Last week, I wrote this: “Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives.” In our day jobs as financial advisors, we frequently meet people who would rather not have to withdraw the funds from their retirement accounts. While we understand their positions, we also maintain that the RMD requirement is reasonable. In my opinion, our ability to contribute and grow Retirement funds in tax-deferred accounts over decades is vastly more significant than later taxes on the RMD requirement.

For many Retirement Account owners, the RMD requirement fits into their retirement lifestyle when used as a replacement for the monthly income formerly received while working. Timing of RMD payments is only bound by the calendar year, with annual, monthly, or quarterly withdrawals treated the same by IRS. Federal Tax withholding can be structured to work like paycheck tax, but no FICA or Medicare withholding applies (RMDs are “unearned income”).

Timing of RMD withdrawals is a personal, needs-based decision, with as many available permutations as account owners. With flexibility comes the opportunity to tailor withdrawals to your needs and/or wants. Our clients’ requests span the gamut, ranging from transactions (such as car purchases or dream vacations), to monthly income streams or investment of the net proceeds in taxable brokerage accounts.

Most retirees welcome the income they receive from RMDs, but (for tax reasons) some would rather reduce their annual RMD withdrawal requirements. For these folks, there are two relatively unknown options, called Qualified Charitable Distributions (QCD) and Qualified Longevity Annuity Contracts (QLAC). Although they are completely different strategies, both are effective methods of reducing future taxable RMDs.

IRA owners who are subject to RMDs and are charitably minded can now distribute donation funds directly to their qualified charities, while saving themselves income tax on the QCD amounts. Rather than receiving direct (and therefore taxable) distributions from their IRA, an account custodian (Schwab, Fidelity, etc.) sends a check directly to the charity. This amount reduces the RMD dollar-for-dollar, but is not counted as income to the Account Owner. No income, no tax, on all QCD funds (up to the current $111,000 annual limit).

We should note that all IRA owners who have attained age 70-1/2 are eligible to execute QCD transactions. Under the new, higher RMD age limits, this feature was not restricted by any increased age requirements.

Next week, we will cover the QLAC option for postponing a portion of RMD requirements for IRA owners who do not need current income.