Kelly Bullis
Let’s get on the same page. When making financial decisions about how to arrange your affairs to minimize taxes, one challenge is the government requirement that you pull out a certain amount of your IRA-type retirement accounts based upon the IRS life expectancy table. The shorter your expected life, the larger your RMD.
Another thing to know. Current tax rates are expected to expire in 2025. Example: Consider a married couple, both age 68 with $112,250 withdrawal from their IRA. If they have no other income and do not itemize, but instead take the standard deduction, their tax would be about $9,700. Fast forward to 2026, same information, their tax would be about $13,600. 2027 would be the year our intrepid couple would be in the Required Minimum Distribution (RMD) group. Now, assume their RMD for IRA withdrawal would jump to $175,000, then their tax would jump since the higher RMD would put them a higher tax bracket. (They would be in a lower bracket if the Trump Tax Rates don’t expire.)
This is a trap. Not only are they being forced to pay higher taxes, but their IRA is being forcibly drained at an unsustainable rate. What if they don’t need that extra $60,000 they are being forced to take out? They could sock it away in a brokerage account and in essence save it for some future need.
One option, if you don’t need your IRA RMD funds, is to invest the excess IRA RMDs into life insurance policies. ($1 million policy could cost about $20,000 or more in one-time premium.) Life insurance is not taxable to your heirs, and you could put the policy into a trust and direct how you want it distributed.
Or, you could designate up to the first $100,000 of your RMD to designated charities. This reduces the taxability of the RMD.
Another option is they could take advantage of the lower tax rates until 2025 and start doing some ROTH IRA conversions. Paying tax now, even if in a higher tax bracket, and then not ever having to pay tax on the ROTH IRA withdrawals for the rest of their lives.
The general concept is that the ROTH can be left alone to grow, tax-free for as long as this couple decides they don’t need anything out of it. Thus, instead of a steadily declining balance due to regular IRA RMD requirements, a ROTH IRA is growing unhindered by any RMD requirements.
Planning is the key. Don’t let the government dictate your choices.
Have you heard? Proverbs 12:20 says, “Deceit is in the heart of those who devise evil, but those who plan peace have joy.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.