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Smart Options for Your RMDs

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You should be aware that if you hold an IRA or are enrolled in a retirement plan, you are obligated to start taking the required minimum distribution from these accounts in the year you turn 73. How much you will withdraw is calculated by dividing the prior Dec. 31 balance by your life expectancy. The math can get complex, but often the brokerage or another professional adviser will help.

And you should make sure you get good advice; there are penalties for not withdrawing the RMD on time. In the first year, the money must be withdrawn by April 1 of the year you turn 73, and Dec. 31 in the following years. If you fail to meet these deadlines, you will be responsible for paying 25% of the amount not taken at the time.

Once you have taken your RMD, you have several options regarding how to use it:

  • Invest it. Unless you need the money to cover your immediate living expenses, you can reinvest the money into a taxable-brokerage account. If you have a family member who is planning on going to college, you can use your RMD to start a 529-college savings account.
  • Spend it. If you need money to help maintain your lifestyle, you can use the proceeds from your RMD for living expenses. You should also have a budget in place so you can track these living expenses. It’s possible to make adjustments so that you have a balanced budget every month, depending on what contingencies may arise.
  • Gift it. Before you take the RMD for the year, consider donating to a qualified charity that is eligible to receive a qualified charitable distribution. By doing this, you can lower your tax burden since the donation amount is transferred directly to the charity and counts toward the total RMD. This has an important impact on certain high-income earners. The IRS allows you to donate up to $100,000 from an IRA without having to pay taxes on it. Note that you cannot claim the donation as a charitable deduction on your taxes.

Being in the enviable position of not having to immediately spend annual required minimum distributions offers several options. You can reinvest the funds or donate them to a qualified charity. Contact a professional financial planner or tax accountant for additional guidance in planning what you should do with your distributions.

As you approach retirement age, it’s important to view these assets as part of your estate. Without proper planning, retirement accounts may be lost to taxes or distributed to unintended recipients. When you are ready to set up a comprehensive estate plan, reach out to our Petaluma, CA office for an educational webinar.

Bridget Mackay
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