Avoiding the Required Minimum Distribution at Age 70.5
Q - Can you avoid taking out money from your IRA or 401(k) at age 70 1/2?
You might ask why anyone would not want to take distributions from their IRA or 401(k) at retirement. Isn't that what they saved it for?
First, you might have enough money elsewhere to live on, like a spouse's retirement, a military pension and/or savings in nonretirement assets. Or you may still be working.
Remember, you pay both federal and state taxes on most IRA distributions and most people would obviously rather avoid those taxes.
Or, you might want to keep the IRA or 401(k) intact and growing for a younger spouse or to pass it on to your children for their retirement. The second is a great idea given how hard it is to save for retirement, especially if they are not highly paid.
Whatever the reason you want it to stay put, whether legally avoiding taxes or to grow it for another time or person, it is doable.
1) Roll over your IRA into your 401(k). The IRS does not require you to take distributions after 70 1/2 from a 401(k) if you continue working.
2) Roll your IRA into a Roth IRA and pay taxes when your account is smaller. Roth IRAs have no withdrawal requirement if you meet certain conditions. Why? - Since no taxes are due the IRS doesn't care because they get nothing in taxes. Collecting taxes is the main reason there is a required minimum distribution (RMD) on traditional IRAs.
The Roth conversion is best if you do it well ahead of retirement when the account is still fairly small compared to what it is expected to be at retirement. Pay the taxes on the small amount, not on the bigger amount at the end.
3) Roll your 401(k) account balance from the traditional side of the 401(k) to the Roth side if your plan offers a Roth 401(k). If they don't, you should push for one.
It only typically costs the employer $100/year for the whole plan to have a Roth side in their 401(k) and having one can potentially save each employee hundreds of thousands of dollars in taxes at retirement. There is not a good excuse for a company not to offer a Roth as part of their 401(k). Usually, it is because they are unaware they can or aren't up on the benefits.
4) Not only should many people roll their traditional 401(k) into the Roth side of the 401(k), most people are better off making their payroll deductions to the Roth side. Be aware that employer cannot make his matching or profit-sharing contributions into the Roth side of the 401(k).
You should always check with your financial advisor first. Hopefully, you have an independent fee-only advisor who is willing to be a fiduciary.