If you are like most of our clients, you have spent years contributing to your employer’s retirement plans (401(k), 403(b), etc.) and maybe even your Individual Retirement Accounts. Your intention was to grow these accounts and ultimately turn them into a source of income in retirement or pass it along to the next generation. That plan typically works well until you turn age 72, and then the IRS requires you to start taking distributions from your retirement accounts because, ultimately, Uncle Sam wants you to pay tax on these accounts. Since you will be, or are currently, required to take these distributions, the question that many people have is “What should I do with my RMDs?”
- Use the money to live on. Many people depend on their retirement accounts to provide them cash flow and even though they have not been required to take distributions prior to age 72, they take them because they need the money to cover living expenses. If you are in the habit of spending your RMDs, please be aware that the RMD amount increases as a percentage of your account every year and over time the distributions will ultimately deplete the account.
- Invest the proceeds. Although the proceeds cannot be invested in an IRA, they can be invested in a nonqualified (Individual or Joint) account. Because the RMDs increase as a percentage of account value every year, it is wise to invest the proceeds that are not going to be spent so that your money can continue to grow.
- Qualified Charitable Distributions. If you donate to charitable organizations (including church contributions), it may make sense to donate directly from your retirement account to the charitable organization to satisfy you RMC (up to $100k/yr. per person). These distributions, if done correctly, will not be taxable to you as a normal IRA distribution would. In other words, when filing your taxes, you can benefit from the increased standard deduction and get a “deduction” for charitable contributions as if you were itemizing. Please note, if you want to use this strategy, the money must be distributed directly from your retirement account to the charity to be excluded from your gross income. the money cannot be distributed to you, personally, then send to the charity without being taxable to you. We can handle the distribution for you, or you can request a checkbook for your IRA and make those donations yourself. Either way, make sure you keep good records, because you will need to report those distributions as “qualified charitable distributions” when you file your taxes.
If you would like to make changes to how you are taking your RMDs, then please let us know.