There are various strategies to help mitigate the effects of RMDs from increasing your income taxes, taxes on your social security benefit, and possible Medicare surcharges.
Qualified Charitable Donations
(QCDs): QCDs from Traditional IRA accounts may help reduce a larger tax bill and higher Medicare premiums, which is based on the income reported on your tax return from two years prior. The QCD is not taxable to you and is not added to your adjusted gross income, which can help mitigate the surcharges on your Medicare premiums. Even if you don’t itemize, you still benefit because of the higher standard deduction.
Donor-Advised Funds (DAFs):
DAFs are another option that helps mitigate the taxes on your RMDs. This private charitable giving account can include contributions of cash, appreciated stocks, crypto currency, or other assets. These accounts are managed by a sponsoring organization and can provide an income tax deduction the year you make the contribution.
Roth IRA Transfers: Transferring funds from a traditional IRA or employer-sponsored retirement plan to a Roth IRA may be another option to offset the RMD impacts. Although a Roth IRA offers tax benefits, it will depend on your tax bracket and your ability to pay the taxes due upon the conversion. If you are already taking your RMDs, a Roth conversion isn’t a substitute for your RMDs.
Annuities: For those who do not need RMDs for current living expenses, looking into an annuity could be another option. The SECURE 2.0 Act includes rules that may allow you to use income from a qualified income annuity purchase with retirement account assets to satisfy RMD requirements for the purchasing account and potentially other IRA accounts.
Please contact Kakenmaster & Associates to schedule a tax consultation appointment if you have questions on how to best mitigate the tax implications of current or future RMDs.