KEEP THE IRS FROM RAIDING YOUR SAVINGS

Lots of excitement the past few days with Super Bowl LVI and Valentine’s Day back-to-back. A surge of football parties, hours cheering on our national athletes to Olympic glory, romantic dinners, a steady supply of nachos, wings, chocolates, and flowers. An odd combo to be sure.

Truth is, we haven’t had as much time as we’d like to revel in the light of the TV or candlelit dinners over here at Utah Real Estate Accountants.

Now, last week, we discussed retirement contributions and lowering your tax bill. So, sticking with the topic of retirement, let’s talk about how to hold onto as much of your retirement as you can when you reach retiring age.

But before I dive into that, a word about Super Bowl commercials.

Every year, there is a collective moan among the tax and accounting community about the Intuit commercials, and how aggressively they crow about what is essentially an AI-driven software solution for a tax system that is FILLED with different opinions, code changes, and tax court interpretations that can favor YOU (the taxpayer) … or they can favor the tax TAKERS.

And Intuit seems to have figured out that what people really need is a person to guide them through it. Their big push this year is that you can have a person who is suited to your situation. It...could happen!?!?

But let’s talk savings, shall we?

Janet Behm's
"Real World" Personal Strategy Note

Keep the IRS From Raiding Your Savings
“The question isn’t at what age I want to retire, it’s at what income.” - George Foreman

Something everyone dreams about is reaching those retirement years. Not only for the R&R but also because you finally get to tap into all that money you saved up over all those years.

Except…

What about the IRS? Well, they want their share of your retirement stash, too. And they’ll want it when you withdraw from your retirement accounts. Of course, paying your fair share of taxes is something you’d expect, but wouldn’t it be nice to give the IRS just a little less of your hard-earned savings?

Sure would – and here’s how…

Is time on your side?

When you take money out of your 401(k) or Individual Retirement Account (IRA), you make what’s called a “Required Minimum Distribution” or “RMD.” The government says you can start taking distributions when you turn 59½; take out the money any earlier and you pay a 10% penalty (with some exceptions).

And though there’s a federal bill afoot to increase this age in the coming years, right now you still have to begin taking required distributions when you turn 72. The government’s reasoning is that you deferred taxes on this money via deductions when you put it into these accounts, and the government wants its money eventually.

(There are a few exceptions to this age-72 rule – if you have a Roth IRA, it doesn’t have RMDs during your lifetime.)

The amount of your RMDs depends on both your account balance at the end of each year and your life expectancy according to an IRS Uniform Lifetime Table. New figures on the tables do let you reduce your RMDs a little.

If you don’t take any of your RMD starting when you turn 72, you’re in for a nasty surprise: a penalty that’s half of what you should have taken … yikes. The good folks at the IRS will waive the penalty for reasonable error if you promise to fix the situation. (That proposed federal law that we mentioned would lower this penalty to 25%.)

Common sense would seem to say that the longer you can leave your money alone until you turn 72 – even after you retire, especially if you can keep working – the better off you’ll be, right?

Not necessarily, at least when it comes to taxes.

Time and growth can work against you

Given that your retirement account is invested in the stock market and the like, you see returns on your retirement account money every year. As long as you leave the money alone and let it grow, you see returns on your returns year after year, at least until you hit 72.

But think about it: By delaying RMDs completely, you’ll eventually be forced to make bigger withdrawals from an account that got fatter over time. That means a bigger tax bill in your early 70s.

We’re afraid there’s more: RMDs are taxed as income. That could mean a higher tax bracket, dings to your Social Security and tax deductions, and maybe even mucking up your Medicare.

How to lower the taxes

Let’s assume you want to retire and use your nest egg and not just leave the accounts to heirs (which can create a whole different set of tax problems for them). How do you whittle the tax bite on RMDs? A few suggestions:

Giving feels good. Sure does – especially when you save on taxes. You can donate some of your distributions to a qualified charity with what’s called a QCD, a “Qualified Charitable Distribution.” This makes your RMD (up to a hundred grand from an IRA) non-taxable. Your IRA custodian has to agree to transfer the funds to your charity on your behalf (you can’t do that directly). You also can’t claim the donation as a charitable deduction on your taxes (no double-dipping…)

Go Roth. Qualified distributions from Roth IRAs are 100% tax-free and you don’t have any RMDs at all. By converting your traditional IRA to its Roth cousin, you can make tax-deferred assets into tax-free ones. Not completely “tax-free” though: You will owe ordinary income tax on assets that you convert, potentially a whopper of a tax bill for one year. We can help you do the long-term math to see if this deal’s for you.

Cue the QLAC. Qualified Longevity Annuity Contracts (QLACs) can help you defer income taxes until you turn 85 when you have to begin receiving payments. (Again: “defer” doesn’t mean “eliminate” …) You transfer money out of your retirement account – lowering your RMDs – to buy the annuity. Could be a good tax-deferment if you live that long and you can pick the right annuity company.

One last word before I finish – and a little piece of good news: The IRS has opted to suspend various automated notices until they clear up the jam in return processing from the last two years. This all comes after a push from tax pro coalitions and US senators alike demanding the IRS provide better support for taxpayers. ‘Bout time, IRS!!!

Do an internet search for financial calculators. With a little research, you can begin to run some numbers and discover huge benefits in certain retirement strategies.

BE THE ROAR not the echo®

Janet Behm