Published by Taylor Financial Group
Whether you are in your thirties or over the age of 70.5, taxes are on everyone’s mind! Everyone wants to pay less taxes and there are two tried and true methods of potentially reducing taxes when funding IRAs and when taking your withdrawals.
Consider using your IRA funds to make a contribution to a charity.
If you are age 70.5 or older, you can make a distribution from your IRA of up to $100,000 per year to a charity and the distribution won’t be included in your income. A Qualified Charitable Distribution can be beneficial to those who already have substantial incomes, such as those who are still working or who already draw an income from a pension plan. For example, John has taxable income of $191,650, is a single filer, and is required to take a Required Minimum Distribution (RMD) of $8,000 from his IRA. He makes an $8,000 Qualified Charitable Distribution from his IRA, which will not add any additional income and will satisfy his RMD. This Qualified Charitable Distribution is important for John because if he added $8,000 to his income and did not make the charitable distribution, he could be pushed into a higher tax bracket, changing from a bracket of 28% to 33%.
Convert your Traditional IRA into a Roth IRA as soon as possible!
We love Roth IRAs and we encourage you to consider shifting your pre-tax money from your traditional IRA to a Roth IRA. Your money in a Roth IRA will grow tax free and any distributions at retirement are tax and penalty free. Since withdrawals are tax free, you are protected against any potential future tax hikes. Furthermore, unlike Traditional IRAs, Roth IRAs do not have mandatory minimum distributions. There are no income limits when converting assets from a traditional IRA to a Roth IRA. Taxes, however, are due on the funds the year you complete the conversion, so it might be beneficial to convert your money over a series of different tax years. If you intend on leaving your Roth IRA assets to your heirs, your beneficiaries must begin taking withdrawals by December 31st of the year following your death, but those withdrawals are tax and penalty free and can be taken over their lifetimes. In this scenario, your Roth IRA assets will have years of potential compounding tax free.
If you have any questions on these strategies or would like to implement them in your portfolio, don’t hesitate to call us!
Source: Barron’s, Three Ways To reduce Taxes on IRA Withdrawals, December 2017.
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