Retirement Planning, Elder Law, and Senior Finance

6/28/2023 | By Sandra Block

Once you start taking required minimum distributions from tax-deferred retirement accounts, you have fewer options to lower your tax bill. Follow these two RMD strategies to help protect your finances.

In the first year you’re required to take an RMD, you have the option of postponing your first distribution until April 1 of the following year. For example, if you turn 73 this year, you can postpone your first distribution until April 1, 2024. (For all years following the first year, your deadline is Dec. 31.) However, when you postpone your first RMD until April 1, you’ll end up having to take two RMDs in one year, which could double your tax bill.

Here are a couple of RMD strategies to lower your tax bill once your distributions start:

Qualified charitable distribution

You can support your favorite charities and lower taxes on your RMDs through what’s known as a qualified charitable distribution. You can make a QCD as early as age 70 1/2, but once you’re required to take distributions, the QCD will count toward your RMD. Although a QCD isn’t deductible, it will reduce your adjusted gross income, which besides lowering your federal and state tax bill can also lower taxes on your Social Security benefits and shield you from paying higher Medicare premiums.

required minimum distribution

To take advantage of this tax break, your charitable gifts must be made directly from your IRA to the charity. In addition, you can’t make a QCD to a donor-advised fund or private foundation, and the recipient must be a 501(c)(3) charity registered with the IRS.

The maximum you can donate through a QCD is capped at $100,000 a year. Starting in 2024, that amount will be indexed to inflation, so look for higher thresholds in the future. But even if you donate less than that, you can use this tool to lower your tax bill.

Qualified longevity annuity contract

Another strategy is to purchase a qualified longevity annuity contract (QLAC) that provides a source of guaranteed income and will also defer taxes on your RMDs. QLACs allow seniors to use funds in their IRAs or 401(k) plans to purchase a deferred income annuity that provides guaranteed payments on or before age 85. Some seniors use these products to cover their long-term-care expenses, which tend to increase significantly late in life.

The portion of savings used for the annuity is excluded from the calculation to determine your RMDs. For example, if you have $500,000 in an IRA and transfer $100,000 into a QLAC, your RMD is based only on the remaining $400,000. The taxable portion of the money you invested will be taxed when you start receiving income from the annuity.

A recent change in the law increased the maximum you can invest in a QLAC to $200,000, from $125,000. The law also eliminated a provision that limited QLAC investments to 25% of your plan balance.

Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.

©2023 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

Read similar articles about RMDs on Seniors Guide: Lower Taxes on RMDs

Sandra Block

Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.