The end of the year is fast approaching. This means at least some retirees will soon be making mandated withdrawals from their non-Roth IRAs. You may know these payments better as required minimum distributions, or RMDs.
This impending wave of retirement account payouts raises a key question... what if you don't actually need this distribution right now? Here are some options to consider.
All about required minimum distributions
First things first: Are you even required to take an RMD this year?
It depends on your age. IRS rules say you must start taking a minimum amount of money out of traditional IRAs, SEPs, SIMPLE IRAs, and 401(k) and other employer sponsored plans (assuming you're no longer employed by the plan's sponsor) retirement accounts once you turn 73. You have until April 1 of the year following the one in which you turn 73 to take your first required distribution. After that first year, you must complete these annual disbursements by Dec. 31 each year.
As for how much money must be removed for these retirement accounts to satisfy these distribution rules, there's a IRS table that matches your current age with your life expectancy. Take the value of your retirement account at the beginning of the previous year and divide it by that life expectancy number, and that will typically be your RMD for the year. For instance, the current life expectancy number for a 73-year-old is 26.5, meaning you'd need to take 1/26.5 or about 3.78% of the account's value as of the end of the previous year. The amount goes up a little every year.
Oh, yeah, one more detail... these distributions are typically subject to income taxation. If you've got other sources of income at the time, it's possible they could push you into a higher tax bracket (not that this would be the worst problem to have).
But what if you just don't need -- or even want -- an RMD at this time? You can't simply skip taking it, since doing so will incur a 25% penalty on any amount you didn't withdraw but were supposed to. Here are some of your top options.
4 options for your RMD
1. Invest it in a high-yield money market fund
Although it's not a requirement (more on this in a moment), most retirees will be taking their RMD as a cash payment. This doesn't mean you must leave it in the low-yield money market account most banks and brokers use as their default option, though. If you're willing to make a phone call or place an online trade, you can direct this money into a higher-yielding money market, many of which are paying in excess of 4% at this time.
2. Take an in-kind distribution
While most required minimum distributions will be made in cash, that's not your only option. If you're holding an investment you simply want to continue holding, you can remove some or all of that position just by transferring it out of your IRA and into a traditional brokerage account. You'll simply need to give your brokerage firm these explicit instructions.
No tax liability is avoided in taking these so-called "in-kind" distributions, to be clear. The IRS just uses the value of the distribution on the day the transfer out of the IRA is completed as your taxable withdrawal figure. You'll still ultimately need to satisfy any given year's calculated RMD, which is taxable by a dollar amount based on the previous year's ending value. You might need to transfer more than one position, or some additional cash, to meet this requirement.
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3. Give it away
Assuming you neither need this money now nor will need it at any point in the future, you can also donate your RMD to a legitimate charity using the IRS' qualified charitable deduction (or QCD) rules.
On the surface, these gifts look like any other tax-deductible donation. There's one important difference, though. That is, while such charitable giving satisfies required minimum distribution rules, up to $105,000 per person (or up to $210,000 per married couple filing jointly) per year of such giving is also not considered taxable income by the IRS. This could not only do the good you probably want to do with your money, but will also help prevent your income from jumping into a higher tax bracket.
4. Just keep being smart
Finally, perhaps the smartest move to make with any RMD money you don't need just yet is investing it -- or reinvesting it -- in a way that still makes sense with the entirety of your holdings.
What does that mean? For starters, if your portfolio's already unbalanced and there's no timing-based benefit in taking an in-kind distribution, take a cash-based required distribution instead and step into some stocks and/or funds that reduce your risk while adding exposure to sectors or categories where you're lacking. Also bear in mind that while you enjoyed tax-sheltered growth during the time these assets were in a retirement account, outside of an IRA you'll get no such benefit. So, choose wisely if that's a worry.
Mostly, though, prioritize assembling an all-around diversified portfolio. Although you can minimize or even postpone the payment of taxes, you can never completely avoid them. Doing so to the detriment of your long-term investment performance can often do more long-term harm than good.
