Happy New Year!! This month I would like to explore some ideas for your Required Minimum Distribution (RMD). So, if you are over age 72 and had to take an RMD from your Qualified plan (401K, IRA, etc..) BUT don't need to use the money, what are some ideas as to what to do with it?
First, the new RMD age is 72 representing an increase from age 70 1/2 established a few years ago. Some retirees who did a great job of saving find that they don't need the RMD they are forced to take and pay taxes on. Between their costs falling in retirement and income from Social Security and their after-tax portfolios, some even discover that they don't need to spend their required minimum distributions (RMDs). So, they can still make smart use of that money if they don't need to spend it.
Give it Directly to Charity
Once you're 72, you can make what's known as a qualified charitable distribution. With that approach, you can donate up to $100,000 per year to a charity directly from your Traditional IRA. If you made it before you took your RMD for the year, the donation could count against the total you need to take as your RMD.
In addition to reducing the need to take the RMD, the qualified charitable distribution never counts as income for a retiree. This can help retirees reduce their higher tax and mandatory costs that RMDs would otherwise drive.
Invest it in After-tax Accounts
Although you must take the required minimum distribution from your retirement account, no rule says you have to spend the money once you take it out. After you pay your taxes on the distribution, the cash you take out can be invested in an ordinary brokerage account with no issues. Even if you don't directly need the money, investing it this way can be an essential estate planning tool. Investments transferred as an inheritance get a step up in the basis based on the date that the original owner died. In essence, if you buy $10,000 of stock in an after-tax account that grows to be worth $50,000 when you pass away, your heirs receive that stock as if they paid $50,000 for it.
In addition, the money you have invested in after-tax accounts remains available to you throughout your life. So if you need the money, you can tap it to spend it. For example, if you want to take your extended family on a major bucket list vacation, you can use it.
Use it to Pay the Taxes on Roth IRA Conversions
You still must take your required minimum distributions before you make any Roth IRA conversions with your money. But, once those distributions have been taken, you can convert any additional amount you want from your Traditional IRA to your Roth IRA. Those conversions are taxable events. Using the money you are required to take out of your other retirement accounts to cover the taxes on your Roth IRA conversion can help you in several ways.
First, once your money is inside your Roth IRA, it is never again subject to required distribution within your lifetime. Those required distributions can get quite large later in life, as the percentage of your account balance subject to them increases as you age. Converting more of your traditional retirement account balance to a Roth IRA earlier in your retirement can keep those later-life distributions down. Once you have money inside a Roth IRA for at least five years and are past age 59 1/2, you can take distributions from your Roth IRA completely tax-free for any reason. That offers unparalleled flexibility on how you spend your money, should you eventually need or want to tap.
As always, feel free to reach out to one of our American Retirement Advisors to help with your financial needs.
By Marc Frye
Marc Frye provides financial analysis and market commentary for the ARA newsletter, translating complex economic trends into actionable insights for retirees.
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Easy Eddie's Take
Marc's three strategies are excellent choices, and I see people use all of them successfully. One question that comes up all the time is "when exactly do I have to start taking required minimum distributions?" The answer depends on when you were born. If you were born in 1951 or later, your required beginning date is April 1st of the year after you turn 72. For Traditional IRAs and 401(k) plans, the Internal Revenue Service uses specific IRS Publication 590-B tables to calculate your exact RMD amount each year.
Here's something most people are surprised to learn: if you're still working at age 72 and participating in your current employer's 401(k) plan, you can actually delay RMDs from that specific 401(k) until you retire. This is called the "still working exception," but it doesn't apply to IRAs or old 401(k) plans from previous employers. The qualified charitable distribution Marc mentioned is particularly popular because it satisfies your RMD requirement while never appearing as taxable income on your Form 1040. Many of our Arizona clients use this strategy to support local charities while keeping their Adjusted Gross Income lower, which can help with Medicare Part B premium calculations.
Think of it this way: RMDs don't have to be a burden if you plan ahead. Whether you choose charitable giving, taxable investing, or Roth conversions, you're turning a tax requirement into a wealth-building opportunity.