Reduce taxes and penalties!

Are you over age 70½? Do you own a traditional IRA? You may need to take a required minimum distribution from your account before year-end. If you don’t need the income yet, you may be wishing you had other options. One reason: Depending on the size of your required minimum distributions, you can potentially pay more tax during your retirement than you were paying before you retired. The distribution is also included in your provisional income, which can trigger a tax on your social security. Yet if you don’t take the distribution, you might have to pay a penalty of 50% of the amount you did not withdraw. What can you do?

An option that might help this year is to make a qualified charitable contribution. When you’re age 70½ or older, you can distribute up to $100,000 to a qualified charity directly from your IRA. The annual distribution is excluded from income and is counted as a required distribution.

For future years, consider converting all or part of your traditional IRA to a Roth. A conversion helps minimize future required distributions from your traditional IRA. In addition, you typically don’t have to take withdrawals from Roth accounts, and money you do withdraw is tax-free. You even have the option of “undoing” the conversion next year if you think you made a mistake.

What about the tax you’ll have to pay on the conversion? By “filling” your current tax bracket you can pay the tax at your current income tax rate. Filling a bracket means you convert an amount that keeps your income below the top of the income range for that bracket. For example, the upper limit of the 15% tax bracket is $75,300 in 2016 when you’re married filing jointly. Say your estimated income for 2016 is $65,000. You can convert approximately $10,000 from a traditional IRA to a Roth before you move into the next tax bracket.

Caution: Be aware you can’t convert your required minimum distribution to a Roth. You can, however, use the distribution to pay the federal income tax due on the conversion.