If you are over 70 ½, read this article! The Internal Revenue Service requires you to withdraw a minimum amount each year from your retirement accounts. If you don’t need the money, you have options that can reduce your taxes either this year or in the future.
Every year after you reach the age of 70 ½, a required minimum distribution (RMD) must be withdrawn from all your retirement accounts, except any Roth retirement vehicles. You must pay the income tax owed on the distribution with your 2013 tax return. What if you don’t need the money? You should consider the following options:
1. Make a Gift to Charity
If you plan to make charitable contributions in 2013, gifting from your IRA is the most tax efficient method. If you are over 70 ½, you are eligible to gift your RMD (or part of it) directly to one or more qualified charities, up to a maximum of $100,000. Any amount gifted directly to a charitable organization is not included in your taxable income. So, instead of paying tax on funds received from your IRA, the amount that goes to charities is tax-free. Important to note: The custodian of your IRA must distribute the gift directly to the charity and not to you. Also, this opportunity is only available in 2013 unless Congress extends the provision for 2014.
By reducing your taxable income, this strategy lowers your adjusted gross income (AGI). A lower AGI may allow you to qualify for deductions and credits that you otherwise miss if all or part of your RMD is taxable. Lowering your AGI also reduces your chance of being subject to the 3.8% Medicare surtax.
2. Reinvest in a Roth IRA
If either you or your spouse has earned income in 2013 and your modified AGI does not exceed specific thresholds, you can make a contribution to a Roth IRA. You still pay tax on your distribution, but once reinvested in a Roth IRA, all future earnings and growth on the investments are tax-free. Furthermore, there is no annual distribution required from Roth IRAs. Any withdrawals that you do take from a Roth IRA are tax-free as long as the account has been in existence for a minimum of five years.
The maximum amount you can contribute to a Roth IRA in 2013 is $6,500 or the amount of earned income during the year, whichever is less. Contributions can be made to Roth IRAs for both spouses, even if only one is working.
3. Reinvest in an Investment Account
If the RMD is not needed for living expenses, you can deposit the funds into a brokerage account and invest those dollars according to your overall investment plan. While you will still pay tax on the funds distributed from your retirement accounts, this will allow the dollars to continue to provide growth for your overall portfolio. If it’s an appropriate strategy for your portfolio, reinvesting in municipal bonds will allow future earnings to be tax-free.
Summary
The IRS requires those age 70 ½ to take funds from their retirement accounts and pay the tax owed, even if the money is not needed. If this is your situation, you now have options that will allow you to save taxes by giving to a charity or reinvesting in a tax-efficient manner. Be sure to consult your qualified financial planner or tax advisor when implementing any of these strategies to ensure that all the right steps are taken.
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