One tax strategy for age 73+ and
one tax strategy for 64 and younger
It’s the start of a new year, the time when it is most evident that procrastination is not anyone’s friend—especially when it comes to finances.
If you spent any part of your holiday season reviewing tax documents, budgeting, and wishing you had been more strategic with your spending and investing, we’re here to help.
There are two tax-savings strategies that individuals of any income level can employ, and the best part is, you don’t have to wait until December to take advantage of them—you can start right now.
Be strategic with your RMDs
The first strategy is fairly simple, but little known to most everyday investors, and it involves Required Minimum Distributions, or RMDs.
What is an RMD?
If you are over the age of 73[1] and have money saved in any pre-tax retirement account (e.g., an IRA or 401(k)), you are required to withdraw a certain amount of money from that account each year, which you are then taxed on.
How is your RMD calculated?
The amount of money you must withdraw is determined each year by a formula the IRS uses to calculate an individual’s RMD. This formula considers your age/life expectancy along with your account value as of December 31st of the previous year. As you age, your RMD increases, in an effort to (essentially) drain the account.
How can you minimize your tax burden from RMDs?
Any time you withdraw money from a pre-tax account, it counts as taxable income. However, if that money is transferred directly to a charitable organization (rather than deposited into your checking account), it does not. This is what’s known as a qualified charitable distribution, or QCD.
So if you’re already charitably inclined or simply don’t need all of your RMD to support your current lifestyle, you can take advantage of a QCD and lower your tax bill. It’s a simple way to save money, especially for individuals who already give consistently through a tithe or other donation.
Just think, if your RMD is $10,000 and you already plan to give away at least that much to a qualified charitable organization, you could save $3,000 in taxes (supposing the tax rate is 30%) just by rearranging where the funds come from.
Of course, the details are slightly more complex, so it’s important to work with a professional who understands the regulations and can ensure the transfers are done correctly to achieve your desired outcome.
And you don’t have to give away the entirety of your RMD to reap the benefits of a qualified charitable distribution—you could keep 60% and donate 40% and still receive the tax break on the 40%.
Does it matter when I take out my RMD?
The short answer is no; it just depends on what works best for your cash flow, and, if you’re doing a qualified charitable distribution, when you have time to do a little extra paperwork. The important thing is to get the RMD out of your account before the end of the year—if you don’t, the IRS penalizes you 25% of your RMD, and you still have to pay the taxes.
Utilize a Health Savings Account
Health Savings Accounts, or HSAs, are available only to individuals who have high-deductible health plans, and if you fall into that category, they can be incredibly beneficial, as they are the only triple-tax-advantaged savings account.
What is an HSA?
A health savings account allows individuals to save pre-tax money[2] for qualified medical expenses. That money grows tax deferred and can also be withdrawn tax-free—hence the triple tax advantage.
The definition of “qualified medical expense” covers far more than most insurance plans. Money from an HSA can be used to cover doctor visits, prescriptions, and even services like acupuncture and orthodontic care.
Benefits of an HSA
Whether or not you have high medical expenses, an HSA can serve as a valuable tax-advantaged savings vehicle. Once you reach age 65, you can withdraw from your HSA for non-medical expenses without incurring the standard 20% penalty. You still have to pay income tax, but it’s on your pre-tax money that has (theoretically) grown over the years tax deferred.
How to get the most from your HSA
Most individuals with an HSA open them through their employer, and those HSAs typically act like a traditional savings account (apart from the triple-tax advantage) with an interest rate of around 0.05%. However, you can open an HSA that is invested in exchange-traded funds or mutual funds, so the account value grows at a much higher rate.
Our firm offers these types of accounts, and if you already have a traditional HSA through your employer, you can roll it over to an invested HSA and start taking advantage of greater growth opportunities.
Get Started Today
The beginning of the year is the best time to formulate a tax-savings plan. Not only does it give you more time to determine what strategies are reasonable for your budget, but it allows you to implement your plan incrementally—for example, you can start contributing monthly to your HSA rather than try to max out your contribution during the holiday season.
If you’d like assistance formulating a savings plan for the year, we’d love to help. Email or give us a call to schedule a consultation.
[1] This age limit is gradually increasing; several years ago, it was 70½, and for individuals born after 1960, the age to begin taking RMDs will be 75.
[2] Individuals under age 55 can contribute up to $4,300 for the year 2025 (couples can contribute $8,550), and individuals 55 and over can contribute an additional $1,000.
