Reduce Your RMD Tax: Tips to Save You Money

Shawn Plummer

CEO, The Annuity Expert

Reducing your required minimum distribution (RMD) tax is a priority for many retirees. Fortunately, there are a few things you can do to help minimize the amount of taxes you have to pay on your RMDs. In this guide, we will discuss some tips that can help reduce your RMD tax bill. Follow these tips and you could save yourself a lot of money!

How can I reduce my RMD tax?

IRA and 401k owners over the age of 72 must take an annual required minimum distribution (RMD). You can lower the taxable amount of your RMD by:

  • Taking your RMD as a series of payments throughout the year
  • Converting your traditional IRA to a Roth IRA
  • Investing in a Qualified Longevity Annuity Contract (QLAC)
  • Donating your RMD to a qualified charity
  • Purchase a deferred annuity with a premium bonus to make up the taxes owed.
  • Purchase a life insurance policy for your beneficiaries with the RMD.

What is the best way to take my RMD?

The best way to take your RMD will depend on your individual circumstances. You should consult with a financial advisor to determine what is best for you.

Generally, there are three ways to take your RMD:

  • As a lump sum payment
  • As a series of payments throughout the year
  • By investing in a Qualified Longevity Annuity Contract (QLAC)

What is the difference between a QLAC and a traditional annuity?

A traditional annuity is an insurance contract that provides regular payments to the annuitant, typically during retirement. A QLAC is a type of annuity that allows you to postpone required minimum distributions from your retirement accounts.

QLACs have some advantages over traditional annuities, including:

  • The income from a QLAC is not taxed until it is received
  • The income from a QLAC can be used to cover expenses in retirement
  • QLACs offer the potential for higher payouts than traditional annuities

What are the disadvantages of a QLAC?

There are some drawbacks to consider before purchasing a QLAC, including:

  • The income distributed from the longevity annuity is irrevocable and cannot be changed, even if your circumstances change.
  • If you die before the start of the payout period, your beneficiaries will not receive any benefits from the QLAC.
  • QLACs can be expensive, and there may be surrender charges if you cash out early.
  • QLACs are not insured by the FDIC.

Deferred Annuity With A Premium Bonus

A deferred annuity with a premium bonus is an annuity that pays a “sign-on” bonus for purchasing an annuity. The premium bonus is an extra sum of money that the insurer adds to the policy to encourage people to keep their policy for a longer period of time. Bonuses can be as large as 17%.

Buy A Life Insurance Policy For Beneficiaries With The RMD

By using your required minimum distribution (RMD) to purchase a life insurance policy, you can create a tax-free inheritance for your beneficiaries. This strategy can be especially beneficial if you are in good health and can qualify for a policy with low premiums.

Conclusion

As you can see, there are a number of things you can do to reduce the amount of taxes you have to pay on your RMDs. If you would like more information or would like to speak with an expert about reducing your RMD tax bill, please don’t hesitate to contact us. We would be happy to help!

Reduce Required Minimum Distribution (Rmd) Taxes.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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