Two Ways to Beat Taxes on Your Retirement Accounts

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club



Today’s Two-Minute Retirement Solution is a follow-up to the segment I did two weeks ago about Required Minimum Distributions (RMDs).

For those who missed it, I explained that the RMD is the annual amount you must withdraw from a tax-deferred account, like an IRA or 401(k), after you turn 70 1/2. The exact amount varies based on your age and account value.

But these distributions must be taken seriously. They carry a 50% penalty if you don’t meet the minimum. That means you’d pay a penalty worth 50% of the RMD you failed to take, plus you’d be responsible for the withdrawal – and you’d pay the tax due.

If these aren’t handled properly, they can become very expensive at tax time.

But there is a way you can delay them. Let me explain…

If you’re employed when you turn 70 1/2, and if you contribute to your employer’s 401(k), you don’t have to take any distributions until after you retire or leave your position (so long as you don’t own 5% or more of the company).

As long as you’re employed and contributing to your employer’s plan, the money you have in that account is exempt from the RMD.

And it gets better…

Let’s say you have an IRA outside of the employer-sponsored 401(k) you’re currently contributing to. In most cases, you can roll your IRA into your 401(k) plan, which allows you to delay the RMD you would have to take on your IRA.

You’ll want to check with your plan administrator to be 100% sure about your specific plan, but in most cases, IRA rollovers are exempt as long as you transfer the money before you turn 70 1/2.

So if working past your full retirement age is part of your plan (it is for me and for most folks!), use these strategies to avoid additional tax burdens created by required distributions.

Keep in mind that, as I said two weeks ago, Uncle Sam will get his share one way or another. But with some strategic advance planning, at least you can control how much you pay and when you pay it.

All distributions from your tax-deferred accounts are added to your taxable income the year they occur. If you don’t plan properly, that additional money can bump you into a higher tax bracket.

So it bears repeating – RMDs can be a big unexpected expense at tax time.

Make sure you take a look at what your options are and, as with all tax questions, consult your accountant or tax preparer before you make any changes.

Oh, and before I forget, it’s that time again! We’re gearing up for The Oxford Club’s annual Investment U Conference. It’ll be held at The Vinoy Renaissance Resort & Golf Club in St. Petersburg, Florida, March 15-18.

I’ll be there with Marc Lichtenfeld, Alexander Green and all of the other Oxford Club editors – plus an impressive lineup of special guests. Attending this conference is one of the best financial decisions you’ll make this year. Make sure to book your seat today.

Good investing,