Three Costly Tax Errors to Steer Clear of in Your 70s

Don’t let tax planning end when required minimum distributions begin. These common missteps in your 70s can leave you paying far more to the IRS than necessary.

Jim and Mary, both 76, had been taking their required minimum distributions, or RMDs, for years and believed they were following the rules carefully. But their strict compliance was not helping them tax-wise.

I asked the new clients to bring in their tax return for a review.

“How do you take out income and RMDs each year?” I asked them.

“We don’t need the income,” Jim said, “but we have to take the RMDs. Every January, we called our former investment adviser and moved the RMD to our bank account. We know some people wait until December, but we never want to miss a year.”

“Then in December, Mary and I decide which charities we want to support and usually give away our full RMD because we don’t need it. We keep records for our tax preparer so we can claim the deduction.”

I asked whether either adviser had ever explained qualified charitable distributions, or QCDs, or whether they had checked how much of their giving was actually deductible.

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“We haven’t heard about QCDs,” they said, “and isn’t all of our charity tax deductible anyway?”

“A QCD becomes available once you turn 70½,” I explained. “Your IRA custodian can send money directly to an eligible charity. That amount is not taxable to you, but it still counts toward your RMD.”

Even though Jim and Mary were donating $10,000 a year — the full amount of their RMD — they were not receiving any charitable deduction because they were not itemizing.

They had missed out on $2,200 in tax savings in both 2021 and 2022, and neither of their trusted advisers had pointed it out.

Jim and Mary believed they were doing everything correctly. They received the right forms, satisfied their RMDs and tracked every donation.

They also assumed their high-tax, complicated-return years were behind them, so they paid less attention to their tax picture.

But like many retirees, they were unintentionally making more of their Social Security taxable, paying extra tax because of the way they gave to charity, and neglecting to plan for future tax changes the surviving spouse was likely to face.

Here are the three biggest tax mistakes I see people make in their 70s, often because they think RMDs mean there is nothing left to plan for.

1. Treating your RMD as a one-time event instead of part of your retirement tax plan

Jim and Mary were focused on meeting the RMD rules, even calculating the amount and taking it in January, far earlier than most people do.

What they were not doing was fitting the RMD into their broader retirement tax plan.

For them, using QCDs would have met their goals and reduced their taxes substantially.

For others, using an RMD for tax withholding instead of estimated payments may be the better move.

2. Thinking Roth conversions are off-limits once RMDs start

I have heard it many times over the past 23 years as a financial adviser: “My CPA says I’m too old to do Roth conversions.”

Fortunately, Roth conversions have no age limit, and starting RMDs does not prevent you from doing them.

If a conversion makes sense because it could reduce the total taxes paid from your IRA for you, your widowed spouse or your heirs, age should not decide the issue.

There are a few extra rules to follow once you reach RMD age:

• You cannot convert your RMD
• You must take your RMD before completing a Roth conversion

Jim was a retired pastor, and the tax treatment of his minister pension would change if he died first. Mary would still receive the same amount, but it would become fully taxable instead of nearly tax-free.

After we made sure they met their RMD obligations, we identified how much they should convert to a Roth IRA each year so Mary could continue building tax-free money, assuming the Roth distribution rules were met, after Jim’s death changed her tax situation.

3. Giving to charity without capturing the tax advantages

Jim and Mary were generous to the charities they supported, but they were also generous to the IRS. Because they handled their giving in the wrong order, they were overpaying taxes by $2,200 a year.

Once the RMD went into their bank account, they could not later treat that distribution, or the gifts they personally mailed out, as a QCD. To qualify, the money had to move directly from the IRA to an eligible charity.

Like many retirees I have worked with over the years, they assumed it did not really matter because they would get a tax deduction anyway.

But they overlooked two other effects.

Because the RMD was taxable income, it increased how much of their Social Security became taxable. It could also affect eligibility for part of the enhanced senior deduction in future years.

Because the standard deduction is now so high, many retirees assume they are getting itemized deductions when they are not.

There is now a charity deduction for non-itemizers that allows up to $1,000 for single filers and $2,000 for married couples filing jointly, but Jim and Mary were giving far more than that.

They kept careful records for their $10,000 in charitable donations, but they were not getting the large tax benefit they expected.

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Tax planning does not end in your 70s

The common thread in all three mistakes is that each decision was made separately rather than as part of a coordinated plan.

There is nothing wrong with handling RMDs, doing Roth conversions or giving to charity while keeping track of donations.

Where Jim and Mary went wrong was treating RMDs as something to get out of the way, instead of one piece of the larger retirement puzzle.

When retirement, investing and tax choices are fitted together properly, they can help you avoid tax mistakes not only in your 70s, but before and after them as well.

That is why I developed a five-step “Retirement Master Plan” process, which I discuss in my book Retire Today.

Many people enter their 70s assuming tax planning is mostly over. That is the kind of thinking people associate with working years and saving for retirement.

It is a mistake to think that RMDs mark the end of tax planning.

When you reach your 70s, the IRS sets the minimum amount that must come out of your IRA each year. But it does not choose your charitable strategy, tax withholding, investment approach or Roth conversion plan.

With careful planning and a coordinated retirement process, you can still make tax decisions in your 70s that help you avoid common errors.

Jeremy Keil is an Investment Adviser Representative of Alongside, LLC, d/b/a Keil Financial Partners, an investment adviser registered with the SEC. This article is for general information and education only and is not individualized investment, legal, or tax advice. Investing involves risk, including possible loss of principal. Kiplinger does not endorse the author's views, products, services, or strategies, and publication by Kiplinger does not constitute an endorsement, recommendation, or guarantee of any kind. For more about Alongside LLC, see its Form ADV at the SEC's Investment Adviser Public Disclosure website.

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