Required minimum distributions (RMDs) are the minimum amounts you must withdraw each year from certain retirement accounts to stay on the good side of the IRS. These accounts include traditional IRA, SEP IRA, SIMPLE IRA, and other pre-tax retirement plan accounts.
As of now, you're required to start taking RMDs at age 73 so you can start paying taxes on those withdrawals. However, if you're part of a workplace plan like a traditional 401(k), you may be able to delay your enrollment until the year you leave the workforce.
If you don't need the extra cash flow from your RMDs, those withdrawals might feel like a big headache. Worse, they could even bump you into a higher tax bracket. But don't worry -- there are smart ways to make the most of your RMDs. Here are two options that are worth considering.
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1. Put your money to work
It might be tempting to withdraw your RMD and let it sit idle in a checking account. But why stop your money from working for you? Instead, consider reinvesting it in a taxable brokerage account so your funds can continue to grow.
Let's say you invest in dividend-paying stocks. You'll owe taxes on the income you earn, but you'll be able to build a steady stream of dividend income that potentially pays you every month. Or you can invest in growth stocks and ride the wave of capital appreciation.
Want to spread your risk? Consider exchange-traded funds (ETFs), and you'll have instant diversification.
If you're still earning income from side gigs or other work, you can use your RMD money to fund a Roth IRA if you qualify.
2. Determine if a QCD is right for you
Not feeling up to managing your RMD? Maybe you'd rather put that money to good use supporting others. A qualified charitable distribution (QCD) might be your cup of tea. If you're 70 1/2 or older, you can use a QCD to satisfy your RMD and support your favorite charity without itemizing deductions.
The best part? It won't bump up your taxable income. The money has to go straight from your IRA trustee to the qualified charity, though, to remain tax-free.
For 2024, the tax-free charitable donation cap through QCDs has climbed to $105,000. If you're married, you and your spouse can donate up to $210,000 combined -- as long as you have separate IRAs and check the box on the requirements.
Pay attention to the deadlines so your RMD can count for the current year. Also, grab a written acknowledgment of your contribution from the charity before filing your tax return.
What happens if you don't take your RMD?
Not needing your RMD is one thing, but not taking it? That's a whole other story -- and can cost you a pretty penny. Whether you've got cash to spare or not, Uncle Sam still expects you to take your RMD before the deadline. If you miss it, you'll face a penalty tax of up to 25% on the amount you skipped.
To avoid this penalty, make sure you know the rules, and calculate your RMD correctly. Some financial institutions might handle this for you, but it's always a good idea to double-check their math.
RMDs now kick in at age 73, with most due by Dec. 31 each year. If you turn 73 in 2024, your first RMD deadline is April 1, 2025. And you'll need to take your next RMD by Dec. 31, 2025.
If RMDs are on your to-do list, make sure to plan ahead so you can put that money to work and make the most of it.
