Taking more than your required minimum distribution (RMD) from a traditional IRA or 401(k) can be a strategic move in retirement. While it may seem counterintuitive to pay more in taxes now, a larger withdrawal can offer several long-term benefits.
Here are five reasons to consider taking more than your RMD:
* To Manage Future Tax Brackets: You may be in a lower tax bracket now than you anticipate being in the future. By taking larger withdrawals, you can “fill up” your current low tax bracket (e.g., the 10% or 12% bracket) with taxable income. This can help you avoid being pushed into a higher tax bracket later in life, especially if you expect other income sources like Social Security or a spouse’s RMD to increase your total income.
* To Reduce Future RMDs: The amount of your RMD is calculated based on your account balance at the end of the previous year. By taking more than the minimum, you reduce your account’s principal. This, in turn, leads to smaller RMDs in future years, which can help you manage your taxable income and keep you from being subject to higher tax brackets later on.
* For Estate Planning and Beneficiaries: If you have heirs who are in higher tax brackets than you are, taking larger withdrawals now at your lower tax rate can be beneficial. When your heirs inherit the IRA, they will be required to take distributions and pay taxes at their own, potentially higher, tax rate. By drawing down the account yourself, you can minimize the tax burden on your beneficiaries.
* To Manage Medicare Premiums: Your Modified Adjusted Gross Income (MAGI), which is largely influenced by your taxable income from sources like RMDs, can determine your Medicare Part B and Part D premiums. A higher MAGI can lead to higher premiums. By strategically taking larger withdrawals in certain years, you can help manage your income and potentially avoid a future premium increase.
* For Roth IRA Conversions: While you cannot directly convert your RMD, any amount you withdraw beyond the RMD can be converted to a Roth IRA. Converting traditional IRA assets to a Roth IRA means you pay taxes on the converted amount now, but future withdrawals from the Roth IRA will be tax-free. This can be a powerful way to shift money from a tax-deferred account to a tax-free account and provide a valuable tax-free resource for your later retirement years or for your heirs.
For more information visit the https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds or call our office.