At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com

Hey Hill, how can I reduce my IRA Required Minimum Distributions (RMDs) and related retirement tax liabilities? 

Contributing to traditional IRAs and 401(k)s is a great way to save for retirement. You get a current-year tax deduction, and your money grows year in and year out without being hindered by taxes. The IRS never sleeps.  You either pay them now or later.  Therefore, at some point, when you need to access these tax-deferred funds, whether that’s by choice or because you must begin taking Required Minimum Distributions (RMDs), any withdrawals you make from your IRA will be subject to ordinary income tax rates. Therefore, it’s critical to understand the different ways to plan for this most effectively. 

First, what is an RMD? The IRS requires that an individual begin taking systematic withdrawals from their pre-tax/qualified retirement accounts (e.g., 401(k), 403(b), traditional or rollover IRAs, etc.) at age 72, 73, or 75, depending on your date of birth. This annual required mandatory distribution is known as an RMD. You can calculate your projected RMD using the Schwab RMD Calculator. 

While we want our pre-tax retirement accounts to grow and be as large as possible, the taxes that will ultimately be due also grow. An investor can use three strategies to optimize this tradeoff between growth and taxes.

ROTH Conversions

One strategy is to convert assets from your traditional or rollover IRA to a Roth IRA before RMDs begin. When investors are in a low tax bracket, there are often many years between retirement and the RMD start date. Therefore, investors can save a lot in taxes by converting assets during a lower income period.

Let’s consider an example to showcase how this strategy works.

Betsy has just retired at 65 and has $500,000 in her traditional IRA. She must begin taking RMDs at age 73. Her projected RMD at 73 is about $30,000 per year. This amount might bump Betsy to a higher tax bracket in the future and may even increase her Medicare premium costs.

Since Betsy is retired, her reduced income level moves her from the 22% tax bracket to the 15% tax bracket. She decides to convert some of her traditional IRA into a Roth IRA. She withdraws $40,000 annually for the next five years from her pre-tax traditional IRA to fund her Roth IRA. Each year, she pays income tax on the $40,000 distribution but at her new, lower tax rate. This is known as a Roth Conversion. Her money has moved from one tax-advantaged account (the Traditional IRA) to another (the Roth IRA), the taxes are “pre-paid” at a lower rate, and her invested money in the Roth will continue to grow and never be taxed again. By age 70, she has successfully reduced her traditional IRA balance by $200,000, and her RMD at 73 is now projected to be only $18,000 rather than $30,000.

QCDs

But there is even more she can do. Starting at age 70.5, the IRS allows you to distribute funds from your IRA without paying taxes if the funds are gifted directly to a qualified charitable organization. Betsy currently gives $10,000 to her church annually by writing a check from her bank account. Instead, she should direct her Hill advisor to make those payments on her behalf from her IRA. This approach takes advantage of the Qualified Charitable Distribution or QCD. If Betsy’s RMD following her Roth Conversion was projected to be $18,000, by donating $10,000 from her IRA, she will only be taxed on $8,000. By planning 8 years into the future, Betsy’s Hill Advisor has reduced her RMD from $30,000 to $8,000, she will pay less in taxes, and she has a growth Roth IRA for her future needs.

Asset Location

Finally, behind the scenes, Hill manages portfolios by locating the higher-growth assets away from pre-tax accounts and locating the income-producing assets within the pre-tax accounts. This asset location strategy helps minimize future retirement taxes across your entire household. By doing this, you reduce the income taxes you pay year to year and ensure that your high-growth assets get taxed at lower capital gains rates rather than higher income rates.

Both the Roth conversion and the QCD approach, along with Hill’s asset location strategy, are not just tax savvy; they are also strategic moves that can enhance your financial security. By taking the long view on your IRA funds, you can minimize the taxes due and maximize the total dollars you have available to you as you enjoy your retirement.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk, and past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser or tax professional before implementing any investment or tax strategy.

During the summer months, we often recommend books we are reading in the offices of Hill Investment Group. This year, we decided to steer you to a podcast we enjoy; some episodes are almost as long as an audiobook. If you’re reading this, you, like us, believe in the power of a long-term perspective, continuous learning, and evidence-based decision-making. These core principles guide our investment strategies and resonate with the themes explored in the extraordinary podcast “Acquired.”

What is “Acquired”?

“Acquired” is a highly regarded podcast that dives into the stories behind some of history’s most significant companies and acquisitions. Hosts Ben Gilbert and David Rosenthal provide in-depth analyses of how these companies were built, the strategic decisions they made, and the challenges they overcame. Each episode offers valuable insights into the entrepreneurial and business world, making it a must-listen for anyone interested in understanding the dynamics of successful companies.

Themes from “Acquired” that Resonate with Hill Investment Group

• Long-Term Perspective:

Episode Highlight: In the episode covering Amazon, “Acquired” explores Jeff Bezos’ long-term vision and his relentless focus on customer experience, illustrating how patience and strategic planning can lead to enduring success.

Hill’s Approach: Similarly, we at Hill Investment Group emphasize the importance of taking the long view. We believe patient, disciplined investing, guided by enduring principles rather than short-term market trends, is key to building sustainable wealth.

• Evidence-Based Decisions:

Episode Highlight: The episode on Whole Foods’ acquisition by Amazon underscores the significance of data-driven decisions. Bezos’ use of extensive market research and analytics to guide Amazon’s strategies reflects the power of evidence-based decision-making.

Hill’s Approach: Our investment strategies are grounded in Nobel Prize-winning academic research, ensuring our clients benefit from the most reliable financial principles.

• Resilience and Adaptability:

Episode Highlight: The story of Apple’s turnaround under Steve Jobs, as discussed on “Acquired,” showcases the company’s ability to innovate and adapt in the face of adversity.

Hill’s Approach: We prepare our clients to navigate market volatility through diversified portfolios and robust financial planning, helping them stay resilient and focused on their long-term goals.

• Continuous Learning:

Episode Highlight: Each “Acquired” episode is a business history and strategy masterclass that provides listeners with knowledge and insights.

Hill’s Approach: We believe in lifelong learning and continuous improvement. Our team regularly engages with the latest industry developments to ensure we provide our clients with the best possible advice and service.

We encourage you to explore the “Acquired” podcast to gain deeper insights into the principles that drive successful businesses. Let’s continue to embrace the long view, grounded in evidence-based principles and enriched by continuous learning.

Take the long view,

The Hill Investment Group Team

Our favorite episodes include Starbucks, Hermes, Porsche, Costco, and Nike.

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Feel free to listen to “Acquired” and join us in exploring the fascinating stories behind the world’s most successful companies. 

Dear Clients and Friends,

At Hill Investment Group, we believe change is inevitable and essential for growth. Like nature’s evolution, we see change as an opportunity to enhance and sharpen our commitment to you.

We are excited to share some significant updates:

A New Home for Our St. Louis Office

As mentioned in our prior newsletter, we are moving our St. Louis office to a new, handsome location. This space will better serve our team and, ultimately, you, fostering greater collaboration and innovation. We are officially out of the space that served us well for nineteen years, and the St. Louis team will be working remotely or on a communal floor in the new Plaza building.

*Did you know our 14 team members are currently spread between Austin, Houston, Nashville, St. Louis, and New York?

Welcoming Matt Zenz as a New Partner 

As you’ll read below, we are delighted to welcome Matt Zenz as our newest partner. His dedication and expertise align perfectly with our evidence-based approach, strengthening our leadership team. Matt is the kind of person you want on your side (see his Picking up Pennies series on our site to know precisely what I mean.)

Commitment to Our Boutique Approach

While embracing these changes, we remain committed to staying small and boutique in size. This allows us to deliver the best evidence-based value in the independent RIA world, ensuring your unique needs are our top priority. Please hold us accountable if you ever see something that could be improved. Our team is fiercely committed to improving every day as we strive to be known as one of the country’s premier boutique, evidence-based advisors!

Thank you for being a part of our journey and for your continued trust and support.

Take the long view,

Matt Hall

Hill Investment Group