5 Savvy Ways to Use Your Required Minimum Distribution (RMD) This Season

Motley Fool11-24 18:03

Just because you must take a required minimum distribution doesn’t mean you can't keep making work-based contributions to an IRA. If you don't need the funds to cover your expenses, do ...

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See, while you don't have to take your very first required minimum distribution -- or RMD -- from most tax-deferred accounts until April 1 of the year after you turn 72, for every year beyond that first one, these withdrawals must be made by Dec. 31. So if you do postpone that first distribution into the year that you turn 73, you'll need to take two distributions that year.The starting RMD for a 73-year-old is roughly 3.7% of the account's value as of the end of the previous year, for the record. But this percentage grows a little bit every year.These distribution requirements raise an important question for many senior investors, though: If you aren't taking these disbursements anyway to cover your living expenses and other bills, what should you do with the money you're being compelled to take out of your retirement accounts? Here are five solid options to consider.1. If you're eligible, make an IRA contributionIt may sound crazy given that you're being forced to withdraw money from your retirement accounts. But presuming that you're eligible, you can simultaneously use that RMD money to help fund IRA contributions for the tax year in which you withdrew it.The chief factor in determining that eligibility, of course, will be whether or not you have earned income -- via a job that generates work-based wages. This year, anyone 50 or older can contribute the lesser of $8,000 or 100% of their workplace earnings into either a traditional IRA or (if you aren't earning too much) a Roth IRA. However, the IRS doesn't really care where the money comes from. Hitting the age when you must start taking required minimum distributions also doesn't negate your eligibility to participate in an employer-sponsored plan like a 401(k) -- assuming you're still working somewhere that offers one.Just bear in mind that depositing new money into any non-Roth IRA will cause your future RMDs to be higher than they otherwise would be. Also remember that while contributions to IRAs can be tax-deductible, required minimum distributions are also taxable income.Whatever the case, if you'd still like to keep as much money as possible in a tax-deferred account, this option would work.2. Help cover the tax bill of a Roth conversionIf you don't want to worry about any of this RMD stuff with your IRA ever again, you could make it all go away. Just convert your traditional IRA into a Roth IRA -- Roths aren't subject to required minimum distributions.This move is almost always a 100%-taxable event, however. That is to say, the entire balance you convert will be treated as taxable income in the year you perform the maneuver. While you can use some of the converted funds to cover that tax bill, that would take a sizable bite out of your balance. The conversion also doesn't negate the RMDs for any year prior to the year it is completed.Image source: Getty Images.With a bit of careful timing, however, you can satisfy your prior year's required minimum distribution and offset at least some of the tax cost of converting your IRA to a Roth.Something else to think about: It's better to implement Roth conversions when the stock market's down since this will minimize your tax bill.3. Put it in a money market fundIf neither of these options works for you, there are other things you can do with your RMDs that are simpler in terms of taxes. Chief among these alternatives is just taking the money and parking it somewhere safe as well as productive. A high-yield money market account will do nicely.Let's be clear. The sort of rates offered by most checking and savings accounts remain unimpressive. You'll specifically want to deposit this money into a true money market mutual fund, most of which are paying in the ballpark of 4% to 5% right now.Some of these money market funds have minimum holding periods, and in most cases, you'll need to instruct your bank or broker to sell shares of them in order to access your money. It could take a day to settle such trades. However, considering how much stronger the returns are from such accounts, they're an attractive option.4. Invest it as your portfolio's goals dictateIf you have the financial flexibility to do so, you could -- and arguably should -- reinvest your RMD money in a way that helps your overall portfolio achieve your bigger-picture goals. This could mean putting it into dividend stocks, or it could mean buying growth stocks. Or maybe both.Whatever your goal, just remember that this money is no longer in a tax-deferred account, while a sizable remainder of your retirement savings may still be in an IRA. If you're buying dividend stocks specifically to live on the income they generate, you may as well do it in a taxable brokerage account. You'll be paying taxes on that dividend income either way.5. Give it away (tax efficiently)Finally, if you're taking required minimum distributions that you don't need now and feel confident that you'll never need in the future, you can give the money away.Of course, that's the case with any funds you might have. If you're making charitable gifts, however, you may as well make them in as tax efficient a manner as possible. Designating an RMD as a qualified charitable distribution does that job nicely. These are simply direct transfers of cash or assets to legitimate charitable organizations before they ever reach your hands or are put in your name outside of a retirement account.At first blush, this direct-gifting process seems unnecessary. After all, although required minimum distributions are taxed as income, donations are tax deductible.There is a difference, however. You have to itemize to claim regular donations as charitable deductions, but a QCD effectively acts as a deduction without itemizing by reducing what otherwise would have been taxable income. Also, for most individual filers, there are relatively low annual limits to tax deductions stemming from charitable gifts of cash or assets held in your name. That's in contrast with qualified charitable distributions, which can be used to satisfy the IRS's required minimum distribution rules, but are never put in your name to begin with and therefore don't raise your taxable income in any given year. This year's qualified charitable distribution cap is $105,000 per person, or a total of $210,000 for joint filers.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485767203"}