Dave’s Inbox: How can I minimize taxes on Required Minimum Distributions?
By For this month’s Money Talks article, I want to dip into my inbox and answer a retirement question that comes up frequently.
Dave, I hear a lot about tips for minimizing the taxes I’ll pay on Required Minimum Distributions (RMDs) in retirement. Is there something I should be doing today to prepare?
Tax efficiency is a popular topic in retirement planning. While I embrace the idea of paying as little in taxes as possible, these “tips” are often rooted in the assumption that you’re going to be in a lower tax bracket in your retirement.
The reality is, individual circumstances vary, and there’s no guarantee that tax rates or personal income needs will be lower later in life.
Consider this: As your career progressed, your standard of living may have increased. Perhaps you upgraded your car, took more extensive vacations, or expanded other lifestyle choices. Retirement planning often focuses on maintaining a comfortable standard of living rather than reducing it.
For many people we work with at Family Financial Partners, a successful retirement means having the freedom to explore the world, visit family, and enjoy experiences they didn’t have time for during their working years. Rarely does a client save just to swim in a pile of gold like Scrooge McDuck, watching their wealth potentially compound over time. Most want to enjoy the money they spent decades saving.
Once RMDs begin at age 73, distributions from retirement accounts may exceed what is strictly needed for living expenses. And that’s OK! This can be an opportunity: having sufficient resources to support your lifestyle and goals is typically seen as a positive outcome.
That said, we do have some options to consider.
For example, if you’re near retirement and anticipate your income being a little lower in your early retirement, we can talk to you about exploring Roth IRA conversions over a period of time to pay taxes before age 73. In some situations, this may help reduce the amount of RMDs required at 73, even if the income isn’t immediately needed. It’s important to note that whether any strategy is appropriate depends on personal circumstances, goals, and risk tolerance.
Tax efficiency, probate, estate planning — all of these terms can seem confusing, and the meaning behind them is often misconstrued. These phrases shouldn’t be scary. They’re just part of each of our lives as we age, whether we’re leaving somebody the keys to the house, the family farm, the car, or the company stock.
That’s why I’m in this business. Our team at Family Financial Partners is here to provide education on strategies that may help you manage your current financial situation and explore ways to support your beneficiaries’ future inheritance — if that aligns with your goals.
If you’re interested in starting that process with us, you can contact us today for a free consultation. We’ll review your current financial state and give you some ideas on how we may be able to help make it stronger.
You could also purchase our Pre-Retirement Fee for Plan package. This will include a detailed, customized plan for the final years of your career, as well as a year of follow-up services.
Our goal isn’t just to focus on minimizing taxes; it’s to help you work toward a retirement that supports your lifestyle and long-term goals. Over the years, we’ve guided many clients in exploring strategies and planning approaches that align with their objectives. You can start learning more about how these strategies might fit into your retirement planning today.
Securities offered through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way Cincinnati, Ohio 45242 (513) 794-6794. Investment Advisory services offered through O.N. Investment Management Company. Family Financial Partners does not provide tax advice, but we do coordinate our services and work together with our clients’ tax professionals. Estate planning services provided in conjunction with your licensed legal professional. For specific assistance, the services of an appropriate professional should be sought.
Article by David Smyth, Senior Partner and Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.