The stock market has been on a rollercoaster ride lately, with the S&P 500 hitting a record high in January. While this may be good news for some investors, it could spell trouble for older retirees who are required to withdraw from their pre-tax retirement accounts every month. These mandatory withdrawals, known as required minimum distributions (RMDs), can lead to higher taxes and surcharges for retirees over the age of 72, especially if their account balances have reached new highs.
With rising account balances come larger withdrawals, which in turn result in greater taxable income. This can push retirees into a higher income tax bracket or trigger the net investment income tax of 3.8% on returns from interest, dividends, and capital gains. For retirees who have more income than they need, this can come as an unwelcome surprise.
However, there are strategies that retirees can consider to mitigate the impact of higher taxes on their retirement savings. Working with a qualified tax professional, retirees can explore options such as making qualified charitable donations (QCDs), converting pre-tax retirement accounts to Roth IRAs, and using life insurance policies to build intergenerational wealth.
One strategy is to make qualified charitable donations (QCDs) to avoid paying taxes on extra income. Under the SECURE 2.0 Act of 2022, individuals over the age of 70½ can transfer up to $105,000 from an IRA to a charity tax-free each year. This can help offset taxable income and provide tax breaks for eligible charitable organizations.
Another option is to convert pre-tax retirement accounts to Roth IRAs, which offer after-tax contributions and tax-free distributions. By doing so, retirees can create an asset that is no longer subject to taxation under RMD requirements. While there may be upfront taxes to pay for the conversion, the long-term benefits can outweigh the costs.
Additionally, retirees can consider using a life insurance policy to build intergenerational wealth for their grandchildren. By setting up a trust that serves as the owner and beneficiary of the policy, retirees can ensure that certain sums of money are used for specific purposes, such as college tuition or living expenses. This strategy can help retirees leave a lasting legacy for their loved ones.
In conclusion, retirees should assess their financial situation and work with financial and tax professionals to determine if their nest egg is more than they need. By implementing these strategies, retirees can plan their legacy and make the most of their retirement savings. It’s important to consult with qualified professionals before making any financial decisions to ensure that they align with your individual goals and circumstances.
