MINNEAPOLIS – March 18, 2019 – As the 2018 tax deadline approaches, many Americans are looking for ways to mitigate their tax bill and navigate changes to their taxes as they reach retirement age. One often-overlooked area that can lead to unwanted surprises come tax season is required minimum distributions (RMDs).
That’s why many Americans say understanding and managing the impacts on taxes resulting from RMDs is top of mind, according to a recent study by Allianz Life Insurance Company of North America (Allianz Life®).
The RMD Options Study* asked high net worth consumers ages 65-75 about their opinions and behaviors with RMDs, and found that most consumers want to reduce the impact RMDs have on their taxes. The vast majority (95%) said it is very important to minimize their tax burden in retirement, yet nearly a third (32%) say they have difficulty understanding how RMDs could impact their overall tax obligation. Not surprisingly, 83% of consumers said they hate paying taxes on their RMDs that come out of most tax-deferred retirement plans, which are calculated as income tax.
Avoiding Unwanted Tax Surprises
Navigating RMDs can be confusing for many consumers due to the nuances and rules that can vary between different qualified retirement plans and arrangements. Further, understanding the specific tax implications proves to be a challenge as well.
Another point of confusion for many consumers is the worry that their RMDs may push them into a higher income tax bracket. The study found that 61% of people are concerned about this, and worry they will end up paying more taxes overall.
“Understanding how RMDs can affect taxes is a complex issue,” said Kelly LaVigne, VP of Advanced Markets, Allianz Life. “Particularly for those who are just turning 70 ½, it’s important to work with a financial professional who can help lay out all options and find a way to efficiently handle taxes on RMDs.”
Those who turned 70 ½ in 2018 have an upcoming deadline to be aware of, before taxes are due on April 15.
“April 1 is the deadline to take your first RMD payment if you turned 70 ½ last year,” said LaVigne. “This date can be confusing to some, but if you didn’t take your first distribution at the end of 2018, you should start that process as soon as possible to ensure you comply with the April 1 deadline.”
Making a Plan for RMDs
While 67% of consumers say they have a good plan to minimize the impact of taxes on their retirement income overall, that still leaves a third who do not have a strategy in place.
Despite those who don’t have a plan, many consumers say they want an easier way to manage their distributions, with 57% wanting the RMD distribution and tax payment to occur without having to get involved.
“Because RMDs are often a manual and confusing process, it’s a good idea to plan ahead and determine how, when and from which accounts you will take the payments,” said LaVigne. “There are many different factors to consider, so talk to your financial professional for help with your RMD strategy.”
With certain RMD and tax deadlines right around the corner, Americans preparing to take their RMDs or waiting to see the impact on their taxes can avoid unwanted surprises by developing an RMD strategy with their financial and tax professionals.
*Allianz Life Insurance Company of North America conducted an online survey. The RMD Options Study was conducted in February/March 2018, and included a nationally representative sample of 805 respondents ages 65-75 with retirement savings of $500,000 if single or $750,000 if married and who are the primary decision maker or share equally in decision making.