Once your client reaches age 70½, he or she must take required minimum distributions (RMDs) annually from taxable IRA and 401(k) accounts. The bigger the account, the bigger the RMD—and the larger the tax bite.

"During working years, we focus on the importance of tax-deferred retirement savings. We talk a lot less about what happens on the other end of that deferral, when the tax bill comes due,” says Joe Musumeci, a CPA with Rowles & Company in Baltimore.

Long-term tax minimization is a must, according to Bruce Primeau, a CPA at Summit Wealth Advocates in Prior Lake, Minn. “Looking out 10 to 20 years and projecting what RMDs and taxes will look like, as well as what role Roth IRA conversions and charitable donations may play,” is how he describes the planning process.

“Consider taking more than the RMD in years when your income and tax rate are lower, which leaves less on which to calculate future RMDs,” says John Mezzanotte, managing partner with Marcum LLP in Greenwich, Conn.

Adds CPA and advisor Ingrid Lamb with Bayview Financial Consulting in Chesapeake Beach, Md., “Be careful of holding off the first RMD and pushing it to the next calendar year, forcing you to take two distributions in one calendar year—which may push you into a higher tax bracket. Take your first distribution as soon as you turn 70½ unless you expect to see your income drop significantly in the next calendar year.”

RMDs also affect other kinds of retirement income. For instance, 85 percent of Social Security benefits are generally subject to federal tax if your client  exceeds income thresholds (currently $34,000 if single or $44,000 if married and filing taxes jointly), according to Musumeci. “If your income is hovering around these thresholds, RMDs may play a role in determining how much of your Social Security benefits are taxed,” he says. “States tax retirement plan distributions and Social Security benefits under widely varying approaches, so it’s important to keep state tax in mind.”

The most effective way for your client to reduce tax on RMDs is to reduce the aggregate value of the traditional (taxable) IRAs. One common tactic involves converting a traditional into a Roth IRA. Says Mezzanotte, “Roth IRA owners enjoy tax-free accumulation of income and have no RMDs. … The taxable portion of the IRA balance converted is taxed as ordinary income that year.” Converting to a Roth can hinge on a client’s age, income tax rate and expected longer-term tax rates. “Converting at an early age in a year when income is down or when tax rates have been cut can reduce the cost of converting,” Mezzanotte says.

Another way to reduce aggregate value in a traditional IRA: Your client can purchase a qualified longevity annuity contract, potentially delaying taxable distributions until age 85. The amount of the annuity purchased is not included in the aggregate value, so it effectively reduces the RMD, according to Mezzanotte, who adds that the current limit is 25 percent of the IRA amount up to $125,000.

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