If you don’t need your RMD (required minimum distribution) to cover ongoing living expenses, you are required to still take it. Here’s 3 options that can help you reduce taxes and continue to grow your wealth from an unneeded RMD:
Although the large majority of Americans end up spending their IRA’s Required Minimum Distribution (RMD) each year, some of our clients want to know what to do with the amount if they don’t need it right now.
If you are required to take an RMD from your IRA, 401(k), or other qualified retirement accounts – You have to take a withdrawal out of the account, that’s not negotiable. The IRS imposes a 50% penalty of the amount not removed each year. Even if you don’t need the money, failing to meet your RMD is a bad idea. Here’s 3 popular options we advise our clients who don’t need their RMDs to do each year:
If you are over age 70.5, you have the ability to perform QCDs, or Qualified Charitable Distributions. These donations are don’t directly from your IRA and count towards your RMD amount for the year. For those over age 70.5 years old, and especially those over 72 who don’t need their RMDs for living expenses, this is the most tax-efficient way to donate to charity.
For example, if your RMD was $10,000 for the year, you could donate $10,000 directly from your IRA to a charity via a QCD. After that, you will not be required to withdrawal any additional amount from your IRA or other qualified retirement plan. You will pay no taxes for the withdrawal of $10,000 from your IRA, and it will have no impact on your taxable income for other purposes, (like Medicare’s IRMAA surcharge).
In order to qualify, the money has to go to a recognized charity, and be processed as a check directly from the IRA. The money can not go to your bank account first.
How do QCDs work? For our clients, we provide them a checkbook that is to be used only for charitable contributions. You can then write a check, and everything will be processed to count towards your RMD and not cause any additional tax burden.
For more on developing a tax-efficient charitable giving plan, see our webinar here: How to Create a Charitable Giving Strategy
There’s no rule that you have to spend the money, you can also invest in taxable brokerage account!
While this will require some taxes to be paid, a large majority of your withdrawal can then be reinvested and grow in a taxable brokerage account where it will be subject to much less in taxes later. Unlike withdrawals from your IRA, which are taxed at ordinary income tax rates, investment gains in a taxable brokerage account are taxed at long term capital gains tax rates, which are lower.
If you know that your RMDs will regularly not be needed in the future, developing a Roth conversion plan may be very beneficial to reduce future tax burden from your RMDs.
While Roth conversions do not count towards your RMD amount, money that is withheld for taxes does. So, you can withhold the entire amount of your RMD to pay Federal and state taxes for a Roth Conversion. This is an alternative idea that has to be done correctly, but can be a powerful way to get more Roth savings and dramatically reduce your future tax bills.