Consider tax-smart and charitable options
Dear Dan,
I have over $1 million in IRA accounts, my government Thrift Savings Plan, and $100,000 in Roth accounts. I will be 71 this year. I’m thinking about taking $45,000 out this year and next to fill up the 24% bracket pre-required minimum distributions (RMD).
In that case, I would just withdraw money from my TSP and IRA account and pay taxes. Should I just move money to my brokerage account? Convert to Roth? Charitable trust for some amount?
I don’t have children and currently have another $2 million in stocks, bonds, cash and more than $1 million in real estate to leave to close relatives.
Dear Preparing,
If you are assuming the $45,000 from the IRA will be taxed at a higher rate in the future than the 24% rate you would pay in 2024, then what you are looking to do can be a good move. If that is your expectation, I prefer putting the $45,000 in a Roth via a conversion.
Putting the withdrawals in a brokerage account means you’ll likely pay some tax every year when you earn interest, dividends, or sell something for a gain. By contrast, at your age, if those funds go in the Roth IRA, every penny should be available to you tax free as long as it has been five years since you first opened any Roth IRA even if that first Roth IRA account no longer exists.
However, you mentioned a charitable trust. If your intent is to leave funds to charity, IRA or Thrift Savings Plan (TSP) neither withdrawals nor conversions are advised because a qualified charity can receive the funds tax free. Roth conversions mean paying tax now to avoid tax later. You’d be paying taxes now to avoid a tax that will never materialize in the future. The tax-exempt status of charities make them an ideal beneficiary of retirement accounts and other tax-deferred accounts.
Similarly, if you want to leave IRA or TSP money to relatives in a low tax bracket, you might do better by not taking distributions until required in two years when you turn 73, because you’d just be paying taxes now at your higher rate when the money could get taxed at a lower rate when withdrawn by an inheriting relative.
That is not always the case because the relative may be in a higher bracket in the future when they inherit, or the size of the account may be high enough that the inheritor’s RMD puts them in a higher bracket.
Regardless of who you want to inherit your retirement funds, if you have charitable intent, you can whittle down your 2026 required minimum distributions (RMD) by making qualified charitable distributions (QCD) from your IRA now. (You cannot make QCD from the Thrift Savings Plan.) You became eligible to make QCD the day you turned 70 ½. The donations must be paid directly to a qualified charity and the total of all QCD during the year is subject to a cap of $105,000 for 2024 and $108,000 for 2025.
These distributions will be excluded entirely from your gross income and completely untaxed. By making these QCD, the balance of your IRA will be lower than if you had not made the donations. Your first RMD for 2026 is based on the account balance as of Dec. 31, 2025, the RMD. Furthermore, if you make QCD in 2026 or later, those donations will count toward your RMD.
Depending on how charitable you are, it is possible for you to never pay a dime of taxes due to RMD.
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Originally published on MarketWatch. Read the original article here.