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There ARE Solutions for Required Minimum Distributions! 11.15.2021

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By: Steve Pitchford, Director of Tax and Financial Planning      

Dreading a Required Minimum Distribution, or RMD, from a retirement account? No doubt, it’s because of T-A-X-E-S.

While RMDs can be an unwanted by-product of contributing to and investing in retirement accounts such as 401(k)s, IRAs, 403(b)s, etc., there are impactful and proactive tax planning strategies that can materially lessen the tax sting of an RMD.

What are RMDs, and how should an individual plan for them within the context of a tax-efficient retirement strategy? Read on to learn more about RMDs, and specifically, three actionable RMD strategies worth evaluating to better keep Uncle Sam at bay.

Required Minimum Distributions RMD taxes

What is an RMD?

The Internal Revenue Service (IRS) requires that individuals begin taking annual distributions (read: withdrawals) from pre-tax qualified retirement accounts[1] when they reach age 72. These withdrawals are referred to as required minimum distributions (RMDs).

RMDs from pre-tax qualified retirement accounts are subject to ordinary income tax rates in the year in which they are taken.

Examples of pre-tax qualified retirement accounts include:

  • Regular/Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans[2]
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contributions plans  
  • Inherited IRAs (subject to special rules, see page six)
  • Annuities, but only when held within another qualified retirement plan

Generally, Roth IRAs are the only type of qualified retirement plan not subject to RMDs. Withdrawals from Roth IRAs are tax-free, and the IRS does not mandate distributions from these accounts, as no tax revenue is generated when taking a Roth distribution.

Why are Investors Subject to RMDs?

Pre-tax contributions to a qualified retirement account provide two important and major tax advantages:

  1. A dollar-for-dollar reduction in taxable income (read: an income tax deduction) for the contribution in the year it was made
  2. Investment earnings (interest, dividends, and capital gains) are not taxed until withdrawn from the plan[3]. The power of tax-deferred compounding is tremendous, FYI:
The Power of Tax Deferral RMD taxes

If RMDs did not exist and an individual had sufficient supplemental financial means[4] to meet their retirement spending goals and objectives, they would probably avoid distributions from a pre-tax qualified retirement plan in the interests of avoiding paying the concurrent ordinary income taxes on those distributions. Requiring these distributions ensures that the government will not lose out on valuable tax revenue, on top of the lost tax revenue from the upfront tax deduction and tax-deferred growth that retirement accounts already provide.

How are RMDs Calculated?

For most individuals, the annual RMD calculation is as follows:

  1. The individual determines the account balance as of December 31 of the year before the RMD is to be taken.[5]
  2. The account owner determines his or her “life expectancy factor” using the life expectancy tables published by the IRS.
  3. The account balance is divided by the life expectancy factor to determine that year’s RMD.

The life expectancy table used for most individuals is the following:

Required Minimum Distributions How are RMDs Calculated

*Individuals should speak with their financial advisor or tax professional to ensure that they are not subject to a different life expectancy factor, as exceptions to the above table do exist.

Investment custodians such as Charles Schwab, Fidelity, and Vanguard typically calculate RMDs on behalf of the retirement account owner. However, it is the responsibility of the owner to ensure the RMD is satisfied before year-end.[6]

Towerpoint Tip:

Withholding taxes directly from qualified retirement plan distributions is generally the most convenient way to pay the RMD taxes. However, using after-tax dollars instead to pay estimated tax payments to cover the RMD taxes may be a more tax-efficient approach.

Form 5329 | What If an Investor Misses Taking Some or All of Their RMD?

If a retirement account owner who is subject to an RMD misses taking it by December 31, the penalty is steep: 50% of the RMD shortfall.

If this happens to occur, the individual should immediately:

  1. Take corrective action and distribute the shortfall from their qualified retirement account as quickly as possible.
  2. File a Tax Form 5329.
  3. Attach a letter to the Form 5329 explaining the steps taken to correct this and why it was missed in the first place. While there is no formal guidance from the IRS regarding an error that would qualify for the penalty to be waived, three common positions taken are a change in address resulting in not getting the RMD notification, a death in the family, or an illness.

How to Effectively Plan to Decrease RMD Taxes

There are three strategies that we regularly employ for our Towerpoint Wealth clients to mitigate RMD taxes.

Strategy One: Accelerate IRA Withdrawals

Subject to certain exceptions, age 59 ½ is the first year in which an individual is able to take a distribution from a qualified retirement plan without being subject to a 10% early withdrawal tax penalty.

Consequently, the window of time between age 59 ½ and age 72 becomes an important one for proactive RMD tax planning. By strategically taking distributions from pre-tax qualified retirement accounts between these ages, an individual may be able to lessen theiroverall lifetime tax liability by reducing future RMDs (and the risk that RMDs may push them into a higher tax bracket) by reducing the retirement account balance.

This strategy becomes particularly opportune for an individual who has retired before age 72, as it often affords the individual the ability to take these taxable distributions in a uniquely low income (and lower income tax) period of time.

At Towerpoint Wealth, we utilize BNA Income Tax Planner, a robust piece of tax planning software, to evaluate these types of tax planning opportunities, helping our clients optimize this decision-making process.

Towerpoint Tip:

Don’t forget Social Security! Leveraging distributions taken from qualified retirement accounts to serve as a retirement income “bridge” is an important consideration when strategically planning how and when to receive Social Security benefits. Oftentimes, it is advisable to take distributions from qualified retirement accounts to meet retirement spending goals and objectives and delay filing for Social Security benefits until age 68, 69, or even 70.

Why? Each year Social Security benefits are deferred, starting at the first eligible filing year of age 62, until age 70, the monthly benefit amount increases by a guaranteed 8%! 

Strategy Two: Execute a Roth Conversion

A Roth conversion is a retirement and tax planning strategy whereby an individual transfers, or “converts,” some or all of their pre-tax qualified retirement plan assets from a Traditional IRA into a tax-free Roth IRA.

While ordinary income taxes are owed on any amounts of tax-deferred contributions and earnings that are converted, a Roth conversion, when utilized properly, is a powerful tax planning strategy to reduce a future IRA RMD, as Roth assets are not subject to RMDs. Further, Roth conversions 1) maximize the tax-free growth within a taxpayer’s investment portfolio, 2) provide a hedge against possible future tax-rate increases (as Roth retirement accounts are tax-free), and 3) leave a greater tax-free financial legacy to heirs.

Roth IRAs IRA RMD

For both strategies #1 and #2: Consider executing these strategies for the older spouse first, as this individual will be subject to an IRA RMD earlier. For this same reason, it is often advisable to contribute to the younger spouse’s pre-tax qualified retirement plan first.

Towerpoint Tip:

At Towerpoint Wealth, pairing a Roth conversion with the “frontloading” of a Donor-Advised Fund (DAF) has been a powerful tax planning strategy, allowing our clients to convert additional assets “over” to tax-free Roth assets at lower tax rates, while also allowing taxpayers who would not ordinarily itemize deductions to “hurdle” the standard deduction. This ensures that they receive at least a partial tax deduction for their charitable contribution to a DAF.

Strategy Three: Use the IRA RMD to Make Qualified Charitable Distributions

When an individual becomes subject to an IRA RMD, in lieu of having the IRA distributions go to them, they may consider facilitating a direct transfer from their IRA to one, or more, 501(c)3 charitable organizations (up to $100K annually). This is known as a Qualified Charitable Distribution (QCD).

As long as these distributions are made directly to the charity, they 1) satisfy the RMD and 2) are excluded from taxable income.

This strategy, when executed property, results in a dollar-for-dollar income reduction compared to a “normal” RMD.

Required Minimum Distributions Charitable Distributions

What Is an Inherited IRA, and Are They Subject to RMDs?

An Inherited IRA, also commonly known as a Beneficiary IRA, is a qualified retirement account that is opened on behalf of the beneficiary(ies) of the original owner’s qualified retirement account after the death of this owner. While the rules surrounding RMDs for Inherited IRAs can be complicated, Inherited IRAs are subject to mandatory distribution schedules.

For most individuals, the RMD on Inherited IRAs is levied as follows:

            RMD on Inherited IRA for an owner who passed before December 31, 2019

Subject to a life expectancy table similar to those for regular RMDs. These RMDs begin the year following the death of the owner.

            RMD on Inherited IRA for an owner who passed after December 31, 2019

Subject to the “10-Year Rule” where all funds need to be distributed ten years after the year of the owner’s death. How and when funds are distributed within this ten-year time horizon is up to the owner of the Inherited IRA.

Towerpoint Tip:

The “10-Year Rule” is making Inherited IRA tax planning more important than ever. Although the flexibility of how and when to withdraw funds within this period may be helpful, the window of distribution is more compressed (for most individuals) compared to the “old” rules.

Individuals should consider a Roth conversion if they are concerned about their inheritors paying taxes on future distributions. While Inherited Roth IRAs are subject to the same RMD rules as Inherited IRAs, the distributions are tax-free. A Roth conversion, within this context, is an estate planning strategy to transfer tax liability to the original account owner and away from the future inheritor(s).

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax-efficient retirement strategy. If you would like to discuss further, we encourage you to call, 916-405-9166, or email spitchford@towerpointwealth.com to open an objective dialogue.


[1] A retirement plan that provides tax advantages relative to nonqualified plans. Most employer-sponsored plans are qualified retirement plans.

[2] Less than 5% owners can defer RMDs until they leave the company or retire.

[3] Taxable investment accounts, such as a brokerage account or trust account, are subject to taxes based on annual earnings. Investors receive a Form 1099 each year showing the income to be reported on tax returns.

[4] Pension income, Social Security benefits, taxable investment assets, etc.

[5] For example, a 2021 RMD is calculated using the account balance as of December 31, 2020.

[6] RMDs may be taken all at once or throughout the year.

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Six Strategies to Optimize Your Charitable Intentions 04.13.2021

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By: Steve Pitchford, Director of Tax and Financial Planning and Matt Regan, Wealth Advisor
Published: April 13, 2021 updated October 22, 2021

Most individuals who are philanthropically inclined usually just take the path of least resistance and write a check directly to a charity. Of course, this is a straightforward approach and can qualify for an income tax deduction, but when being charitable, there are many different (and often economically more advantageous) options and strategies available to you. Indeed, with strategic and thoughtful planning, a taxpayer may be able to optimize their gifting strategy, meeting multiple objectives by maximizing the economic benefits 1.) to themselves, 2.) to their favorite charities, and even 3.) to their loved ones.

Are you optimizing your philanthropy and gifting strategy? Below you will find a myriad of different charitable strategies we regularly employ for Towerpoint Wealth clients, designed to help you better understand your options.

Cash/Direct to Charity

A cash gift is the simplest and (by far) most popular form of charitable giving.

The income tax deduction[1] for a cash gift is generally equal to the amount of cash donated less the value of any goods or services received in return. And while the benefit of a cash donation is its simplicity, as you will see below, it is not always optimal from a tax and gifting perspective.

Donor-Advised Fund

A Donor-Advised Fund (DAF) is a charitable fund, a 501(c)(3) entity in and of itself, that allows an individual to donate cash or appreciated securities, such as individual stocks, bonds, mutual funds, or exchange-traded funds (ETFs).[2]

Donor Advised Fund DAF Charitable Intentions White Paper

Donating appreciated securities can be a more tax advantageous way to fund a DAF, as donating an investment that has gone up in value generally provides the exact same tax deduction as donating cash, while at the same time provides the extra benefit of eliminating the capital gains tax that a taxpayer would normally pay upon selling the security.

How does it work? The donor makes an irrevocable gift of cash or appreciated securities to a DAF. The donor is then able to decide, on their own timeline, when to grant funds out of the DAF and directly to a charity or charities of their choice. If the contribution is appreciated securities, the DAF is allowed to sell these positions tax-free. The DAF will typically then, at the donor’s discretion, invest the funds in a manner consistent with the donor’s charitable goals and objectives. Once the donor is ready to make a grant from the DAF, he or she simply informs and authorizes the DAF custodian (usually via the custodian’s online platform) to send a check directly to the charity on the donor’s behalf.

Typically, the funding and operational costs of DAFs are low, and our clients also love that they provide a year-end summary report, eliminating the hassle and stress of tracking each contribution/grant out of the DAF individually.

Towerpoint Tip:

At Towerpoint Wealth, we also evaluate “frontloading” a DAF with several years’ worth of potential charitable contributions, allowing a taxpayer to “hurdle” the standard deduction and thus, not only eliminate the future capital gains tax of the donated funds, but also provide them with at least a partial tax deduction for their charitable contributions in a particular tax year.

Private Foundation

A private foundation is a 501(c)(3) organization set up solely for charitable purposes.

A private foundation may be structured either as a corporation managed by a board of directors, or as a trust managed by trustees. Unlike a public charity, the funding for a private foundation typically comes from a single individual, family, or corporation.

The primary benefit of a private foundation is the enhanced control that it provides, as it is able to formulate its own customized charitable gifting approach and platform (and continue to gift directly to other charities as well). A donation to a private foundation is an irrevocable charitable gift, and qualifies for a potential income tax deduction that, for most individuals, will be the exact same as gifting directly to another 501(c)(3) charity.[3]

Importantly, private foundations have administrative and tax reporting requirements that may be costly, and speaking further with a financial advisor and tax professional regarding the benefits and drawbacks of establishing one is recommended.

IRA Qualified Charitable Distribution

Individuals who are over the age of 72 are subject to annual required minimum distributions (RMDs) from their pre-tax IRA(s). These distributions are included on an individual’s tax return as taxable income and are subject to ordinary income tax.

As an alternative to taking a “normal” RMD, an individual can instead execute a Qualified Charitable Distribution (QCD), which allows them to both satisfy their RMD and their charitable intention at the same time.

How does a QCD work? Instead of a “normal” RMD, which usually is deposited into an individual’s checking, savings, or brokerage account, a QCD is paid directly from the IRA to a qualified charity. This distribution not only offsets – or, depending on the amount, fully satisfies – an individual’s RMD, but it is also excluded from taxable income.[4]

And unlike other gifting strategies, a QCD’s net effect as an “above the line” dollar-for-dollar tax deduction can offer additional economic benefits when compared to a “typical” itemized charitable tax deduction.

Charitable Remainder Trust

A charitable remainder trust (CRT) allows a donor to make a future charitable gift, while at the same time, receive an income stream during their lifetime for their own spending goals and needs. There are two types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). The two main differences are how the annual distribution to the income beneficiary(ies) is calculated and how often assets can be contributed to the trusts.[5]

When the donor establishes and contributes to a CRT, they are entitled to a current income tax deduction that is equal to the future expected value of the trust assets that will ultimately pass to the charitable beneficiary(ies). The deduction calculation is based on a number of different factors, such as the annual income stream payout set by the CRT, the age(s) of the income beneficiary(ies), the trust’s specified term of years, and the published IRS monthly interest rate.

At either 1.) the donor’s death, 2.) the death of the beneficiary, or 3.) the completion of the trust’s term, the trustee will distribute the balance of the trust assets directly to the chosen charity(ies).

The primary benefit of a CRT is that an individual may receive a substantial tax deduction in the year they open and fund the CRT, while at the same time, continue to receive income for themselves (or other income beneficiaries) during their lifetime. If the CRT is funded with cash, the donor can claim a deduction of up to 60% of adjusted gross income (AGI); if appreciated assets are used to fund the trust, up to 30% of their AGI may be deducted. In addition, if the trustee decides to sell contributed appreciated securities, he or she can do so tax-free.

Towerpoint Tip:

Opening, funding, and administrating a CRT is complicated and there are important ongoing tax filing obligations. As such, it is highly recommended to work with a trusted financial advisor and tax professional to ensure that a CRT is the right choice. Further, the tax deduction calculation may be audited, so it is important to hire a qualified professional to appraise this value.

Charitable Lead Trust

In the simplest sense, a charitable lead trust (CLT) is the reverse of a CRT. The income generated by the contributed assets is distributed to the chosen charity, and the beneficiaries receive the remainder interest. Like a CRT, a CLT can be an annuity trust (CLAT) or a unitrust (CLUT), but different distribution rules apply.

There are two main types of CLTs: a grantor CLT and a non-grantor CLT. A grantor CLT, like a CRT, is designed to give the donor an upfront charitable income tax deduction. However, to receive the charitable deduction, the donor must be willing to be taxed on all trust income. Since the gift is “for the use of” a charity instead of “to” a charity, cash contributions to a grantor CLT are subject to reduced deduction limits of 30% of AGI, and appreciated asset contributions are subject to deduction limits of 20% of AGI. For non-grantor CLTs, the grantor does not receive a charitable income tax deduction, nor are they taxed on the income of the trust. Instead, the trust pays tax on the income, and the trust claims a charitable deduction for the amounts it pays to the charity. It is very important to note that since they are not tax-exempt, neither type of CLT offers the ability to avoid or defer tax on the sale of appreciated assets like a CRT does.

A CLT may be a better option than a CRT if an individual has no need for current income and wants to ensure that, upon their death, their loved ones receive an inheritance.

Towerpoint Tip:

A charitable lead trust is often structured to provide gift-tax benefits, not necessarily a current income tax deduction. A donor is able to gift more to family members with a reduced gift-tax effect because the gift’s present value is discounted by the calculated income to be paid to the charity(ies). The tax deduction the individual receives is based on the annual amount provided to the charity.

Pooled-Income Fund

A Pooled-Income Fund (PIF) is a type of charitable trust that functions like a mutual fund.

A PIF is comprised of assets from many different donors, pooled and invested together. Each donor is assigned units in the fund that reflect his or her share of the fund’s total assets. Each year, the donors are paid their proportionate share of the net income earned by the fund – the distribution amount depends on the fund’s performance and, importantly, is taxable income to the beneficiary (which is typically the donor but may also be a family member, friend, etc.). At the death of each income beneficiary, the charity receives an amount equal to that donor’s share in the fund.

PIF contributions provide a tax deduction to the donor upon contribution and, like the other charitable gifting vehicles described previously, affords the donor the ability to avoid paying any capital gains taxes on the contributed appreciated securities.

Pooled Income Fund Donor Charity

A primary drawback of a PIF is that the donor has no control over how the assets are invested, as the investment of the fund is directed by a professional manager. As such, it is important that individuals speak with a financial advisor to ensure that a PIF is thoughtfully incorporated into their overall investment allocation and strategy, as well as philanthropic and charitable giving plan.

How can we help?

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work 100% in your best interests. If you would like to learn more about charitable giving strategies, we encourage you to contact us to open an objective dialogue.

Steve: 916-405-9166, spitchford@towerpointwealth.com


[1] In order for an individual to receive a tax deduction, their combined itemized deductions must exceed their standard deduction.

[2] Appreciated securities may be donated directly to certain charities as well. However, doing so is typically an administrative hassle for both the individual and the receiving organization.

[3] Donations to a private foundation are tax deductible up to 30% of adjusted gross income (AGI) for cash, and up to 20% of AGI for appreciated securities, with a five-year carry forward

[4] Up to an annual maximum of $100,000, per taxpayer.

[5] A CRAT pays a fixed percentage (at least 5%) of the trust’s initial value every year until the trust terminates. The donor cannot make additional contributions to a CRAT after the initial contribution. A CRUT, by contrast, pays a fixed percentage (at least 5%) of the trust’s value as determined annually. A donor can make additional contributions to a CRUT.

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Funding a “Backdoor” Roth IRA

Do you have the enviable problem of NOT being able to contribute to a tax free Roth IRA every year because you make too much money?

Click to watch the video below from our Wealth Advisor, Matt Regan, to learn how you can go through the back door and still fund a *tax-free* Roth every year!

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Retirement Account Rollovers | One Minute Tax Tips

This week’s One Minute Tax Tip – old 401(k) and retirement account rollovers! Many people have a retirement account held with a previous employer, but oftentimes don’t know what to do with these assets. Watch this quick video to learn more about the four options available to you.

Feel free to email us at info@towerpointwealth.com to discuss your circumstances further.

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President Joseph Eschleman Cited As Expert

Our President, Joseph Eschleman, recently penned a white paper for Towerpoint Wealth that discussed 14 different strategies to consider during the coronavirus crisis. Joseph was cited as an expert by MutualFunds.com for his work and content on the subject, who published his commentary on their website on June 11.