Taxes in Retirement

Recently a call came in to our podcast from Suzanna. She just turned 73 and she was going to have to start taking RMDs, or required minimum distributions. And that money is going to put her into a different tax structure from now on. She asked me, “What are my options?” And that is a great question.

For those that don’t know, RMDs are the agreement you made in exchange for saving tax-deferred money in accounts like 401(k)s or IRAs. They may have helped you save money on income taxes when you were younger, but eventually you have to pay taxes on those amounts. Per the IRS, you have to start taking RMDs every year when you hit 73 years old, you’re required to take out this money no matter what.

You have to proactively remember to take them. Your 401(k) plan sponsor or the custodian holding your IRA money doesn’t have to alert you, or tell you how much to take when it comes to required minimum distributions. Also, there is no grace period to Tax Day; the money has to come out of the right accounts in the right amounts by midnight every December 31, and you account for this on your tax return later. Not doing this correctly can result in penalties plus income taxes owed.

But yes, Suzanna, you and other retirees do have options when it comes to RMDs. There’s a thing called a QCD, or qualified charitable contribution. A QCD allows you to donate your RMD amount to the nonprofit charitable organization of your choice and you do not have to pay taxes on it in that case. IRS rules apply. We are involved with a lot of nonprofits in Charlotte NC, and we can help you make a plan.

There are other options, too, like Roth conversions, which have to be done carefully following all rules. Roth conversions let you take taxable funds and convert them into tax-free funds. You have to pay taxes the year you do the conversion, but you don’t have to take RMDs on Roth accounts, and your kids can inherit a Roth tax-free as well. The account has to be in place for five years though, and all tax rules have to be followed.

NOTE: I don’t give tax advice, but I can help your accountant or CPA with Roth account strategies.

Why not sit down with professionals and talk about all the different options before you pull the trigger, and well before you turn 73?

I don’t know if I want to say this word on the air, but laziness, avoidance, fear… all can be a big part of not taking action in advance. People just don’t want to take the time.

Want the “easy” button? That doesn’t really exist. Everything you do in life, from starting first grade all the way up to your graduation, to your job, to raising a family, to working, to learning how to drive a car, to teaching your kids and grandkids how to drive a car… nothing is easy and nothing is going to be given to you. You have to take action.

You also have to take the time to learn new information and new skills. If you think back, you didn’t just learn the alphabet in one day; you didn’t just learn how to count to 100 in one day; you had to take the time to do it. And guess what? As a child, you did it.

In retirement, you have to take the time because that’s your obligation to yourself, to your family, and your loved ones to learn new information, and to take actions that are in your best interests. A retirement income annuity might help you generate the retirement income to support your lifestyle. You should at least look into it.

Don’t be afraid to ask questions or get more opinions. We’re here to help you, and I promise we will treat you as well as Trader Joe’s. (Funny story, I once had a list of groceries and a Trader Joe’s employee took me through the entire store in 20 minutes to fulfill that list that would have taken me hours by myself. I would have been lost.)

If you don’t ask a financial advisor in Charlotte that you trust, there are probably a lot of retirement tax and RMD options out there that you might know about, just like a lot of things in life.