How to Prepare for RMDs Starting at 75 -- Even if You're Only 60 Right Now
Key Points
RMDs can create huge tax headaches.
Planning for them ahead of time could save you money and hassle in the long run.
Consider a spread-out Roth conversion if you have a large amount of money in a traditional retirement plan.
- The $23,760 Social Security bonus most retirees completely overlook ›
If you're 60, retirement may be getting closer. But if you have your savings in a traditional IRA or 401(k), you may still be a good number of years away from having to take required minimum distributions, or RMDs.
Unless you have a Roth retirement account, RMDs kick in at age 75 for anyone born in 1960 or later. The good news is that if you're 60 today, you still have more than a decade to prepare. And taking a few proactive steps now could make RMDs easier to manage later.
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How RMDs could affect your retirement income
If you have a small IRA or 401(k) balance, your RMDs may not be so substantial. But if you were a diligent saver, you may be sitting on a nice pile of cash. That's a good thing, but it could leave you with large RMDs to deal with.
RMDs not only create a tax liability, but could affect other parts of your financial picture, too. They could determine whether your Social Security benefits are taxable and whether you pay higher Medicare Part B and Part D premiums due to income-related monthly adjustment amounts (IRMAAs).
Even if you don't need the money for living expenses, skipping RMDs is generally a bad decision. That's because failing to take one typically triggers a 25% penalty.
A good strategy to employ now
If you're 15 years away from when RMDs start, you have two things on your side -- time and flexibility. You can use both to your advantage by spreading out a Roth conversion across multiple tax years.
While Roth conversions create taxable income in the year they're completed, they can lower your RMDs in the future or potentially get you out of them entirely. A large Roth conversion in a single tax year could result in a large IRS bill. But with a 15-year window, there's time to move your savings into a Roth IRA slowly, minimizing the tax impact.
For example, if you have $1.5 million in a traditional IRA and start a conversion now, you can move $100,000 per year instead of much larger sums, potentially allowing you to stay in lower tax brackets.
Although RMDs might seem like a distant concern if you're only 60, they're much easier to manage when you start planning years in advance. If you're worried about the tax consequences of RMDs, the time to start mapping out a Roth conversion strategy is now.
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