RMDs, Dividends, and Taxes, Oh My!


RMDs, Dividends, and Taxes, Oh My!

Just like Dorothy was afraid of lions, tigers, and bears in the Wizard of Oz, many retirees (especially those of higher net worth) are most concerned or “afraid” of how to minimize their tax obligations in retirement.  It’s not about how much you make in retirement, but how much you get to keep at the end of the day!  What’s the point of having a successful investment portfolio if you don’t have any tax strategies in place to keep Uncle Sam from digging into your pockets?  Many of our clients are most concerned about what kind of distribution strategy will conserve as much of their money from excessive taxes as possible.

Required Minimum Distributions are inevitable for all retirees when they reach age 70 ½.  Any savings held in a tax-deferred accounts (IRA, 401k, 403b, 457) will require a mandatory distribution in the year you reach that age.  The IRS has a calculation which determines how much you must take out, but it will most likely vary between 3.6% to 3.8% of the cumulative value of your retirement accounts your first year of distribution.  The percentage will gradually go up every year you get older, which is a concern because all of this money is 100% taxable at your ordinary income tax rates.  It’s important to plan accordingly for this, because the last thing you want is to get bumped up into another tax bracket, forcing you to pay that higher rate.  Even if your RMD is not drastic enough to bump you into the next tax bracket, it’s still a significant factor that must be considered when trying to minimize your tax bill in retirement.

Dividends become a big issue in those accounts outside of your retirement savings (we call these non-qualified accounts).  In your non-qualified accounts, any dividend income is automatically added to your tax return (on a 1099), and depending on the nature of the dividends you will have to pay either at your ordinary income tax rate or a rate similar to capital gains taxes.  The issue with dividends is simple: no matter whether you collect the dividends or reinvest them, they are 100% taxable the year you receive them!  Depending how much you have saved in non-qualified accounts, this can be a real killer on your tax return.  We have seen dividend income on client tax returns amount to over $150,000 per year. Imagine that on top of all your other sources of income! (Social Security, pensions, RMDs, other qualified distributions, etc.)

Taxes, Oh My!
The key to an effective tax minimization strategy is effectively removing some of this extra income from your tax return without minimizing your goal of preserving and growing your assets.  This can be done through diversifying among different asset classes which have more tax-advantaged structures.  For example, a great start to this strategy may be removing just enough dividend income to cancel out the additional income generated by your required minimum distribution.

You Need a Plan
It’s been often quoted, “To fail to plan is to plan to fail”.  Unfortunately, most CPAs are not as focused on tax-strategizing as they are in tax-preparing.  They become so overwhelmed with responsibilities during tax season that they can oftentimes have ‘tunnel vision’:  trying to save you money on this year’s tax return, at the expense of planning for your next twenty years of tax returns in retirement.  Is your current broker or advisor giving you guidance in this important area?  If the answer is no, ask yourself “Why not?”  We would be glad to work with your current tax professional, or recommend a tax strategist in order to nail this issue before you pay way too much than you should to Uncle Sam.  Could a second opinion be worth saving thousands of dollars compounded over the next twenty years?

Questions, comments, concerns? Feel free to contact me!
Rich Feola

732 364 5462


At Family Focus Financial Group, Rich develops unique retirement strategies for his clients and recognizes that there is no one-size-fits-all approach. Rich is committed to developing both a custom strategy and close relationship with each client. He believes maintaining a relationship with our clients will ensure their strategy is always on course to reach their goals. Rich Feola maintains an insurance practice and the fiduciary standard of Investment Advisor Representation, a series 66 licensed registration, with Global Financial Private Capital, an SEC Registered Investment Advisory Firm.

*Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor. Global Financial Private Capital and Family Focus Financial Group are not affiliated companies. Not intended for specific legal or tax advice. Any views expressed are for information purposes only and should not be construed in any way as an offer, an endorsement, or an inducement to invest or purchase insurance products.