It may not be the worst of the many things retirees must deal with, but when you turn age 70½, you must begin to take withdrawals from your IRA -- no later than April 1 of that year.
IRS Publication 590 specifies when the distributions must begin and the amount you must withdrawn each year. Even beneficiaries have to follow a special set of required distribution rules when they inherit an IRA.
However, let’s say you have a considerable amount of money in an IRA, but you also have enough income from other sources to live on. People who are collecting pension payments and retirement benefits from Social Security often find themselves in a situation where they’re also required to take taxable IRA withdrawals, but don’t really need to do so.
In fact, IRA withdrawals can increase your taxable income and cause more of your Social Security benefits to become taxable. For anyone in this situation, here are three strategies to consider for delaying taking taxable IRA withdrawals.
One new strategy is to invest some of your IRA in a Qualified Longevity Annuity Contract, or QLAC. These are deferred-income annuities designed by insurance companies. A QLAC guarantees a specified amount of income for life that begins at a set date in the future. The important thing to know is that money invested in a QLAC is ignored for the purposes of required minimum distribution rules.
Here’s how a QLAC works. Say you’re a 70-year-old male and want to reduce the taxable withdrawals you’re otherwise required to take from your IRA. You could invest up to $125,000 of your IRA in a QLAC. If you want to wait to receive distributions on that part of your IRA until age 80, you could get about $23,560 per year for life. If you can wait until age 85, the annual lifetime income could be $46,112.
If you want to make sure your beneficiaries receive the unused portion of what you invested in the QLAC, the annual income payout to you would be about 25 percent less. If you did this, your taxable minimum distributions would be reduced by about $4,500 per year.
The rules for QLACs allow you to invest the lesser of 25 percent of your combined IRAs or $125,000 in a QLAC to avoid having to take distributions on that money. You’ll still be required to pay taxes when you receive payments from the annuity, but the required distributions can be delayed to as late as age 85.
A second strategy is to continue working for an employer who provides a 401(k) plan benefit. If you’re still working, you can transfer your IRA into your employer’s 401(k) plan. By doing this, you can delay the requirement to take distributions from the transferred IRA funds.
This is because people over age 70 who continue to work aren’t required to take taxable withdrawals from their retirement plans at age 70½. Instead, they can delay taxable retirement plan distributions until the year they actually retire.
But this works only for those who plan to continue working after age 70 and roll over their IRA into their employer’s retirement plan before they hit that age. This is a good financial planning strategy for people who don’t need the IRA distributions for income and are in a higher tax bracket.
Are you taking taxable IRA withdrawals and making donations to a nonprofit, religious organization or charity?
If so, reconsider what you’re doing and think about this third strategy: If you’re over 70½, the tax rules allow you to take money from your IRA and donate it to charity tax-free. The rules require that the money distributed from the IRA be directly transferred to a charitable organization. There’s a dollar limit for this, which is up to $100,000 per year.
Also, while such a direct distribution to a charity is tax-free, you can’t also claim the donation deduction on your tax return.
This was a temporary tax provision that was permanently extended last year. For people with higher incomes, this is better financial planning than taking a taxable distribution from your IRA and then donating the cash to a charity and claiming an itemized deduction. That’s because those in higher tax brackets lose some of their itemized deductions as a result of an income-related phase out of deductions.