in substantial income tax savings — so why not take advantage of those savings and convert part of your traditional IRA to a Roth?

Investment advisory services offered by duly registered individuals through Creative One Wealth, LLC, a Registered Investment Adviser. Creative One Wealth, LLC and Tax & Investment Advisor are unaffiliated companies. Mr. Guy is a licensed insurance professional, not affiliated with any Government agency, and does not provide tax or legal advice. You should consult with your own legal and tax professional before implementing any of the ideas in this article.

Converting an employer plan to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums in the year of conversion. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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• Are Roth IRAs Really as Great as They’re Cracked Up to Be?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Thanks to the SECURE 2.0 Act, the age at which you must start taking RMDs from retirement accounts such as IRAs and 401(k)s has increased to 73 in 2023 for individuals who turned 72 after Dec. 31, 2022, or who will turn 72 before Jan. 1, 2033. The law increases the RMD age to 75 in 2033 for individuals turning 74 after Dec. 31, 2032. Under previous law, retirees had to begin taking RMDs at 72. (Also, if you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled.)

RMDs often pose problems for people in their financial planning. But these significant changes that increase the RMD age create planning opportunities. Some people now have an additional two or three years before RMDs take effect, giving them time to take advantage of certain opportunities, like stretching their tax bill or giving to charity in a more effective way. What are you going to do with this extra time?

And in conjunction with RMD-related planning changes, it’s also wise to consider the tax context of the next couple of years and ways to plan accordingly. Large portions of the (TCJA) will expire by the end of 2025. So there are two more years to capitalize on historically low tax rates before they likely go back up in 2026.

Here are three key planning options to consider as a result of the SECURE 2.0 Act:

1. Qualified charitable distributions (QCDs)

This opportunity for a tax break is often overlooked. Despite the new mandatory RMD age being 73, you can still exercise a QCD as early as age 70½. QCDs are tax-free donations allowing you to withdraw money from IRAs and qualified accounts and distribute it to a qualified charity.

QCDs can count toward RMDs if certain conditions are met. Although the money is withdrawn from your IRA, it is not counted as taxable income the way regular withdrawals are. A QCD also can be deducted from your gross income on your tax return without having to itemize your deductions.

2. A coordinated Roth conversion plan

A Roth conversion gives you the ability to make tax-free withdrawals in retirement. If you’re going this route, you should know the answers to these questions:

• How much do you need to convert?
• How much is it going to cost tax-wise to convert in a given year?
• How much are you going to save in taxes in retirement?

Roth IRAs aren’t subject to taxes when you withdraw from them in retirement as long as you’ve held the account for at least five years. Roth IRAs also aren’t subject to RMDs for the owner during his or her lifetime, but the owner’s beneficiaries generally must take RMDs on a Roth IRA.

The amounts people may have thought they needed to convert have changed significantly because they’ve now got more years until they have to start taking RMDs. They can adjust the amount they’re converting year over year.

Again, it’s important to keep in mind that tax rates will remain low until the TCJA expires at the end of 2025. Therefore, some people may want to convert more money to a Roth this year and in each of the next two years before rates likely go up in 2026.

3. Accelerate distributions

In your pre-RMD years and once you reach 59½ years old, you have the flexibility to plan on a yearly basis how to minimize both your present and future taxes. In that context, you may want to accelerate your distributions from certain accounts sooner than you had previously planned.

Let’s say you have a large balance in a tax-deferred account, such as a 401(k) or traditional IRA — this means you’ll face high RMDs in the future. In that case, it would benefit you to withdraw those assets in the years leading up to your RMD age. While that move would give you some tax liability up front, you’re taking advantage of lower tax rates through 2025 and having more years to drain that bucket before your RMD kicks in. Most important, you’re reducing your tax liability at 73 or 75 by lowering the account balance.

Money buys many things, but one thing you can’t buy is time, which becomes even more precious in retirement. The SECURE 2.0 Act gives you valuable extra time to plan for those hard-earned, relaxing and enjoyable years, so use it wisely.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Fortunately, the custodian recognized this mistake, helped file the proper forms and even wrote an explanation to the IRS. Crisis averted. But my FOM (fear of missing) RMDs was permanent.

The SECURE 2.0 Act reduced the harsh penalty to only 25%. So, if you miss your RMD on a $1 million IRA in your first year and don’t take corrective action, you’ll owe only about $9,000 instead of $18,000. Not good, but not as much of a biggie. In addition to the reduced penalty came new age brackets for RMDs.

A brief history lesson: Prior to 2020, everyone had to start taking RMDs at the same age: 70½. This, in and of itself, could be confusing for anyone who was born in the second half of a year, which pushed the RMD age to Dec. 31 of the following year.

Following the SECURE Act of 2019 and the SECURE 2.0 Act, we now have age brackets similar to those for Social Security, telling you the age at which you have to take your first distribution. Those brackets are:

These brackets pertain only to RMDs for your own accounts. The rules for inherited IRAs are complex enough that I wrote a separate article about them, You’ve Just Inherited an IRA: What Do You Do Now?

Now that you know when you have to take your money, let’s talk about your options if you don’t actually need it. The RMD serves as a sort of backstop for the IRS to get “its” money. If you started your 401(k) at age 30 and are now 70, you have been kicking the tax can down the road for 40 years. IRS makes it very difficult to avoid paying at least the taxes on the distribution. Think tolls on the New Jersey Turnpike. There are a few strategies that should be driven by bigger goals to delay or avoid the RMD.

1. If you are concerned about longevity/running out of money…

If you expect to live many more years and are scared of taking money out of your accounts, you can evaluate a qualified longevity annuity contract (QLAC). With a QLAC, you are giving an insurance company some amount of money (premium) in exchange for receiving some percentage of that amount for the rest of your life. QLACs allow for up to $200,000 in premium and will allow you to defer distributions from that pot of money up until age 85.

2. If you want to keep working…

More and more people are working into their 70s and may not need the money. If you fall into this boat, the “still-working exception” allows you to defer RMDs from your current workplace plan, so long as you don’t own 5% or more of the company. While I don’t often advise this, many employer-based plans will take rollovers from IRAs. If you go this route, you can put a larger chunk of your savings into your current plan to further defer distribution.

3. If you are charitably inclined…

Beginning at age 70½, regardless of your RMD age, you are allowed to donate up to $100,000 per year from your IRA directly to charity. This money will not be counted as income on your tax return and will reduce your RMD dollar-for-dollar. This is often the most efficient way to donate for retirees, as it reduces your gross income and, thus, your Medicare premiums.

4. If you want to leave a legacy to your kids…

Best to get way out in front of this one. We often suggest partial Roth conversions from the time you retire until the time you start your RMDs. This requires paying the tax in the year you move money from a pre-tax bucket to a Roth, but allows for income-tax-free growth on any gains and eliminates the RMD for all money in Roth accounts.

Now that you’ve gotten to the end, my advice is to work backward to figure out what makes sense for you. Our clients work in this order: Life—>Plan—>Tools. In other words, if leaving a legacy is the most important thing to you, start there: To whom and when do you want to leave money? Work with a planner to draw up a plan to do that. The tool to do that may be a Roth conversion, but that should be dictated by the plan.

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• What You Need to Know About Calculating RMDs for 2023

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

New RMD rules

For example, a few years ago, the SECURE Act raised the age for taking RMDs from 70.5 to 72. But when the SECURE 2.0 Act became law, the RMD age moved to 73. That raised questions for many about when their first RMDs were due. 

Confusing things even more, the IRS delayed rules for some inherited IRA RMDs. The agency also waived penalties for failing to take certain RMDs. So, for 2023, some retirees wonder whether and when they must take required minimum distributions.

RMD age by birth year

Thankfully, to simplify things, there is a relatively straightforward guideline for some 2023 RMDs. That’s because the age at which you must start taking required minimum distributions is determined by your birth year.  

• Essentially, if you were born in 1950 or earlier, you must take required minimum distributions in 2023. 
• However, if you were born on or after January 1, 1951, you are not obligated to take RMDs in 2023.

Note: Accounts subject to RMD rules include employer-sponsored retirement plans including, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. Other tax-deferred retirement accounts, such as traditional IRAs, SEPs, and SIMPLE IRAs, are also subject to RMDs. 

Do Roth IRAs have RMDs? But remember that inherited IRAs have their own set of complicated rules. Meanwhile, Roth IRA accounts are not subject to RMD requirements until after the account owner dies. And beginning in 2024, RMDs won’t be required for designated Roth 401(k) accounts. (However, 2023 RMDs due by April 1, 2024, are still required.)

When do RMDs start? 

• If you reach age 72 in 2023, your first RMD can be delayed until age 73. So, the first RMD (for 2024) is due April 1, 2025. 
• If you were age 72 in 2022, the prior RMD rule applies. That means your first RMD was due April 1, 2023, and your second RMD was due Dec. 31, 2023. (The RMD amount would be based on your account balance on Dec. 31 of last year, 2022).

It's important to note that your first RMD can wait until the 1st of April, the following year. That might give you time to align the distribution with your financial situation, but it can result in two RMDs in a year. 

However, remember that subsequent RMDs must be completed by December 31 of a given year.

How are RMDs taxed? 

Required minimum distributions are generally taxed as ordinary income in the year they are taken. So, RMDs can increase your taxable income and potentially push you into a higher federal income tax bracket. 

Additionally, increased income from required distributions can affect your eligibility for some tax credits and deductions and impact the amount you pay in Medicare Part B and D premiums.

What can you do? Given the potential impacts of RMD income and recent legislative changes in SECURE 2.0, it's essential to stay informed and seek advice from financial experts to ensure compliance with the latest regulations. Also keep in mind that failing to take RMDs can result in IRS penalties.

Consult your financial advisor or a tax professional to plan your retirement account distributions and make informed decisions on withdrawals that optimize your financial situation in retirement while minimizing tax implications.

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1. Ask your adviser about tax-loss harvesting.

Taking the time to analyze your portfolio toward the end of the year is important to determine if you can offset taxable income by harvesting capital losses. You may also have tax-loss carryforwards that can reduce your 2024 tax bill. Ask your adviser to see if tax-loss harvesting may improve your situation.

2. Contribute to your pre-tax retirement accounts.

Double-check your contributions to accounts such as 401(k)s, 403(b)s and SIMPLE IRAs so that you are on pace to maximize contributions. If you are age 50 or older, you can contribute an extra catch-up amount. While you must do this by December 31 for these accounts, you have until April 15, 2025 (and potentially until October 15, if you file an extension) to make traditional, Roth and SEP IRA contributions.

3. Convert your traditional IRA to a Roth.

Roth IRAs are generally preferable to traditional IRAs mostly because they are exempt from RMDs (required minimum distributions), and the withdrawals are tax-free. There are many considerations to determine if a Roth conversion makes sense, but if you want to make the conversion for 2024, it needs to be done by December 31.

4. Reassess your risk tolerance.

Year-end is a great time to reflect on life and career changes that may have occurred over the year — those changes can make a difference in your optimal level of risk tolerance. Reassessing your risk tolerance on an annual basis with your adviser may mean adjusting your portfolio to meet that new tolerance.

5. Review your RMDs.

If you turn 73 this year, you must begin taking RMDs. The first RMD must be taken no later than April 1 of the year following the year you reach age 73. There is a significant tax applied if you fail to take the RMD on time, so this is one of the most important items to make sure gets checked off the list.

6. Make charitable contributions.

There are several strategies that could be applied to maximize charitable impact while minimizing taxes. Here are just a few:

• Eliminate capital gains tax by donating appreciated stock rather than cash.
• Make a qualified charitable distribution (QCD) to satisfy your RMD.
• Consider opening a donor-advised fund — you can take a tax deduction for your contributions, which then grow tax-free.

7. Fund investing accounts for your dependents.

If you plan on making contributions to investment accounts for your kids, now is a great time to make sure those are funded to the desired levels. Here are two options:

• Custodial Roth IRAs. Tax-free growth; contributions can be withdrawn tax-free. Note that parents can make contributions only if their child earned income for the year. The current maximum annual contribution is $7,000, or the total of a child’s earned income for the year — whichever is less.
• 529 college savings plans. High contribution limits; withdrawals for school-related expenses are tax-free. Gifts to 529 plans can total up to $18,000 per individual or as much as $90,000 if the parent chooses the five-year election. This election allows parents to supercharge their savings and treats this large lump sum as if it were spread over five years.

8. Stay the course and avoid reacting emotionally to the election outcome.

During an election year like 2024, it’s important to approach your finances with a clear, disciplined strategy. Market uncertainty can lead to volatility, as investors react to the unknown outcome. Historically, however, the S&P 500 has performed positively under various presidents, rewarding long-term investors who stay the course. The key is to stay disciplined and avoid reacting emotionally to short-term market movements. Focus on maintaining a diversified portfolio and stick to your long-term investment goals. Strategies like risk management and avoiding impulsive decisions can help protect and grow your investments, regardless of election results.

The above checklist is by no means comprehensive. With so many items to check off the list and specific considerations for each one, depending on your unique situation, year-end financial tasks can be daunting. This is the time of the year you will want to rely on your tax accountant and financial adviser to help you navigate these choices.

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• Five Thoughts About the Election From a Financial Planner

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

I am going to share an example of a client of ours (we’ll call her Jill) whose spouse (we’ll change his name to Bill) passed away prematurely before Jill started working with us. Their situation is illustrated in the graphic below. Let me walk you through the impact of the widow’s penalty and how severe it was for Jill.

As you can see with this chart, while Bill and Jill were together, they filed their taxes jointly, each received Social Security, and both were older than 73, which means they were forced to take required minimum distributions (RMDs) from the money they had saved in IRAs over all their working years. All their income combined resulted in a tax bill of $11,053. To me, that is a lot of money to have to pay the government, considering Jill and Bill are no longer working. Unfortunately, it gets worse.

When Bill passed, Jill was required to continue the same RMD amount because she was the beneficiary and received all the investments. However, there were two major changes that occurred. The first was that Jill’s Social Security fell off. When one spouse passes away, their Social Security income goes away, and the higher of the two remains. It is great that Jill can take the higher of the two but unfortunate that she will have a loss of income from what she was used to.

This is less of concern since it is typically correct that most surviving spouses will not need 100% of what they needed while their spouse was living, so we can manage that loss. The second change was that Jill’s tax status went from married filing jointly to single.

I have already indicated how severe this is and how it can cause the surviving spouse to pay nearly double the amount of taxes. Let’s explore the tax brackets to understand why this is the case.

As you can see from these charts, two things fuel the fire for the widow’s penalty:

• The standard deduction gets cut in half. This means the surviving spouse will be left with less tax-free income.
• The tax brackets are smaller. For example, if you have $85,000 of taxable income and you are married filing jointly, then you are in the 12% tax bracket, but if you are single with $85,000 of taxable income, then you will be in the 22% tax bracket. See how this can be an issue? This is how that near doubling of taxes can occur.

It bothers me that not only will the surviving spouse have less income, but they will also have to pay more taxes, which leaves them with less money during the time when they need it the most.

How do we plan for this? By utilizing the married filing jointly tax brackets while you can. One spouse is likely to pass away first, so be prepared when that happens.

Also, consider that tax rates may be the lowest we’ll see because they are among historical lows, and most experts expect them to increase due to our country's current debt crisis and overspending. Now may be the best time to pay taxes on those tax-deferred vehicles like your IRA and 401(k) while this tax “sale” is here and while you are still in the more generous married filing jointly tax brackets. You could utilize strategies like a Roth conversion to maximize these types of opportunities.

What else you can do

Another consideration is optimizing when you take Social Security to ensure your spouse will be left with the highest benefit when you pass away. Lastly, if you are going to be drawing larger RMDs in the future, now is the time to start reducing that potential liability, to leave your spouse with less taxable income in the future when it matters the most.

To close, it truly bothers me how severe the widow’s penalty is. Jill was penalized $30,000 per year ($24,000 from the loss of income and $6,000 from the increased tax bill). This is something that can be devastating to surviving spouses, especially when one spouse passes away early — and for those who have done a great job saving. In sum, the tax code penalizes those who have saved and those who have had a spouse pass early.

Unfortunately, you can change only what you can control. We cannot control the tax code or laws, but we can control how we plan for it. So, let's get planning now and make sure our loved ones can continue on with the plan they deserve.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That begs the question, what does a financial plan actually do for you? Do you even need a financial plan? Or, do you need financial planning?

It’s smart to recognize there’s a difference between getting a one-time financial plan and hiring a financial adviser to provide ongoing financial planning. Understanding that distinction can help you avoid costly mistakes and get the right level of guidance.

What a one-time financial plan is and is not

Let’s first discuss the purpose of a one-time financial plan and its benefits.

At its core, a one-time financial plan is intended to provide a detailed picture of your current financial situation. Think of a plan as a snapshot of one point in time showing the status of your overall financial health. Having an accurate, updated and detailed picture of your finances can be very useful.

A one-time financial plan can be especially valuable when you’re facing a life-changing or complicated money decision, such as claiming Social Security benefits, buying a home in a high-interest-rate environment, deciding whether to fund a Roth IRA or boost your 401(k) contributions, investing in a rental property, evaluating your insurance needs or selling your business.

For those preparing to exit the workforce, having a plan is essential to determine whether you can even afford to retire. Further, it can guide you through various retirement decisions, such as choosing a pension payout, evaluating long-term care options and planning around RMDs and Roth IRA conversions.

So, a one-time financial plan is most valuable when confronted with a big financial decision. But it is an assessment limited to only your current situation. And that’s where the danger lies.

People get into trouble using a one-time financial plan because they think it will help guide their financial future. It’s not a roadmap. A one-time financial plan is a snapshot, whereas your life is a movie.

The danger of a one-time financial plan

Unlike a static financial plan, ongoing financial planning is dynamic. Your personal financial life is constantly changing and so is the overall market and economy. As a result, your one-time financial plan has a shelf life. After a while, it gets stale.

If you consult an old financial plan, you risk making misguided decisions based on outdated information. You may also miss opportunities that have arisen since your plan was created. Your outdated financial plan no longer reflects your life circumstances or addresses the decisions you should make for your new life. For example, investments recommended to you in your old plan may no longer be the best options for you.

If you're considering getting a one-time financial plan, carefully weigh the benefits and drawbacks. And if you do decide to go ahead with it, consult a qualified fee-only financial adviser who can provide a plan based on your (and your family’s) entire financial picture.

People often ask advisers for a “financial plan,” which, again, even when it includes investment advice, serves as a current assessment. But what you may really need is guidance with advice, something one-time plans can’t provide.

Retirement planning, for example, requires periodically stress-testing all your cash-flow assumptions now and into the future, using various what-if scenarios so you can course-correct knowing your circumstances are changing. Engaging with a fiduciary adviser for comprehensive ongoing financial planning (and investment strategy) helps make sure you stay on track to reach your desired outcome. (My company, Wealthramp, can recommend an adviser who fits your priorities.)

One-time financial plan vs. ongoing financial planning

What most people need as they move further along their financial journey is a planning process that adjusts as you go. Whether you do the planning yourself or seek help from a professional, the key is being able to see for yourself how you won’t run out of money after you stop working.

Whereas a one-time financial snapshot usually means paying an adviser a one-time fee, ongoing financial planning involves a living plan that comes with investment advice for an annual fee. Think of it as the difference between 2-D and 3-D views of your financial life.

Ongoing financial planning means you have a partner in your financial decision-making and a dynamic financial plan that adapts to changes in your cash flows, interest rates, investments, taxes, incomes and home life. Beyond the numbers, an experienced financial adviser can help you manage change and avoid emotional decisions when the markets are down. For couples, an adviser can be a valuable third party to help them communicate and get on the same page money-wise.

Financial planning is especially valuable for people with complex financial situations. This includes people nearing retirement, those who have significant tax planning needs or those going through a major life change like an inheritance, marriage, divorce or the birth of a child. Robust and detailed financial planning, when done correctly, should give you a sense of confidence and peace of mind.

The biggest misconception about ongoing financial planning is that you must be wealthy to afford it. There are highly qualified financial advisers working with clients of all income and asset levels. They can spend a few hours a year collaborating, educating and talking through your investing and planning decisions. Many of them work with clients for just a few hundred dollars a year.

If you're thinking about hiring a financial adviser, be sure to choose one who is a fiduciary and fee-only, which means that they are legally obligated to act in your best interests and do not get paid commissions (or kickbacks) from third parties. Your adviser should work only and directly for you. (To find out more about advisers’ fees, see my article Should I Pay a Financial Adviser an Assets Under Management Fee?)

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• Glass-Half-Empty Retirement Outlook? Here’s Some Advice
• What Fee-Only Financial Advice Really Means – and Why It Matters
• Financial Planning in an Age of Increasing Longevity

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Running out of money is a top concern for many retirees. To make sure that your post-retirement plan is stacking up, ask yourself these three key questions:

Question #1: How much income do I actually need?

Now that you’ve entered retirement, you may realize that your needs and goals differ from what you originally planned. When every day feels like a Saturday, it is easy for your spending to go up. I know a large percentage of my personal discretionary spending occurs during the weekends!

Between travel, health care, home renovations and supporting family members, there are many ways that people choose to spend their income in retirement. To make sure you can maintain your desired lifestyle, take time to recalculate your cost of living to reflect these expenditures and determine the amount of income you actually need.

Keep in mind, due to inflation, this number is likely going to grow over time to account for price increases for food, clothing, energy and health care costs. The cost of health care can grow faster than consumer prices and may become a major expenditure.

Question #2: Where will my money come from?

During retirement, it helps to arrange enough fixed sources of income — such as Social Security, defined benefit pension plans and retirement plan required minimum distributions (RMDs) — to cover all your essential costs. That way, if your portfolio is affected by a stock market decline, you can be fairly confident that you will still be able to pay for your core expenses.

If you’re looking to further supplement your income, you can consider more flexible sources of revenue, like stock dividends and interest from bonds and CDs; the income from these sources may change due to market fluctuations and interest rates. Part-time work is also an option that many retirees consider. In fact, a recent survey by the Employee Benefit Research Institute reported that 27% of retirees chose to continue working to generate additional income.

Some may also consider an annuity to help increase cash flow. Annuities are insurance products designed to provide a stream of income and can be used to bridge the gap between your fixed income and the amount of money needed to cover monthly living expenses in retirement.

There are various annuities you can choose from — fixed, indexed, buffer, single premium immediate or variable annuity — and each comes with its own mix of risks and rewards, including different fees, features and benefits. In addition to being a source of retirement income, a subset of annuities offers tax-deferred growth. Of these, some enable you to participate in market growth, while providing downside protection of your principal. A financial adviser can help you determine what annuity, if any, will best serve your needs.

Question #3: How will I protect and manage my assets?

Life doesn’t always go as planned, and you need to be prepared for the unexpected. Thinking about sickness and death can be uncomfortable, but planning for these scenarios before they arise is essential to preventing family stress and financial complications.

Original Medicare is federal health insurance for people 65 or older. It typically requires payment of coinsurance and doesn’t cover all health care costs. Some people purchase Medigap insurance together with their Original Medicare insurance, and others may buy Medicare Advantage bundled plans instead that provide additional coverage like vision, hearing and dental services and sometimes prescription drug coverage. For most people, they should start looking into Medicare coverage three months before turning 65. Managing these medical costs will go a long way to protecting your retirement nest egg.

Retirees can also face substantial long-term care costs such as assisted living or a nursing home. Unfortunately, most people don’t realize that Medicare won’t cover most long-term care costs. Many individuals have to pay out of pocket or tap into investments to pay for long-term care.

When thinking of potential coverage options for long-term care needs, you may want to consider a hybrid long-term care insurance policy. These policies can help protect your savings from long-term care costs like assisted living while protecting your family’s future inheritance. Although a hybrid long-term care policy can be more expensive than standalone long-term care insurance, some policies may offer guaranteed premiums, or premiums that will not rise in the absence of certain distributions from the policy. Plus, if the insurance is not needed, your beneficiaries will typically receive a death benefit. Using a long-term care calculator can help you determine if you’re financially prepared for this potentially impending cost.

You should also consider setting up an estate plan to protect your wishes for the distribution of your assets to your family and loved ones when you are no longer around. Your will, trusts and power of attorney are three key components of the overall estate planning process. Additionally, you can prepare essential documents that address issues like guardianship of your children and how your loved ones should approach your medical decisions if you’re incapacitated.

If you have not done so already, work with your tax and financial professionals to start discussing your post-retirement financial plan and meet with your legal adviser about drafting or updating your estate plan today.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Recent legislation with new RMD rules has increased the age at which you must begin taking annual RMDs from your 401(k), IRA or other qualified retirement plan to age 73. By 2033, that age will increase to 75.

Imagine you are age 73 and have accumulated $2 million in your 401(k) or another qualified plan. The amount of your annual RMD is based on life expectancy tables calculated by the IRS. At age 73, the table indicates a factor of 26.5 for 2023. Divide $2 million by that number, and you’ll find that your RMD for the year will amount to more than $75,400. Now imagine you’re in the 35% tax bracket and do the math again. That’s a tax liability of $26,390.

Of course, your tax liability will change from year to year, depending on your age and how much remains in your retirement account, but you get the idea. If you truly need the assets in your plan to meet retirement expenses, you’ll have to bite the bullet. If you don’t need these assets and wish to let them grow unimpeded by taxes and serve as an inheritance for your loved ones, here are two ideas to consider:

1. Qualified longevity annuity contracts (QLACs)

Issued by insurance companies, this specialized type of annuity is available only to qualified retirement plan participants. You may transfer up to $200,000 of your plan assets to a QLAC with no tax consequences, provided you are between the ages of 73 and 85. By doing so, you achieve the following:

• You reduce the amount of your plan assets that are subject to RMDs. As a result, your RMDs will be smaller and subject to less tax liability.
• Your QLAC will generate a stream of guaranteed income for the rest of your life. You may begin receiving this income before you reach age 85. Income is fully taxable, but if you wait until age 85 before receiving it, you may find yourself in a considerably lower tax bracket.
• You may provide your heirs with a death benefit in exchange for lower guaranteed income payments. Your heirs have the choice of receiving their inheritance in guaranteed payments or a lump sum. Either way, they must liquidate their holdings within 10 years after receiving them.
• One caveat — once you transfer assets to a QLAC, you will not be able to access your money until your income payments begin.

2. Roth IRAs

Here’s an idea that may trigger higher taxes immediately but no tax in the future. By converting your traditional IRA to a Roth IRA or rolling over your 401(k) to a Roth IRA, you pay taxes on all the assets in question. However, you pay no tax on future growth and withdrawals. In addition, assets in a Roth IRA are not subject to annual RMDs, so your assets can continue to grow tax-free and provide you with the ability to:

• Withdraw assets tax-free should you need them to meet emergency expenses
• Provide your heirs with a substantial tax-free inheritance and the ability to make withdrawals as needed with no tax liability

Rules differ slightly, depending on whether your beneficiary is a child or spouse. In the case of a child, he or she must liquidate the inherited Roth IRA within 10 years after the parent’s death. In the case of a spouse, the 10-year rule is not in effect, and the spouse can treat the IRA as his or her own.

Which choice should you make?

The QLAC option will reduce your RMDs but not eliminate them. It will defer tax liability until you begin taking guaranteed income payments, but those payments will be fully taxable.

The Roth IRA option offers the flexibility to make tax-free withdrawals and achieve tax-free growth for the rest of your life. However, it requires what will probably be a sizable payment to the IRS upon converting your traditional IRA or rolling over your 401(k).

If you want the flexibility of being able to withdraw assets from your plan and leave them to your heirs with no tax consequences, the Roth IRA may be a better choice.

But remember — the QLAC option only requires you to transfer up to $200,000 from your traditional IRA or 401(k). You won’t have access to these funds, if you need them, but you will have access to the remainder of the assets in your plan, albeit on a taxable basis.

In addition, you will reduce your RMDs and thus your annual tax burden until you reach the age at which you will begin taking guaranteed income payments.

Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC and NFP Corp. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS).

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• What You Need to Know About Calculating RMDs for 2023
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• When It Comes to Your RMDs, Be Very, Very Afraid!

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

I realize that I’m in the minority in thinking that tax planning is fun. However, the things you do before Dec. 31 are typically what save you the bigger dollars. And saving bigger dollars is fun for everyone.

Here are five things retirees should consider before Dec. 31:

1. Roth conversions ‘in the valley’

The valley is the period between when you retire and when your income streams increase again from Social Security and required minimum distributions (RMDs). The earlier you retire, the more you can live off cash, and the longer you delay Social Security benefits, the bigger this opportunity becomes.

Essentially, during your working years, the largest drivers of your taxable income are your wages and any other business income. When you retire, your taxable income, and thus your tax rates, fall. When you turn on Social Security and start taking distributions from retirement accounts, it pops back up. Hence, “the valley.”

During this time, you can move money from pre-tax retirement accounts into Roth IRA accounts and pay taxes at your current rate. If you think your current rate is lower than your future rate will be, you should work with a professional to evaluate this strategy.

2. Realizing capital gains

If you’d had a crystal ball and invested $1 million at the bottom of the market in 2009, closed your eyes and woken up today, you’d have over $6 million. Few people were that fortunate. However, it is fair to say that the longer you’ve held on to your stocks in taxable accounts, the larger the unrealized gains.

As in the strategy above, you may have a tax valley in your retirement years that allows you to sell some of those winners without paying taxes. Most people understand that we have different income tax brackets. Most people don’t know that we have different capital gains tax brackets. Most people will pay 15% federal capital gains. However, if you fall into the 10% or 12% income tax bracket, you pay 0% capital gains. Once again, consult with your tax professionals to see what is a viable strategy for you.

3. Evaluate Medicare thresholds

I work with several retired CPAs, and for some reason, the IRMAA letters they get drive them up a wall. IRMAA is an acronym that stands for income-related monthly adjustment amount. In plain English, it makes your Medicare Part B coverage more expensive, sometimes significantly so, if you cross certain income thresholds.

The premium is derived from your gross (not taxable) income two years prior. So, as we evaluate our client planning for year-end, we are thinking about 2025 premiums. Unlike most insurance policies, if you pay the highest premium of $560 a month vs. the lowest premium of $165 a month, you don’t get any more insurance. It pays to stay below the adjustment thresholds.

4. Take RMDs/fund retirement accounts

RMDs represent something you must do. Funding retirement accounts is something you can do. Ironically, you can both take money out of and put it in the same account in the same year. The IRS imposes required minimum distributions from your pre-tax accounts at certain ages, based on the year you were born. You can figure out your RMD age with the table below:

So, first you must ensure that you take your RMD by Dec. 31. There is an extension in your first year until April 1 of the following year, though this rarely makes sense from a tax perspective.

While you may have to take RMDs, you may still be able to lower your taxable income by contributing to retirement accounts. This seems ironic in an article for retirees. The form we see it take most often is through consulting work, post-retirement. For example, let’s say you are 73 and have $1 million in retirement accounts and had $50,000 in net self-employment income. You could offset almost your entire RMD by funding a solo 401(k).

5. Consider qualified charitable distributions (QCDs)

The deadline for all charitable giving is Dec. 31. This is why more money is donated on Dec. 31 itself than even on Giving Tuesday (the first Tuesday after Thanksgiving in the U.S.). A general rule for those who are 70½ or older is to give from your IRA first, appreciated stock second, cash last. Just like all things in personal finance, what you do should be personal to you.

Giving from your IRA directly allows you to reduce your gross income, not just your taxable income. As noted above, reducing your gross income may reduce your Medicare premium. So, if you are just a few bucks above a threshold, you may give enough to bring you back below it.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As the qualified accounts grow, so does the tax liability — along with the future pressure that required minimum distributions (RMDs) may cause related to where you end up in tax brackets and Medicare premium surcharges.

The reality is that if tax rates go up, deferring is not likely helpful and may actually be harmful. If you have a known tax liability today (that’s fairly low by historical standards), settling that liability is not always a bad idea.

The risk of deferring taxes well into the future is the uncertainty. Tax rates down the road are up in the air, but you can probably count on the word “up.” They are relatively low now, due to the Tax Cuts and Jobs Act of 2017, which expires at the end of 2025. Taxes can go up in the future in at least a few ways. (They can go down or stay the same also, but few believe that will happen.)

First, for many people, tax rates can increase starting in 2026 if Congress doesn’t extend the rules currently in place, and who knows how high they might go in subsequent years as many continue to retire? When Uncle Sam comes calling in your retirement (RMDs and Medicare premiums included), you’ll likely want more control and less tax burden whenever possible.

Second, many retirees may face tax increases for other reasons. Death of a spouse is one. Divorce can be another. Either circumstance can put a person into a single-tax-filing status whereas they previously filed jointly.

Further, taxes could also go up if Congress chooses to raise rates to address the spending that seems to continue to spiral.

Here are some other issues to consider.

Deferring capital gains in non-qualified accounts

Too many people, because they want to limit as much as possible the amount of tax they will pay in a given year, will not sell a stock that has appreciated significantly and will allow greater and greater concentration in an individual stock. That is an example of letting “the tax tail wag the dog.”

When it comes to investment returns, your focus should be on managing risk and thinking in terms of net gains after taxes and on limiting your taxes in retirement. Again, this is about considering settling a liability at a reasonable tax rate rather than at a rate that is likely to be higher in the future. Just like ordinary income tax rates can increase in the future, so, too, can capital gains tax rates.

‘Tax location’ of assets

Pay attention to tax location when looking at your investments. What does that mean? You do not have to have your qualified accounts (IRAs, 401(k)s) invested the same way as your non-qualified accounts (those that don’t receive “preferential” tax treatment).

Example: Let’s say I am retired and have $1 million in a traditional IRA and decide to withdraw $50,000 from that IRA. That withdrawal will be taxed as ordinary income, as is the case with all qualified accounts, no matter what I own in that account.

But with a non-qualified account, how the money is taxed depends on what kind of investment asset I own. For instance, if I own a corporate bond, and I receive interest income on that bond, that is going to be taxed as ordinary income. But if I own a stock, and its value has increased significantly, all of that appreciation is capital gain and, if held for greater than 365 days, is treated as a long-term capital gain and not ordinary income. And under current law, capital gains taxation is generally better for the taxpayer than ordinary income taxation.

So, consider owning things that generate ordinary income in accounts that, no matter what you own, are taxed as ordinary income, and own more capital-gain-oriented assets in accounts that can enjoy capital gains rates.

The long-term Roth advantage

It is beneficial to have assets that have the highest long-term growth potential in a Roth IRA. You don’t get to defer taxes on the money you deposit in a Roth, but you do get growth tax-free and withdrawals tax-free. You’re not going to be hit with taxes when you make withdrawals in retirement, which means you don’t have to worry about those future tax rates.

If you have a capital-gain-oriented asset (usually assets that have growth potential), such as a stock, the least advantageous thing you could do in terms of taxes is to invest in that stock through a qualified account. Again, that goes against conventional wisdom because everyone is told to defer, defer, defer, and you get to use the government’s money — until it is time to pay the piper later.

When you defer, all you are doing is expanding the liability. When you put $100,000 in a 401(k), you’ve deferred taxes on that $100,000, but if it grows to $500,000 over many years, wonderful, you’ve also got a tax liability on that $500,000 awaiting you. And if the tax rates are higher when you get to retirement, what you gained will be considerably less.

Having a short-term mentality is not prudent when it comes to investing, nor is it when it comes to taxes. It is not the person who pays the least amount of taxes this year who wins. It is the person who thinks long-term and limits their long-term tax liability — and has a more enjoyable retirement because they did so.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

These materials are for informational purposes only. It is not intended to provide, and should not be relied on for, any tax or legal advice. Please consult a qualified professional before making decisions about your financial situation. Any reduction in taxes would depend on your specific tax situation.

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• To Defer Capital Gains Taxes, Consider a 721 Exchange

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In reality, the distribution phase of retirement can be the most challenging, especially if the retiree hasn't taken into account how they will spend their money. In this article, we'll explore how to make the distribution phase of retirement work for you and discuss points to consider with your financial planner to ensure a high-quality retirement.

Managing risks in the distribution phase

The distribution phase begins when you start drawing from your accumulated income to support yourself. As financial professionals, it is our responsibility to help you make a plan to not only transition from saving to spending, but also to enter and execute the distribution phase without depleting your nest egg too quickly.

The greatest threats to retirees at this point are failing to consider market volatility and inflation, yearly tax bills and unexpected long-term care and medical costs that may arise from living longer than anticipated.

Planning for market volatility

If you know anyone who retired in 2020, they may have told you stories about how their retirement investments were stable one day and in dire straits the next. This is because they didn't take the economic downturn seriously and didn't have a plan for that eventuality.

Essentially, they were withdrawing money from accounts with shrinking values and no chance to replenish. To avoid this, make sure that you don't have too much invested in high-risk investments and diversify your investments to give your funds a better chance of recovering their value when a crisis impacts the markets (and your money).

Take note of inflation

Overlooking inflation is another danger in the distribution phase. Just because you could hypothetically retire today doesn’t mean the same will be true in 10, 20 or 30 years. Last year, the inflation rate hit an all-time high of 9.1% (the highest since 1981). While it’s since lowered to a more average yearly number of 3.2% (as of July 2023), you can expect plenty of surges and dips like this throughout your lifetime, especially over the next decade.

You can use an inflation calculator to give you a better idea of how far your money will take you when you retire, but the best action is to make sure your retirement fund is protected from tax liability.

Shift from tax-deferred vehicles

The secret to mitigating taxes? Plan ahead. You can lower your tax bill by shifting your retirement nest egg from tax-deferred accounts like IRAs or 401(k)s to Roth accounts. While your tax bill will increase in the year of the shift, you can time it correctly to ensure that this occurs while you still have a paycheck coming in and while tax rates are lower.

Remember that tax rates tend to increase year after year, much like inflation, and one thing is certain: You will have to pay them. It's better to do so while you still have a paycheck coming in and when tax rates are lower, so you won't feel the tax burden as acutely.

Additionally, your retirement funds can continue to grow tax-free until you're ready to use them.

Don't overlook your RMDs: Develop a strategy to take them when it's most beneficial for you.

Understanding sequence risk

They say what you do with your money five years before retirement and five years into retirement have more of an impact on the quality of your retirement than a lifetime of saving. It’s not untrue, but really, it's the timing of the actions you take with your money that matters most. Think again of the trip down the mountain. If it’s raining and icy, it’s probably not a good time to continue your descent.

Similarly, sequence risk is what we call it when withdrawing funds from a retirement account will hurt the overall rate of return. For example, retiring during a bear market can take huge chunks out of your retirement accounts in losses while simultaneously you’re withdrawing money to live. Many financial professionals say that sequence of returns risk is a matter of luck — one can never predict what the market will do, of course. But at our firm, we say it never comes down to luck; it comes down to planning.

To combat sequence risk, you might consider working longer, investing more in government bonds or asking your financial professional to show you some annuity products or life insurance policies with an income rider to help you have more liquidation and income options should sequence risk be at a high when it’s your turn to retire.

The bottom line

Many retirees, and unfortunately some financial planners, too, overlook the fact that their financial portfolio needs much more attention during the distribution phase than it did during the accumulation phase. With no new money coming in from paychecks, there's much less room for error. One misstep could cause you to tumble down the retirement mountain. To protect the quality of your retirement, speak with your financial professional about developing a plan to seamlessly shift from accumulation to distribution.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For example, if you retire between the ages of 55 and 59½, and you need to take money out of your retirement plan to pay off your mortgage, in most cases it would be far better to leave your money in the company plan, at least until you take this withdrawal. This is because you can pull the money out without a 10% penalty, unlike with an IRA.

Or, if you plan on getting new employment, you may want to leave the money in the company plan so you can roll it over to the new employer’s plan. In most cases, this would allow you to delay taking required minimum distributions (RMDs) at age 73 because you’re still working.

Also, if you have access to good investment advice through your company plan or make your own investment decisions, generally the fees on the investments are going to be lower than buying the same type of investments in an IRA through a financial adviser.

When leaving your money in the company plan makes sense

Company plan assets also receive federal creditor protection, whereas state law protects IRAs, with some states offering little or no creditor protection against things like lawsuits, divorce and other creditor problems. If your state is weak on creditor protection and you have legal or creditor problems, you may be better off leaving your money in the company plan.

On the other hand, doing a rollover to an IRA would allow you to have a much broader choice of investment options to choose from rather than being stuck with a limited number of investments offered by a typical company plan.

And in most cases, former employees generally receive far better service and more professional advice from financial advisers compared to some inexperienced phone representative where the company plan has been outsourced to a third party.

For the charity-minded, a qualified charitable distribution (QCD) is a way to take part of your RMD tax-free if you’re giving the funds to charity.

Remember, if you don’t itemize, your charitable giving is no longer deductible, but the QCD creates the same end result even if you don’t itemize. This powerful tax advantage can be made only from an IRA, so it’s lost if the funds remain in your company plan.

IRAs handy for combining different retirement accounts

The IRA is also a handy place to consolidate and simplify all the different retirement accounts into one IRA or perhaps one IRA and one Roth IRA.

This is a huge advantage in a situation where you’re having to keep track of several retirement plans, along with the beneficiary withdrawal options on each plan, the statements for each plan, the passwords for each plan and so on.

Lastly, with company plans, in most cases, employees have to take their RMD from each plan separately, whereas IRAs can be consolidated for calculating RMDs, which can really help simplify the process. For example, IRA owners can take their RMD for all of their IRAs from just one of several IRAs.

So if you’re in the valley of decision on whether or not to roll your company plan over to an IRA, start by reviewing this list of pros and cons, and then perhaps talk with a professional financial adviser, who can help you to make a decision based on what works best for you.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The main reason is that, in retirement, they have Social Security and required minimum distributions (RMDs) from their tax-deferred investments (IRAs, 401(k)s, etc.). If the tax-deferred investments have significant value, combining the RMDs and Social Security income can result in what is called the “tax torpedo.”

This term refers to the stacking of ordinary income tax and Social Security tax so that additional distributions from your IRA could be taxed at over 40%! Yikes! I do not know about you, but I HATE TAXES (so much that I wrote a book with that exact title, available soon on Amazon), and I would never want to see nearly half of your hard-earned money go to Uncle Sam.

So, if you are likely to find yourself paying higher taxes in the future, I have some great news. You can reduce your income in retirement to pay less tax!

Taxes in Retirement: Social Security

Let us first talk about Social Security tax, which is unique. And keep in mind that before 1983, Social Security benefits were not taxed. Unfortunately, Social Security has been in trouble because people are living longer, and a big portion of our population is entering into the phase of needing Social Security; therefore, the rules have changed in the past to keep Social Security alive, and they will likely change in the future. It is just simple math.

However, you can avoid paying tax on Social Security. If your income is low enough, you will not have to pay taxes on the money you have worked hard for all your life. If your income is not low enough, let’s see how we can get Social Security tax-free!

Taxes in retirement are determined differently than what you became used to during your accumulation years as you worked your way up the mountain. Now that you are coming down the mountain to live the retirement you want, you have a new set of tax considerations. This new bracket uses what is called your provisional income. The formula to determine what your provisional income will be: add together half of your Social Security, ordinary income, capital gains and dividends and non-taxable interest. You will take that number to the chart below to determine how much of your benefit is taxable:

So how do we read this chart? If your provisional income is $32,000 or less and you are married and filing jointly, you will find yourself in that 0% tax bracket! If you find yourself with $32,000-$44,000, then 50% of your benefit will be taxable at your income tax rate. The largest portion of your benefit that could be taxable is 85%. Now do not get scared. It is not an 85% tax rate. Uncle Sam is not that mean.

That number refers merely to the amount of your Social Security that is subject to taxation. So, if your Social Security benefit is $10,000, then 85% of it, or $8,500, is the largest amount that could be taxable at your ordinary income tax rate — for example, a 22% or 24% rate. So, at most, you would pay around $2,000 in taxes in this example (24% x $8,500). It’s not as bad as you might have thought, but it’s still a lot of money out of your pocket, which I do not like to see.

Keep in mind that the numbers in this table have not changed since 1985. This is what we call a “stealth tax,” which is when the government does not make changes with inflation to benefit you. Someone in 1985 did not need as much income as you do now and would have found themselves in the lower end of the bracket, whereas more people nowadays find themselves on the higher end. Come on, Uncle Sam, help us out instead of penalizing us for saving and doing right over the years!

Should you find yourself in this scenario, then you would be in the infamous tax torpedo phase. This is where you could see that 40%-plus tax rate I mentioned. See my chart below for what I call “The Retirees Tax Bracket.”

You see that big increase because, in that phase, every dollar you continue to take out keeps pushing your Social Security into that 85% calculation. If you do not push onward, then you avoid that tax! We always plan so we can help our clients stay on the good side of that mountain.

For example, I had a client who was projected to be just over that torpedo. We contributed to an IRA to reduce her income, and that helped her avoid that 40%-plus tax torpedo.

Also, remember at the beginning of this article when I said you will likely not be in a lower tax bracket in retirement? That’s because, as you can see in the above chart, when Social Security becomes taxable, that income could cause you to be around the 20%-plus tax rate. Keep in mind this could get worse if tax rates increase in the future. (If you think tax rates will be lower with our current debt crisis and spending problems, then you are not in the majority.)

As you can see, it doesn't take a lot of income to trigger Social Security taxes. So, if you can already project that you will be at that point or beyond and are in the 0%-24% bracket now, then you need to take action. By taking advantage of the current tax environment, you could find yourself in the 0% tax bracket throughout retirement. It is possible with good planning!

Strategies for Avoiding the Tax Torpedo

So how do we get Social Security tax-free or stay on the good side of the tax torpedo? 

Roth! Roth! Roth! Roth IRAs and other tax-free vehicles, like health savings accounts (HSAs), loans and life insurance, can prevent you from being forced to pay tax on income you withdraw in the future.

The other important piece here is planning — to determine how to maximize your income in retirement to hit the “sweet spots.” We have many clients who pay 0% taxes in retirement because they allow their income to stay under the standard deduction and keep their provisional income under the 0% limit.

This is really hard to do on your own. I would highly suggest using sophisticated calculators and software to determine all the factors that go into this. I would also suggest working with a professional with expertise in this area. It would likely save you a lot of time, money and mistakes.

Making mistakes in retirement can be costly, and you do not want to find yourself on the wrong side of the tax torpedo in retirement!

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But what if there was an easy way to get people who really don’t need Social Security to suspend their Social Security benefits, which would help preserve the program for those who need it most and possibly preserve Social Security as we know it indefinitely?

As conversations around these challenges are picking up in the U.S. Senate, this article presents a legislative proposal called the RMD Option (The Option) Act, which could potentially preserve Social Security indefinitely. Most seniors age 70 and above, of whom there are more than 25 million, receive monthly Social Security payments.

Many of those people are also required by law to take distributions from their tax-deferred accounts (the required minimum distribution, or RMD), solely because the government wants to treat these distributions as income and thus make them subject to income tax. Many of them would happily suspend their Social Security payments in return for being allowed to defer their RMDs.

Many affluent people would be comfortable in retirement without Social Security benefits if they weren’t forced to artificially inflate their taxable income by taking RMDs. They don’t worry about running out of money, but they do worry about being artificially taxed. And in that context, RMDs can create substantial tax liabilities.

Suddenly, at the age of 73, some retirees could go from a 12% tax bracket to a 24% bracket, or from a 24% to a 32%, and they’re stuck with it. Furthermore, this RMD-forced jump in taxable income can cause their Medicare withholdings (another stealth tax) to double or triple. But The Option could give them a meaningful tax-reduction opportunity. We believe that, once elected, many retirees would stay on The Option for the rest of their lives because they’d be saving more in taxes annually than their Social Security benefits would provide. That would mean more money in their portfolios and more for their heirs.

The overarching benefit of the plan is that, if a significant number of people choose to defer or end their Social Security payments, Social Security’s viability would improve. There would be many billions more for the Old-Age and Survivors Insurance (OASI) Trust Fund, which is the fund that the U.S. Treasury uses to pay out Social Security benefits.

With the RMD Option Act, “option” is the operative word because it would be a completely voluntary program. And if, after a year, those who opted in wanted to go back to the traditional system, their Social Security payments would resume at the level at which they were suspended, eliminating any cost-of-living adjustments (COLA) that occurred during the suspension, and their RMDs would also resume.

Administering the RMD Option Act

Choosing The Option would be simple. All a person would need to do is go to the Social Security website and choose what they want to do. They would be immediately informed that proceeding would result in their current Medicare withholdings being frozen for the duration of the suspension. Medicare premiums would no longer be withheld from the Social Security payment, and the person would need to elect their out-of-pocket payment method. (The majority of people pay the standard part B monthly premium: $164.90 in 2023.)

After one year, if they wanted, they could end their participation in The Option and restart Social Security payments. Having that choice provides a built-in safety net. The risk of choosing The Option would be no greater than any other financial decision.

The Act’s Effect on Taxable Income and Income Tax Revenue

For most financially well-off taxpayers, 85% of their Social Security is taxed at their marginal bracket. Under The Option, a person’s taxable income would drop by the amount of their RMDs plus 85% of the amount of their suspended Social Security payments. These two reductions in income could significantly lower the individual’s taxable income. And that could open the door to an array of tax mitigation strategies that many don’t consider due to artificially high tax brackets in retirement.

Of course, all the money held in tax-deferred accounts subject to RMDs would still be subject to income taxes when withdrawn. While taxing would be delayed until the money was withdrawn, under The Option, as the account grew, there would likely be more money subject to tax than otherwise. But remember that tax-deferred accounts and Social Security are both assigned to individuals and are not on a joint basis. One spouse could receive Social Security payments while the other took advantage of The Option.

According to the 2019 SECURE Act, many beneficiaries who inherit the pre-tax accounts mentioned must have these accounts fully distributed within 10 years. All distributions will be subject to income tax. If individuals with large tax-deferred accounts were not forced to start taking RMDs at age 73, the invested funds could potentially grow throughout their retirement years, resulting in exponentially larger accounts being left to heirs.

Once again, this means more tax revenue through the forced 10-year distribution period.

Who Would Be Good Candidates for the RMD Option Act?

As income goes higher, the desirability of The Option increases. Those who save consistently would give it more serious consideration. Higher earners are also likely to receive larger Social Security payments, but find the need for Social Security payments less necessary. The “sweet spot,” so to speak, for The Option are individuals age 70 and older who receive Social Security payments and have taxable income above $100,000, consisting primarily of RMDs and Social Security payments.

Through a simple cost-benefit analysis, anyone can easily see if this proposal would be beneficial. The cost would be Social Security payments, although the word “cost” is a bit of a misnomer. If a person chose The Option, their taxable income would drop by the amount of their Social Security payment plus their RMD. The benefit would be the deferral of the RMD and Social Security taxes, which can be expressed as (RMD + .85 X SS) x MTR (marginal tax rate). If the cost is less than the benefit, one might choose The Option. The Option is most likely financially beneficial if SS < (RMD + .85 X SS) x MTR.

Of course, personal finances are indeed personal, not just mathematical. Some with much lower RMDs may feel that the benefits of having a tax-sheltered account for the rest of their lives exceeds the benefits of Social Security payments. Others may like the security of receiving Social Security payments even though they may be better off financially choosing the RMD Option. Once again, this reinforces the importance of optionality.

Because of the mechanics of RMDs, as people get older, the amount that the government requires them to take as a distribution from their tax-deferred accounts continues to increase, making The Option look even more appealing. There should be few cases of dropping The Option once a person has chosen it. And by choosing to forgo annual Social Security payments, it very well could strengthen the solvency of the Social Security program.

John Jensik and Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Having three more years of tax-deferred growth in your retirement savings accounts, however, is a mixed bag. "Everyone likes when you delay RMDs," says Ed Slott, president of Ed Slott and Co., which provides IRA training to financial advisers. "But waiving RMDs or putting them off doesn't help most people."

In fact, taking RMDs later could hurt. The amount of these required withdrawals from traditional IRAs and 401(k)s is based on both the account balance at the end of each year and the account owner's life expectancy as determined by the IRS's Uniform Lifetime Table. By delaying RMDs, retirees may be forced to make bigger withdrawals from an account that is likely to have a larger balance because it had more time to grow. That can have tax implications.

Of course, raising the RMD age is appropriate given today's longer life expectancies. In the mid-1970s, when the Employee Retirement Income Security Act, or ERISA, first authorized IRAs, U.S. life expectancy at birth was 72.6 years, according to the Centers for Disease Control and Prevention. By 2021, that age, according to the CDC, has increased to 76.4 years.

Raising the RMD age does give retirees more flexibility. Savers can still take distributions before age 75 or, if they can afford to, leave the funds alone a few more years. "This just gives you options but doesn't force you to do anything you don't want to do," says Catherine Reilly, head of retirement solutions at Smart USA, a retirement plan provider.

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The delay also gives people more time to convert a traditional IRA to a Roth IRA before RMDs kick in, which can have tax advantages. (You can still convert to a Roth after you start taking distributions, but before the conversion you must take your RMD for that year.) Roth IRAs have no RMDs, and because the accounts are funded with post-tax dollars, withdrawals in retirement are tax-free.

For most seniors, though, the new legislation is unlikely to matter. The Treasury Department recently estimated that about 20% of seniors required to take RMDs withdraw only the minimum amount. That implies that most people taking RMDs need the money for living expenses and are unlikely to delay distributions if given the choice. Pushing the RMD age back will be a "nonevent" for the majority of retirees, according to Paul Camhi, vice president at investment advisory firm The Wealth Alliance. "Most can't afford to wait until 72, let alone until age 75."

If you can afford to wait, be prepared for a tax hit. Because RMDs are taxed as income, taking a larger sum later could nudge you into a higher tax bracket. As a result, more of your Social Security benefits may be taxed or you could lose out on certain deductions and credits if higher RMDs push you past income requirements. Even Medicare premiums for Parts B and D, which are based on income, could be higher. "There are ripple effects from having more income," Slott says.

No matter what happens, don't assume that waiting to take RMDs is always better. Instead, calculate how your RMDs would change if you take them later. "Try and get the money out at the lowest tax rate possible," Slott says. "That may mean spreading the RMDs over more years to stay in a lower tax bracket. Pushing it back to 75 may not be doing yourself a favor long term."