Required minimum distributions force retirement savers to take taxable withdrawals out of their retirement plans and traditional IRAs, but advisors have four useful tools to help mitigate the impacts.

Addressing attendees of the Investment and Wealth Institute’s Annual Conference Experience in Nashville on Tuesday, Michael Kitces, director of wealth management for Columbia, Md.-based Pinnacle Advisory Group, outlined four techniques advisors can use to help their clients faced with making required minimum distributions, or RMDs.

“There are a number of situations in which you can try to help people save on their RMDs a little, but you can’t stop the train from coming,” said Kitces.

By federal law, American retirement savers are required to withdraw a portion of their defined contribution plans and traditional IRAs each year after reaching 70 1/2. Failure to take RMDs results in penalties on top of the tax burden caused by taking distributions from a retirement plan, said Kitces.

However, advisors have a few tools at their disposal to help their clients.

Couples Strategies

Advisors can try to leverage the age difference between clients who are married couples to lower RMDs, said Kitces, but such a strategy requires planning in advance and going against conventional wisdom.

Kitces suggests that advisors working with clients concerned about RMDs allocate money to a younger spouse’s IRA or defined contribution plan before allocating towards accounts in the older spouse’s name, because the older spouse will have to take RMDs first.

“It’s a little thing, but we see lots of firms who don’t actually so it,” said Kitces. “Some actually do it the opposite way and try to build up (the older spouse’s) IRA because they’re going to retire first. You have to be conscious of liquidity issues, of course, but we should be putting contributions into the younger spouse’s account first, and the older spouse is where we do withdrawals first.”

Delaying RMDs

Clients don’t have to take RMDs from a workplace retirement plan at age 70 1/2 if they are still working in that job, said Kitces. Advisors may want to consider a roll-in to the current workplace account.

“It only works if they’re not more than a 5 percent owner of the company their working for,” said Kitces. “If they want to completely dodge the RMDs, they’ll have to do it the year before they turn 70 1/2.”

This method of delaying RMDs may not be available to contract workers, said Kitces, as they are not usually qualified to participate in their employer’s retirement plan.

Another option open to retirement savers is participating in qualified longevity annuity contracts, or QLACs, a type of deferred annuity where money accumulates and payment of benefits does not begin until a later date.

Acceleration

“We can also manage RMDs with partial Roth conversions,” said Kitces. “Instead of waiting until clients are 70 1/2, start doing partial Roth conversions while they’re still in their 60s.”

Pinnacle Advisory currently uses partial Roth conversions, up to the top of the client’s current tax bracket, to preserve a client’s wealth from the tax impacts of an RMD. The result of the process is a client with smaller RMDs and a much larger Roth IRA, said Kitces

Charitable Giving

Clients can give qualified charitable donations up to $100,000 a year to offset the tax burden of their RMDs, but if they want their charitable donation to be counted as part of their RMD, it has to be done in one seamless process.

“If you want the qualified charitable donation to count as an RMD, don’t take the RMD earlier in the year on purpose,” said Kitces. “If you’ve already done your required minimum distribution, you can’t use it for a charitable contribution. Once you take the dollars out, you can’t put them back.”

Otherwise, a qualified charitable donation creates a perfect pre-tax wash for RMDs, said Kitces.