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A Retirement Savings Exit Strategy

A Retirement Savings Exit Strategy

Create a plan to withdraw your minimum distributions on your terms, while complying with Uncle Sam’s

Every day, an estimated 10,000 people reach the IRS trigger age when they must begin withdrawing money from their retirement plans. If you’re among them, it’s wise to develop a strategy.

Once you hit 70½, IRS rules call for required minimum distributions (RMDs) every year on all of your traditional, simplified employee pension (SEP) and SIMPLE IRAs, as well as employer-sponsored plans. Roth IRAs are exempt.

Since you definitely want to comply (the IRS will levy a 50% penalty on any amount you are supposed to withdraw but don’t), talk to your advisor about how to be smart with RMDs, perhaps even automating them. Here are some strategies.

Scenario: You want to take advantage of a low tax year or down market

Strategy: Convert traditional IRAs to Roth IRAs

If your income declines, you may want to convert a traditional IRA into a Roth IRA. You’ll owe taxes on the amount you convert in the year of the conversion, but unlike traditional IRAs the balance in your new Roth IRA is not subject to RMDs – and any withdrawals you choose to make are not taxable.* You want to pay taxes at the lowest rate possible, so if you are in the 15% tax bracket now but believe you will be in the 25% or higher bracket later, you may be able to save by paying taxes now.


Scenario: You don’t need the money and want to minimize your taxes

Strategy: Make a charitable contribution from your IRA

You may also make a qualified charitable distribution (QCD), which allows you to donate up to $100,000 directly from your IRA to a qualified charity. This removes money from your IRA tax-free, which in turn reduces the amount on which your RMD for that year is calculated, and also provides you with a potential tax deduction. You must be 70½ or older to be eligible.


Scenario: You need the money to live on and want to minimize taxes

Strategy: Consider purchasing an annuity within your IRA

Another idea is to purchase what’s called a “qualified longevity annuity contract” (QLAC) in your IRA. With a QLAC, you pay a specified premium now in return for guaranteed income later. You don’t have to take an RMD from the portion of your IRA used for that premium until age 85, which may cut your tax liability. The IRS exempts longevity annuity premiums of up to $125,000 or 25% of your IRA account, whichever is less. Annuities can be complicated, so discuss it with your advisor.

Guarantees are subject to the claims-paying ability of the issuing insurance company.

Plan wisely, live well

These are just a few of the options available with RMDs; a professional can help you create a specific plan that addresses your individual situation. Remember, your goal is to comply in a tax-efficient manner that takes into account other income streams, your estate plans and the fact that you worked hard for that money and it’s time to enjoy it

Next steps:

Get professional help about:

  • Tax planning
  • Making the most of charitable gifts
  • Other RMD strategies

*Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

As federal and state tax rules are subject to frequent changes, you should consult with a qualified tax advisor prior to making any investment decision

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