By Nino Pavan, J.D., CFP®
You spent much of your working life saving money for retirement. Now, as a retiree, you face a different challenge: taking required minimum distributions (RMDs) without incurring an unnecessary tax burden. For many people, timing RMDs to lower taxes can save thousands of dollars over the years.
Each person’s retirement needs are unique, and I always encourage clients to meet with me to craft their own tax and financial strategies. However, these tips for timing RMDs to lower taxes could help many retirees make the most of their hard-earned savings.
Start Taking Withdrawals Early
Waiting until age 73, the age when you generally must start taking RMDs, to withdraw money from retirement accounts can make sense for certain clients. This approach allows funds in the account to continue growing tax-deferred.
However, if you’re worried about future withdrawals creating a massive tax bill, consider making withdrawals from tax-deferred accounts starting at 59½. This is generally the earliest you can withdraw money without having to pay a 10% penalty. Spreading out your distributions like this can lower future RMDs and give you more control over your taxable income.
This strategy is good for more than just timing RMDs to lower taxes. When you start taking distributions early, you may be able to defer collecting Social Security until full retirement age or later. Waiting longer to claim Social Security increases your monthly benefit.
Harness the Power of Tax-Loss Harvesting
If you’re looking for strategies for timing RMDs to lower taxes, coordinating your RMDs with tax-loss harvesting can be very effective. Tax-loss harvesting involves selling certain investments at a loss to offset gains.
A smart tax-loss harvesting strategy may potentially reduce your overall tax liability and even lower your taxable income a little. This strategy can help you offset higher taxes due to taking RMDs.
Consider Spreading Out RMDs Over the Course of the Year
Many people take annual RMDs. However, for some, timing RMDs to lower taxes means making several smaller withdrawals throughout the year. This strategy can be helpful if you must make quarterly estimated tax payments.
Spreading out your RMDs also offers another potential benefit. Because you receive money in installments instead of a lump sum, it becomes easier to manage your retirement cash flow.
Look at Your RMDs As Part of a Whole
Looking ahead and timing RMDs to lower taxes is generally a smart strategy. However, if you just look at your RMDs in a vacuum, it could be counterproductive.
If you’re like most of my retired clients, distributions from tax-deferred retirement accounts aren’t your only source of income. Without a tax strategy that takes the big picture into account, there’s a chance you could unwittingly push yourself into the next tax bracket, which means you pay higher taxes on part of your income.
Monitoring all your income sources and coordinating them with your RMDs helps you manage your tax liability to keep more of your money.
Want to Learn More About Timing RMDs to Lower Taxes?
Timing RMDs to lower taxes can be very effective. However, if you want to increase your overall tax efficiency, consider consulting with an advisor. At Financial Designs, we aim to help retirees and pre-retirees plan for and enjoy their well-deserved retirements.
If you want to learn more about us and what we do, contact us today. Ready to talk about timing RMDs to lower taxes? To schedule a no-obligation consultation, call (909) 626 1642 or email fdc@fdcadvisors.com today!
About Nino
Nino Pavan is President and a CERTIFIED FINANCIAL PLANNER® professional at Financial Designs, a retirement planning firm in Claremont, California, with the mission of enabling individuals and families to financially prepare for and confidently enjoy their retirement years through goal-centered planning. With more than 30 years in the financial services industry, Nino is thankful for the opportunity to serve his clients by making the retirement process a stress-free one; he worries about their money so they don’t have to!
Nino holds a law degree from the University of Southern California, a Bachelor of Science in Telecommunications Management from DeVry Institute of Technology and has been a contributing advisor to Kiplinger. In addition to being a CERTIFIED FINANCIAL PLANNER® professional and Investment Advisor Representative, Nino has passed the Series 7, 24, and 63 securities exams and holds life and disability insurance licenses. He also conducts retirement and estate planning workshops for employees of major California companies. Outside of the office, Nino enjoys sports (regular and fantasy), traveling (specifically tropical destinations), walking, pickleball, church activities, and spending time with his wife Sherry and their two children, Derek and Sara. To learn more about Nino, connect with him on LinkedIn.
