Asset location
As you plan for retirement, you can facilitate flexibility in your withdrawal plan by investing in accounts with different tax treatments, such as Roth accounts and taxable accounts, in addition to tax-deferred accounts. It’s important to be deliberate about the types of investments you hold in each type of account. For example, you might consider holding slower-growing investments, such as bonds, in tax-deferred accounts that are subject to RMDs, while keeping investments with a higher growth potential, such as stocks, in Roth or taxable accounts that are not subject to RMDs. This asset location strategy generally puts tax-efficient investments in the taxable account, while limiting increases in the RMD amount over time.
Roth conversions
If you don’t expect to need a portion of your retirement savings, you might consider moving those assets into a Roth IRA through a Roth conversion. This technique is most useful during years when you have recorded lower taxable income, as the conversion amount is taxable income, which generally increases your income taxes and may also raise your Medicare premiums.
A Roth conversion not only reduces the balance of your savings that are subject to RMDs, but it also provides your heirs with the benefit of tax-free withdrawals should they eventually inherit those assets. What’s more, the increase in the age at which RMDs start gives many investors more time to plan and execute a conversion strategy while their tax rates are favorable.
Accelerated withdrawals
You may also consider withdrawing funds from your tax-deferred accounts before your required beginning date (but after you turn 59½, to avoid early withdrawal penalties) during years with lower taxable income. This is similar in concept to the conversion strategy but may be easier to implement for people without other assets to cover the tax bill. By withdrawing funds from your retirement account up to the maximum income limit of your current tax bracket, you may reduce future RMDs and limit the impact of potentially higher tax rates in the future. This strategy may also allow you to delay claiming your Social Security benefits (to as late as age 70), which would result in higher annual benefits.
Your RMDs are an important component of your retirement income plan—after all, supporting yourself in retirement is the very purpose you set this money aside for in the first place. In light of the new RMD rules, consider reviewing and updating your retirement plan on your own or with a financial advisor. The recent rule changes may provide new opportunities to plan your RMDs to maximize your tax efficiency.
