Many of us have invested in a 401(k) or some similar savings plan so that we can enjoy a comfortable retirement. But did you know that there are short-term benefits as well? Contributions are not included in current taxable income. That’s a very lucrative break that helps make saving much more enjoyable.
Kiplinger’s new article, “6 Tax-Smart Ways to Lower Your RMDs in Retirement,” says that unlike dubious foreign tax shelters, this one has an expiration date.
When you turn age 70½, the US government—in the form of the Internal Revenue Service—wants a piece of that action: tax regulations stipulate that you are required to take withdrawals from your traditional IRAs, 401(k)s and other tax-deferred plans or face a hefty penalty of 50% of the amount you should have withdrawn.
The IRS describes a required minimum distribution or “RMD” as the minimum amount you must withdraw from your account each year.
You typically must begin taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 70½, but Roth IRAs do not require withdrawals until after the death of the owner.
Because the withdrawals are taxed as regular income, those RMDs might nudge you into a higher tax bracket. This increase in your adjusted gross income could mean some other unpleasant tax consequences—including higher taxes on your Social Security benefits, a surtax on your taxable investments and a Medicare high-income surcharge.
The key to avoiding a monstrous tax bill is to begin your planning for RMDs well before your 70th birthday.