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Loss Aversion

Overcoming Loss Aversion in Retirement

What is Loss Aversion?

Loss aversion is a term coined by psychologists Daniel Kahneman and Amos Tversky. It claims the pain we experience from a loss is twice as great as the pleasure from an equivalent gain. This means for someone to accept the risk of losing $10 in a coin flip, they would need the chance to gain $20 for winning. 

With this in mind, loss aversion can be a driving force when making investment decisions. All investments, including cash, carry some form of risk you must accept. The difference between them is how quickly that risk can manifest itself.

This can lead many to focus on avoiding short-term volatility while potentially exposing themselves to longer-term risks.  

Loss Aversion to Sudden Risks

When people think about “losing money” from investing, they view it as getting into a car accident. Where an unavoidable sudden shock can cause damage that can take years to recover from.

With this in mind, some may want to avoid driving altogether, to ensure they never get into an accident. However, you can see the potential accommodations you would have to make to your lifestyle by never using the motorways again. 

Loss Aversion to Gradual Risks

There is another kind of risk that is often overlooked. This is the potential erosion of your purchasing power from inflation. Since this can take years or decades to occur you are less likely to feel it taking place.

This gradual loss is similar to living a sedentary lifestyle. Meaning skipping a single workout is unlikely to have much effect on your long-term health, but years of consistent inactivity can result in serious health consequences later in life.


We tend to be averse to losing and this aversion can frequently manifest itself in our investment decisions as you can see in the examples above there are different risks that are associated when investing.

The sudden risk that can occur in the stock market and the gradual risk that comes from conservative investments. In both instances, careful planning and the development of a strategy can attempt to mitigate these potential risks. This can allow you to tie your investment plan to your goals to ensure your approach is prudent given your circumstances.

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How Sequence Risk Can Impact Your Retirement

What is Sequence Risk?

A common assumption when planning for retirement is that your portfolio will grow at an average rate each year. This helps simplify projections when determining if your nest egg is sufficient enough to last through your retirement.

However, in the real world, future investment returns are rather unpredictable from year to year. This means a string of poor investment returns is not uncommon and can potentially cause your returns to be lower than expected. This is known as sequence risk.

The Potential Impact Sequence Risk Can Have on Your Retirement

If a series of negative returns occurs during the period leading up to or immediately after your retirement, there could be a major impact on your retirement nest egg. This is because sequence risk amplifies investment volatility since you are selling shares at a depressed value to fund your retirement expenses.

As a result, there could potentially be a permanent impairment in the amount of retirement income you could generate from your portfolio if there was a dramatic market decline early in your retirement.   

How to Potentially Mitigate Sequence Risk

Unfortunately, there is little you can do to control the economy or stock market conditions surrounding your retirement. However, you are able to take steps to attempt to insulate your portfolio from the volatility of the market.

This means you could carve out portions of your nest egg and place it in investments that attempt to mitigate risk to fund your upcoming years of retirement spending. This way you do not have to sell other investments that may have decreased in value but instead are using funds that were already set aside for that purpose.

In addition, it could make sense to reduce your discretionary spending during a period of poor returns. This could include, postponing a trip, delaying major purchases, or cutting your portfolio withdraws by a certain percentage.

During this time, you could also look to tap other sources of liquidity to allow your investment portfolio to recover.


With a retirement that could last 30+ years, it is important to consider the impact that a sequence of negative investment returns early on can have on the longevity of your nest egg. Awareness of this risk allows you to develop a strategy to attempt to mitigate this risk during the years surrounding your retirement.

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How Longevity Risk Can Impact Your Retirement

Understanding Longevity Risk

One of the key assumptions in a financial plan is how long you expect retirement to last.  However, the longer you expect to live, the greater the possibility you could run out of money in retirement.

This is what’s known as longevity risk. With longevity risk, the concern is not about dying early, but rather living longer than anticipated. For married couples, this means looking at the likelihood that one of the two of you will live much longer than expected.

Estimating Your Longevity with Software

A useful tool when estimating your, and your spouse’s, longevity is the Actuaries Longevity Illustrator (ALI) which was developed by the American Academy of Actuaries and the Society of Actuaries.1  

Their projections are based on mortality tables used by the Social Security Administration in the annual Trustees’ Report and separate rates are used for males and females. They also assume the trend of improving longevity will continue when making their projections.

To account for individual differences, they make additional adjustments based on four other factors (age, gender, smoking, and health.) They have found that these factors account for significant individual variations in longevity.  

Their models suggest a retirement period lasting 30 years (to age 95) would be appropriate for the average, non-smoking, 65-year-old male/female couple retiring today.

Longevity’s Potential Impact on Your Retirement Plans

Once you have a grasp on what your potential retirement horizon may be, you might begin to view some financial decisions differently. Some of these decisions include:

When you decide to retire

Knowing that your retirement may last 30+ years could cause you to rethink when you retire. This could be due to not having enough saved to cover your future expenses. Or it could be that want to gradually reduce how much you work over several years before finally retiring.

When you claim Social Security

Social Security is a source of retirement income that can help protect you from longevity risk. This is because your benefits are adjusted annually for inflation, and continue for your lifetime.

Additionally, if you’re married, your spouse could receive survivor benefit payments once you pass. With this in mind, it’s important to consider when you claim your Social Security benefits.

It may make sense to not receive your benefits as soon as possible since you will receive a larger benefit by delaying. If you can wait until age 70, you will receive what is considered the maximum benefit.

How you invest in retirement

With a retirement that could last decades, it’s important to invest your retirement assets with a goal of maintaining your standard of living throughout retirement.

This means you must have a mix of assets that allows you to fund your current needs while providing you the potential for long-term growth to meet your future spending needs.


Although longevity risk can pose a serious threat to your retirement plans, its impact can be mitigated with prudent planning and using reasonable assumptions for how long you and your spouse may live.


  1. See American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, (accessed September 21, 2021).

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Diminishing Returns

What is the Law of Diminishing Returns?

The law of diminishing returns is the idea that benefits gained from something will represent a proportionally smaller amount as more money or energy is invested in it. The realms of fitness and retirement planning both provide countless examples to illustrate its effect.

Diminishing Returns with Weight-Loss

For example, in the fitness realm, weight loss is subject to the law of diminishing returns. At a very high-level weight loss can be reduced to burning more calories than you take in. This can be done by either decreasing your caloric intake or increasing your caloric expenditure. However, at a certain point, the law of diminishing returns begins to take effect.

You can only restrict your calories to a certain extent. Beyond that, it can begin to affect your energy levels, performance at work or in the gym, and increase your focus on food. Also, the more extreme your caloric deficit the shorter you will likely be able to maintain it.

Additionally, you can only exercise so much. Meaning you can only burn so many calories in a day before there are negative side effects. This can include the inability to recover, injury, and the sheer time it takes to workout can begin to detract from the rest of your life.

The Importance of a Sustainable Weight-loss Strategy

With this in mind, reasonable (sustainable) weight loss can only happen so quickly and will likely include a combination of moderate calorie restriction and greater energy expenditure. Where this can become an issue is when you want to lose a certain amount of weight in a constrained timeframe.

Often, reaching this short-term goal requires you to engage in unsustainable behavior, which could have long-term consequences. You may be able to lose a majority of all, of the weight before your deadline, but all too often the pounds are quickly regained. It is not uncommon for you to be worse off, from this yo-yo style diet than if you weren’t to diet at all.

Diminishing Returns in Retirement Planning

The law of diminishing returns can also be seen in retirement planning when someone wants to accumulate an investment nest egg sufficient enough to fund their retirement. At a high level, this requires you to spend less than you earn, and save/invest the difference in a way that allows you to transfer economic value through time.

With that being said, for someone who wants to build their nest egg more quickly, they can save/invest more. Or they could look to generate greater returns from their investing. When it comes to boosting their saving, they can either reduce current spending or increase their income.

However, frugality can only get you so far, and at some point, you are left with the basic necessities for survival. On the other hand, earning often means working more, but there are only so many hours in the day.  

The Risk of Seeking Higher Returns

The other possibility is to try and generate greater returns from your investments. Greater potential returns are usually accompanied by taking more risks. This can be done by allocating a larger portion of your assets to riskier investments such as stocks. 

But even a 100% stock portfolio is limited in its long-term growth potential. What also increases as the potential for return increases is the risk associated with a given investment. 

This means the more risk you take, the more likely you could experience a negative outcome. Especially for those who are risk-averse, after a certain point, the extra risk they must take on for a potentially high return becomes undesirable.

Finding a Balance

Just like with weight loss, going to extremes may be tolerable in the short term, but isn’t likely sustainable in the long run. Understanding the law of diminishing returns and applying it to your situation can allow you to develop a strategy that lets you find the sweet spot between the benefits gained and the effort given. 

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Minimizing Complexity in Your Investment Portfolio

The Limits of Diversification

Diversification has its limits when it comes to mitigating risks. It is very useful in mitigating the unsystematic or company-specific risk that comes from investing in an undiversified asset. However, it cannot eliminate the inherent risk that comes from investing in the market.

With this in mind, diversification can only lower your risk to a certain extent, regardless of the number of investments you own. However, what does not decrease, as your holdings increase is complexity.

Often, adding complexity (your portfolio) on top of complexity (the markets) can increase risks rather than reduce them.

The Potential Downsides to Complexity

First, it makes it more difficult to manage a portfolio. Every additional holding means additional research, due diligence, monitoring, and time spent actually trading the investments.

Second, it can increase the costs of your portfolio. More holdings mean more trades and trading fees.  In addition, you could be paying additional management fees without the added diversification benefits. This is due to your funds holding the same underlying assets. When this is the case, you likely could achieve similar returns by holding a lower-cost index. 

Lastly, a portfolio with many different investments also raises the risk of tinkering. This is because we have a bias towards taking action and doing something feels better than nothing. Having many individual components in your portfolio may tempt you to unnecessarily sell/replace an investment. This is especially true when an investment is performing poorly.

Finding the Appropriate Balance in Retirement

As you approach retirement, you want to develop an investment strategy that allows you to achieve broad diversification while minimizing complexity. Thankfully with the rise of low-cost broad index funds, a globally diversified investment portfolio is within reach for the vast majority of savers.

The more individualized portion of your investment strategy is deciding the mix of stock, bonds, and cash alternatives you will hold in your portfolio. This asset mix should be based on your need to fund both your current and future expenses.

This process is relatively straightforward in theory, but in reality, can be challenging when factoring in the unpredictable nature of the markets. This is why it is important to have a plan in place ahead of time so that you can be proactive rather than reactive in your decision-making.

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Reducing Company-Specific Risk in Retirement

What Causes Company-Specific Risk

Oftentimes, those who have accumulated significant wealth did so through the concentrated holdings of stock/option compensation from an employer, business ownership, a successful long-term investment, or inheritance.

This can mean their ability to fund their retirement can be contingent on the continued prosperity of a specific asset. Although this concentrated investment strategy allowed you to generate your current nest egg, it may not make sense from a risk/reward perspective to continue to hold these assets.

This is because holding a large percentage of your retirement portfolio in a single asset increases something known as “unsystematic” risk. Unsystematic or company-specific risk is an additional kind of risk you take on when investing in an undiversified asset.

To illustrate this point J.P. Morgan Asset Management published a report on how often a concentrated position would have underperformed the Russell 3000 Index from 1980 to 2020. They found about 2/3rds of the time, a concentrated holding in a single company would have underperformed a diversified holding in the Russell 3000 Index.

A potentially more alarming finding was approximately 40% of all Russell 3000 Index components lost at least 70% of their value and never recovered.

However, the potential permanent loss of value that comes from holding a single asset can be mitigated through diversification. Proper diversification can limit the risk you take to “just” the inherent risk that comes with investing in the market. 

Potential Barriers to Reducing Company-Specific Risk

In theory, diversifying a concentrated holding should be a relatively straightforward process. You would simply sell a portion, or all, of the asset and invest the proceeds based on your long-term investment strategy.

In the real world, the diversification process can be more complex due to the following factors:


Many times, holdings in a single asset have large unrealized gains, as a result of years of compound growth. Selling this asset would create a large tax bill that many would find undesirable. As a result, many continue to defer the sale indefinitely due to their unwillingness to pay taxes.

Although, if the position happens to be in a tax-deferred or tax-free account, there will not be tax consequences on the sale of the position. The tax liability would not be a factor in this case.

The Endowment Effect

There is something known as the “endowment effect” where you value something more, simply because you own it. It could be the stock of a company you’ve worked at or your share of a business you started. Or this holding could have been inherited from a spouse, parent, or grandparent, and as a result, carries a strong emotional attachment. 

This attachment can tilt your investment decisions. You may continue to hold the asset even if it doesn’t fit in your investment strategy. 

Future Regret (FOMO)

Often you don’t want to sell an asset because you are afraid you will miss the opportunity of future gains. This is especially true with an investment you have seen have significant appreciation in value. You can become overconfident that this past success will continue into the future and will regret ever selling.

A Question to Ask Yourself When Thinking About Company-Specific Risk

With these barriers potentially clouding your judgment, we have found this question helpful when thinking about selling an asset.

“If you didn’t own this asset, but instead had the equivalent amount in cash, how much would you buy of it today?”

Let your answer dictate how you should proceed. If you would feel comfortable buying less than you currently own, or none at all, it may be time to create a diversification strategy.

Create a Diversification Strategy

Having a diversification strategy can allow you to incorporate the sale of this asset with the rest of your retirement plan. Depending on the size of the position, it may make sense to sell portions of the asset over a number of years. Doing this can allow you to spread your tax liability over time while still diversifying away from the position.

Also, the annual sales could be coordinated with your retirement cash flow plan. This could allow you to take advantage of other retirement income-boosting strategies such as delaying your Social Security benefit.

A final option for those who are charitably minded is to donate some, or all, of the assets to charity. By donating the financial asset held for more than 12 months, you can avoid paying capital gains taxes. In addition, your gift may be deductible for income tax purposes.  

The company-specific risk that comes with concentrated holdings can be mitigated through diversification. However, the process of selling can have many nuances. Having a diversification strategy in place could be useful when making investment decisions that have tax and emotional implications.

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Key Retirement Milestones

Breaking Down Important Retirement Milestones

As you approach retirement there are certain age-based milestones you should be aware of. Some of these milestones create potential planning opportunities to boost savings, maximize retirement income, or improve tax efficiency.

Others mark deadlines that could result in stiff penalties if overlooked. Below, I have listed each key retirement milestone by age along with a description.

Age 50

Once you reach age 50, you can begin taking advantage of something called catch-up contributions. This provision allows you to increase your annual contributions to qualified retirement accounts during what could be the high-earning part of your career.

For instance, in 2021, participants in 401(k), 403(b), and governmental 457(b) plans can contribute as much as $19,500 per year. However, those who are age 50 and older can contribute an additional $6,500.

Additionally, there are catch-up contributions for eligible traditional and Roth IRA account holders age 50 and older. You can save an additional $1,000 above the base $6,000 federal contribution limit in 2021.

Age 55

At age 55 you are able to withdrawal employer-sponsored retirement plan savings without incurring the 10% early withdrawal penalty if you leave your job or retire. Important: This only applies to assets in your current 401(k) or 403(b) and money in a former 401(k) or 403(b), or individual retirement account, is not covered. Also, if you were to roll over those assets after leaving your job, you would lose your eligibility for early penalty-free withdrawals. 

In addition, this is the age where you can make catch-up contributions to your HSA account. For those eligible, the annual catch-up contribution is $1,000 above the 2021 limits of $3,600 for self-coverage and $7,200 for family coverage. However, any employer contributions that are excludable from your income reduce your contribution limit.

Age 59.5

After age 59.5 withdrawals from qualified retirement accounts are not subject to the 10 percent early withdrawal penalty. This includes employer plans such as 401(k)s, 403(b)s, and 457s, Traditional IRAs, Roth IRAs*, Simple/SEP IRAs, and annuities. For Roth IRA distributions, they must meet the five-year holding requirement in addition to taking place after age 59.5.

Age 62

62 is the earliest age you can claim Social Security benefits. *  Depending on the year you were born, your monthly benefit will be permanently reduced by 25 to 30 percent of your full retirement age (FRA) amount.

Also, something called the retirement earnings test could reduce the social security benefits you receive prior to FRA if your employment income is above certain thresholds. *Important: Surviving spouses can claim survivor benefits as early as age 60.

Age 65

For those eligible, the initial enrollment period for Medicare starts three months before the month you turn 65 and ends three months after the month you turn 65. Failure to enroll during this window could result in gaps in coverage or potential late enrollment penalties.

Age 66-67

Depending on your year of birth, your Full Retirement (FRA) Age for Social Security is anywhere between 66 and 67. FRA is when you are entitled to receive 100 percent of your primary insurance amount (PIA.)

Age 70

This is the last age you can receive delayed retirement credits (DRCs) for your Social Security benefit. There is no advantage to waiting to file for benefits beyond age 70.

Depending on your year of birth, this could result in you receiving up to 124 to 132 percent of your full retirement age benefit.

Age 70.5

Traditional IRA owners may begin making qualified charitable distributions (QCD’s) at age 70.5. A QCD, allows you to donate directly to an eligible qualified 501(c)(3) charity. This distribution is then excluded from your taxable income. The annual QCD limit is $100,000 per individual.

Age 72

The year you reach age 72 you must begin taking required minimum distributions (RMDs) from your employer-sponsored retirement plans and traditional IRAs. Your annual RMD is based on your age, the value of your accounts on December 31 of the previous year, and your life expectancy factor.

If you do not take your required minimum distribution by the applicable deadline, the amount not withdrawn is subject to a 50 percent tax penalty. Important: original Roth IRA owners are not subject to required minimum distributions.

These retirement milestones mark the rules of retirement as they currently stand. If the past is any indication of the future, these rules are subject to change.

If/when they do, current retirement planning strategies could become less effective. As a result, being able to process new information and adapt your plans accordingly will be an important skill to have in retirement.

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Using Roth Conversions in Retirement

Taking Advantage of Low-Income Years in Retirement

There are many reasons why your taxable income could be lower in the earlier years of your retirement. Potential reasons can include:

During this timeframe, it may make sense to accelerate your income to take advantage of these lower tax years by performing something called a Roth IRA conversion.

What is a Roth Conversion?

A Roth IRA conversion allows you to turn your traditional IRA or other pre-tax retirement accounts into a Roth IRA because you’re taxed as if you took a withdrawal equal to the amount of the conversion.

A Roth IRA is different from a traditional IRA in that contributions are made with after-tax dollars, grow tax-free, and qualified Roth distributions are free of federal income tax. 

Performing Roth conversions in your lower-income years, allows you to potentially decrease your total tax liability throughout your retirement. They can also, reduce your future RMDs, and give you more flexibility with your future withdrawal strategies because qualified distributions aren’t included in your taxable income.

In addition, Roth IRAs can be used for legacy planning since they can provide tax-free withdrawals to your heirs. 

The “Filling Up Your Bracket” Roth Conversion Approach

One way to implement Roth conversions during your pre-RMD low-income years is known as the “filling up your tax bracket” strategy. This approach allows your Roth conversion to be potentially more tax-efficient when compared to a single lump sum conversion. 

In this strategy, you convert an amount that allows you to remain in your current marginal tax bracket for that year. These smaller conversions spread the tax liability over multiple years and reduce the average tax rate you’ll pay on the amount converted.

Roth Conversion Example

For example, in 2021 the 22% tax bracket for a married couple filing jointly ranges from $81,051 to $172,750. If you file a joint return and your taxable income is $120,000, that means that you could add around another $50,000 of income without going into the next bracket or triggering any IRMAA surcharges.

Note: It is recommended before making any conversion, you consult with your tax professional.

Incorporating Roth Conversions into Your Financial Plan

Although Roth conversions can be a useful tactic in retirement, their benefits are unlikely to be fully realized without having a long-term plan in place. Being able to project your taxable income throughout retirement, allows you to spot the years where Roth conversions may be most useful.

*Tax tables are subject to change, which could disrupt any potential tax planning strategies.

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Choosing a Successful Retirement Investment Strategy

How to Choose a Retirement Investment Strategy

As you enter retirement, you may be in a position where you are investing outside of your employer-sponsored retirement plan for the first time. This can often leave people feeling confused and overwhelmed.

Something that may be helpful is, to begin with understanding how to approach your retirement investment strategy. Financial author and academic Charles  D. Ellis wrote in The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds, there are three ways to succeed as an investor.

The first is intellectually difficult, the second is physically difficult and the third is emotionally difficult.

The Intellectually Difficult Approach to Investing

The intellectually difficult way is reserved for those with superior brainpower, and a deep understanding of the markets they are investing in. Think of people like Warren Buffet, Ray Dalio, or George Simons.

The Physically Difficult Approach to Investing

The physically difficult approach requires you to outwork your competition. This is the approach many people on Wall Street take. They are known for working extremely long hours trying to get an advantage over one another.

The Emotionally Difficult Approach to Investing

The emotionally difficult approach requires you to withstand the uncomfortable emotions you experience when investing. This discomfort can include the pain of missing out on an investment or the dread brought on by a bear market. Everyone’s tolerance for emotional difficulty is different and can change over time.

Managing an Emotionally Difficult Retirement Investment Strategy

Assuming you are not of superior intellect, nor do you want to spend your retirement working long hours on investing decisions, you are left with the emotionally difficult route.

In order to increase your likelihood of success, you need to improve your ability to withstand emotionally difficult times in the market. This can be done by creating a long-term investment strategy that is tied to your personal goals.

For example, a primary goal for those in retirement is to fund their expenses not covered by other retirement income. Depending on the amount of income you need, your portfolio will require a certain rate of return.

Typically, the greater rate of return you need to generate, the more risk, you must take. If you are not comfortable with a given level of potential risk you may need to adjust your goals downward.

After creating your long-term investment strategy, you must then execute it. When implementing your strategy, you will need to follow an investing process where you monitor, review, and adjust your portfolio based on your changing needs.

The Role a Financial Advisor Can Play

If you struggle with this, you can seek the support of a fiduciary financial advisor. An advisor can help you develop, optimize and implement an investment strategy suited to your needs in retirement.

They can also show you have this strategy integrates with an overarching retirement plan. Lastly, they can provide an additional layer of support when making investment decisions during uncertain market conditions when emotions are high. 

A successful retirement investment strategy does not require great genius nor tremendous effort, but it does require you to stick with that strategy in good times and bad.

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A Tax-Efficient Way to Manage Required Minimum Distributions

What is a Required Minimum Distribution (RMD)?

When you enter retirement, your initial portfolio withdrawals will likely be discretionary. Meaning you will be able to decide how much you withdraw from which accounts based on your income needs

This is true until you reach age 72. At this point, the IRS requires you to take minimum distributions (RMDs) from your employer-sponsored retirement plans and traditional IRAs. Failure to take the required minimum distribution could result in a 50 percent penalty on the amount that should have been withdrawn. 

Your annual RMD is based on your age, the value of your accounts on December 31 of the previous year, and your life expectancy factor.

Required Minimum Distribution Formula:

RMD = Prior Year-End Account Balance / Life Expectancy Factor

Required Minimum Distribution Example 1

For example, Joe Smith turned 72 on January 1, 2021, and is married to Jill Smith who is 68. Joe’s traditional IRA was valued at $1,000,000 as of December 31, 2020. Based on the current uniform life tables, Joe’s withdrawal factor is 25.6. Therefore, his required minimum distribution for 2021 is $39,062.50.  

Required Minimum Distribution Example:

RMD: $1,000,000/25.6=$39,062.50.

What is a Qualified Charitable Distribution (QCD)?

Required minimum distributions could create an unwanted tax liability for someone who does not need the income to fund their retirement. This is because the extra taxable income can bump you into a higher tax bracket, increase the taxes on your Social Security benefits or cause you to pay higher Medicare premiums.

For those who are charitably inclined, qualified charitable distributions (QCDs) may be a useful tool to potentially keep your adjusted gross income within the desired range. QCDs provide a tax-efficient way to manage required minimum distributions from a traditional IRA while benefiting a qualified 501(c)(3) charity.

A QCD, allows you to contribute to an eligible public charity and receive a tax benefit, whether you itemize or not. The annual QCD limit is $100,000 per individual given they are 70½ or older. 

This means, when your RMDs begin, you can direct your RMD to charity and exclude the distribution from your taxable income. In addition, you can still give more to charity through a QCD than your RMD amount but cannot exceed the $100,000 annual limit. *

Required Minimum Distribution Example 2

Going back to the earlier example, the Smiths’ had 2020 income as follows: $5,000 interest income, $30,000 dividend income, $60,000 Pension Income; $35,000 of IRA income; and $50,000 annual Social Security benefits (of which only 85 percent, or $42,500, is considered taxable in the formula for modified adjusted gross income) for a total annual income of $180,000.

Their resulting modified adjusted gross income is $172,500, which is under the $176,000 Income-Related Monthly Adjustment Amount (IRMAA) income threshold for joint filers. In 2020, the Smiths’ were able to fund their living expenses without triggering the Medicare surcharges.    

However, in 2021 Joe’s RMD was $39,062.50 while the rest of their income remained constant. This added $4,063 income would push their income above the $176,000 threshold and trigger Medicare Part B and D surcharges in two years.

Using the 2021 figures, this would increase their Part B premium by $59.40 per month, and their Part D premium by $12.30. This would result in a total premium increase of $860.40 per spouse for that year. 

Qualified Charitable Distribution Example

One potential way to avoid this is by using a QCD. Joe could direct the first $4,063 of his RMD to a qualified 501(c)(3) charity of his choice and use the remaining $35,000 to fund their living expenses. Since the $4,063 was sent to a charity they will be able to exclude that amount from their taxable income.

This would reduce their modified adjusted gross income to $172,500. This would put them below the $176,000 threshold, and they would not be subject to the premium surcharges in two years. **

Qualified charitable distributions can be a tax-efficient way to manage required minimum distributions for those who are charitably minded. Because of their tax benefit, QCDs and RMDs should be carefully coordinated to ensure proper timing. It is reasonable to seek out help from a trusted advisor to aid you with their execution.

*A QCD must be an otherwise taxable distribution from your IRA. You cannot retroactively classify an RMD as a QCD. Also, you cannot deduct a QCD as a charitable contribution on your federal income tax return.

**These hypothetical examples are used for illustrative purposes only. Actual results will vary.

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