Mandatory RMDs With NO Need For The Money! What Can You Do?
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Required Minimum Distributions
As people save and invest in retirement accounts to secure their future, there’s a rule from the IRS that comes into play. It says you have to start taking money out of these accounts at a certain age. These required withdrawals are called “required minimum distributions” (RMDs). For most retirement accounts, you’ll need to start taking RMDs when you reach 73 years old. It’s an important part of managing your finances as you get older.
Reaching the age where the IRS insists you start dipping into retirement funds when you’re not quite ready to use it a familiar scenario. These required minimum distributions (RMDs) might not be your best bet for maximizing returns, as they can bring taxes and might not earn much in a basic account. So, what’s the alternative? Consider these strategies for making the most of your RMDs.
If you’re aiming to craft a tax-smart retirement strategy, it’s wise to connect with an investment advisor portfolio manager today.
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Why Should You Prepare for RMDs?
Once you hit a certain age, the IRS mandates that you start making withdrawals from most retirement accounts, known as required minimum distributions (RMDs). These apply specifically to pre-tax accounts like IRAs and 401(k)s, but not to Roth IRAs. Interestingly, as of 2024, Roth 401(k)s are also exempt from this requirement.
From the age of 73 onward, anyone holding a qualifying account is obliged to make these minimum withdrawals annually. It’s important to note that this rule applies on a per-account basis, not per taxpayer. For instance, if you have both an IRA and a 401(k), each will have its own minimum withdrawal requirement. The amount you’re required to withdraw is determined by the IRS based on your age and the value of the account.
Let’s break it down with an example: Suppose you just hit 73 and have $500,000 sitting in your IRA. According to IRS regulations, you’d need to withdraw a minimum of $18,867 from this IRA by the end of the year. Now, if your retirement account is valued at $1 million, you’d be looking at an annual minimum withdrawal of $37,735.
But it’s not just your own contributions that are subject to these rules. Inherited retirement accounts also come with required minimum distributions for beneficiaries. Typically, heirs must withdraw the funds within a 10-year window after inheriting them. However, the specific details can vary widely depending on factors like the type of account and the original owner’s circumstances.
RMDs Have Possibilities!
As you hit 73, it’s crucial to recognize that you could still have many years ahead of you, so simply withdrawing your cash and stashing it away in a basic account may not be the most strategic move. Here are a few smarter ways you can put that money to work for you:
Invest for Peace Of Mind
While you might not need the funds immediately, it’s wise to consider your future needs. Required minimum withdrawals present a prime chance to shift your money from growth-oriented investments towards shorter term less volatile assets. Options such as certificates of deposit (CDs) or Treasury bonds can offer a solid means of reducing risk.
Invest for Growth
You may need to consider holding a larger portion of equities in your retirement portfolio than you realize. In retirement planning, it’s crucial to balance risk management with the anticipation of growth. Longevity is a key factor to consider, as you ideally have many years ahead. While it’s not guaranteed, it’s increasingly common to live longer and maintain good health in later years. It’s important to plan for the possibility of an extended lifespan to avoid financial shortfalls.
Throughout retirement, various expenses such as spending needs, inflation, rising living costs, and medical bills will place demands on your retirement savings. If you find yourself not requiring immediate distributions, consider allocating your funds to growth-oriented investments to address these future financial needs effectively.
Consulting with an investment advisor portfolio manager can provide valuable insights into competitive strategies for growing your wealth. It’s essential to seek expert guidance to ensure your retirement savings work hard for you and support your financial goals.
What About A Qualified Charitable Deduction?
If you’re feeling generous, you have the option to bypass the minimum distribution requirement altogether by opting for a Qualified Charitable Deduction (QCD).
A Qualified Charitable Deduction presents a smart tax management strategy concerning RMDs, while simultaneously supporting charitable causes. Instead of withdrawing funds from your retirement account, you can directly transfer cash or assets to a charity of your choice. The IRS considers this transfer as an above-the-line deduction, meaning you won’t be taxed on the donated assets. Additionally, you can still claim the standard deduction for that tax year, and you’ll have fulfilled your RMD obligation.
In essence, this approach enables you to satisfy your required minimum distribution obligation without incurring any tax liabilities.
The Bottom Line
If you’re at the stage where you’re required to start taking RMDs, but you’re not in immediate need of the funds, it’s crucial to strategize how to make the most of this money. You have various options, whether it’s investing for growth, prioritizing safety, or focusing on managing the taxes triggered by these distributions.
Here are some tips for managing your required minimum distributions:
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An investment advisor portfolio manager can provide invaluable assistance in crafting a comprehensive retirement plan tailored to your needs. Finding the right financial advisor doesn’t have to be daunting. Don’t forget: consulting with an investment advisor portfolio manager can be invaluable in figuring out the optimal strategy for managing your withdrawals.
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We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth | iA Private Wealth USA
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