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Strategies To Lower Your Tax Bill When Required Minimum Distributions Are Making It Higher ✅ Thumbnail

Strategies To Lower Your Tax Bill When Required Minimum Distributions Are Making It Higher ✅

As you approach retirement age, managing the tax implications of Required Minimum Distributions (RMDs) becomes increasingly important. RMDs from retirement accounts can significantly impact your taxable income and greatly increase your tax bill. However, there are strategies to help mitigate the impact of RMDs on your tax liability and keep your tax bill lower. After all, who wants to overpay the IRS? 

In this blog, we’ll discuss two highly effective strategies: Qualified Longevity Annuity Contracts (QLACs) and Qualified Charitable Distributions (QCDs). These strategies can be used to lower your tax bill while ensuring a more efficient use of your retirement savings.

Understanding Required Minimum Distributions (RMDs)

Before learning about strategies to decrease the tax impact of RMDs, let's fully understand what RMDs are and why they matter.

What are RMDs?

RMDs are the minimum amounts that you must withdraw annually, typically starting at age 73 for most retirement accounts, including traditional IRAs and 401(k) plans. The purpose of RMDs is to ensure that retirees draw down their retirement savings and pay taxes on the withdrawn amounts, as these funds have likely enjoyed tax-deferred growth during the accumulation phase. In other words, the IRS is licking its chops waiting for you to take RMDs so they can get their share in taxes. The Secure Act 2.0, signed into law in late 2022 made some changes to Required Minimum Distribution beginning dates. See below:

Tax Implications of RMDs

  • RMDs can significantly increase your taxable income, potentially pushing you into higher tax brackets and resulting in a much larger tax bill.
  • If you don't need the entire RMD amount for living expenses, the tax impact of RMDs can be a concern. You still are required to take the distribution even if you don’t want or need the money.

Here’s what you can do about it:

1. Lower Your Tax Bill with Qualified Longevity Annuity Contract (QLAC) 

A QLAC is a specialized annuity that allows you to defer a portion of the RMDs from your retirement accounts to a later age, offering potential tax advantages and helping to manage taxable income in retirement. By pushing a portion of your RMD to the future with a QLAC, you decrease your current tax liability.

How QLAC Works 

Deferring RMDs: By investing in a QLAC, you can defer a portion of your RMDs until a later age, typically up to 85 years old. This deferral can reduce the immediate tax impact of RMDs, as the distributions from the QLAC are not subject to RMD rules until they begin.

Tax Benefits: The funds allocated to a QLAC are not included in the RMD calculation until the QLAC starts making distributions, in turn lowering taxable income and reducing the associated tax bill during the deferral period.

Regulatory Limits: The IRS restricts the amount that can be invested in a QLAC to the lesser of $135,000 or 25% of the retirement account balance, providing clear guidelines for leveraging this strategy.

Guaranteed Income: Once the QLAC starts making payments, it can provide a guaranteed income stream, offering financial security during the later stages of retirement.

2. Qualified Charitable Distribution (QCD) 

A Qualified Charitable Distribution allows you to donate up to $100,000 directly from your IRA to eligible charitable organizations, offering both tax benefits and the opportunity to support meaningful causes. QCDs allow you to give more to the causes you care about while giving less to Uncle Sam and his buddies. You can start doing QCD’s as early as age 70.5. If you anticipate very large RMD’s in the future, consider beginning Qualified Charitable Distributions as soon as you turn 70.5 to help lower the future RMD’s. This strategy allows you to do well by doing good as they say.

Here are the Benefits of QCD: 

Tax Advantages: The amount donated through a QCD is excluded from your taxable income, lowering your tax bill while contributing to charitable causes.

RMD Offset: QCDs can be used to satisfy part or all of your RMD for the year, providing a means to reduce taxable income that would have resulted from the RMD.

Eligible Charities: When utilizing QCDs, it's important to ensure that the distributions are made directly from the IRA to eligible charitable organizations to qualify for the tax benefits.

Impactful Giving: By utilizing QCDs, individuals can support charitable organizations and causes that are important to them while also managing their tax liability in retirement.

Planning Considerations 

When using Qualified Charitable Distributions (QCDs) to lower your tax bill, several factors need consideration. One essential factor is the limitation on the amount that can be donated annually through QCDs. You can contribute up to $100,000 per year via QCDs, with the donated sum counting towards the Required Minimum Distribution (RMD) for that specific year. Another critical consideration is that for a distribution to qualify as a QCD, it must be directly transferred from the Individual Retirement Account (IRA) to the charitable organization. Moreover, the designated charity must be eligible to receive tax-deductible contributions for the QCD to be valid. These planning considerations are pivotal for individuals looking to optimize their charitable giving strategy while maximizing tax benefits through QCDs.


Both QLACs and QCDs offer viable strategies for reducing the tax impact of Required Minimum Distributions, providing opportunities to lower taxable income, manage tax bills, and contribute to charitable causes. 

At Seaside Wealth Management, forward-looking tax planning is a cornerstone of how we help you get the peace of mind you deserve. If you haven’t yet done so, please upload a copy of your tax return to the Seaside Vault so we can get to work on potentially lowering your tax bill now and in the future.

If you need assistance uploading your tax return copies, please reach out to our awesome Client Service Associate, Matthew Awai. You can call our office at (760) 730-8120 or email him directly at matthew@seasidewealth.com.

This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.