15 Nov Avoiding taxes on retirement distributions
Q. I don’t need my Required Minimum Distributions and I don’t want to pay taxes on them, but I don’t really want to give them to charity. Are there other options?
— Taxed enough
A. You’re limited in your choices because of course, the government wants its tax revenue.
You placed funds in a tax-deferred account and those funds had the opportunity to grow with no tax consequences, said Cynthia Aiken, a certified financial planner with RegentAtlantic in Morristown.
“Eventually, the government wants their tax dollars, so they require that you withdraw a small percentage of the account and pay taxes on it from age 70 1/2 for the rest of your life,” she said.
We know you said you didn’t really want to give the money to charity, but you should know how that would work should you change your mind.
Aiken said you can contribute the amount of your Required Minimum Distribution to a qualified charity if it is $100,000 or less, and you must directly roll it over to the qualified charity.
“The gift doesn’t count as taxable income, but it also doesn’t count as a charitable deduction,” Aiken said.
Learn how it would work from a 401(k).
Another option is to convert the account to a Roth IRA.
But of course, this would involve paying taxes upfront, but after that, the account would be tax-free.
“Withdraw the Required Minimum Distribution, pay the taxes and roll the balance into a newly established Roth IRA,” Aiken said. “Roth IRAs are not subject to distribution requirements, the funds grow tax free and any withdrawals are tax free, so they are the best of all worlds.”
We’re sorry, but charity would be your only option to avoid the taxes entirely.
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This post was first published in November 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.