Maximizing Your Required Minimum Distributions: Smart Strategies for Retirees
Required minimum distributions (RMDs) are annual withdrawals that seniors must take from most retirement accounts starting at age 73. Missing these withdrawals can lead to a hefty 25% penalty tax. However, many retirees already withdraw the necessary amounts throughout the year. For those who find themselves needing to take their RMDs but don’t need the money right away, here are three smart strategies to make the most of it.
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1. Allocate Funds for Future Living Expenses
If you’ve just taken your RMD for 2024, consider allocating that money toward your 2025 living expenses. Keeping it in a high-yield savings account or a short-term certificate of deposit (CD) can allow it to grow until needed.
However, be cautious of potentially falling into a pattern of not withdrawing enough from retirement accounts each year. This can result in last-minute withdrawals to avoid penalties. If you’re confident in your finances, using surplus funds on experiences, like a vacation or a big purchase, may be worthwhile while still making necessary withdrawals for living costs and RMDs.
2. Reinvest Your RMD
The purpose of RMDs is to ensure you withdraw from tax-advantaged retirement accounts and pay the taxes owed. Once you’ve taken your RMD, the government doesn’t regulate how you use those funds.
Although you cannot return this money to a retirement account without earned income, you can deposit it into a taxable brokerage account. This allows you to choose your investments for potential growth. Keep in mind that while you’ll owe taxes on any earnings, holding investments for a year or more means paying lower long-term capital gains tax rates, which can save you considerably compared to short-term gains.
3. Consider a Qualified Charitable Distribution (QCD)
If you genuinely don’t need the RMD cash and want to avoid increasing your tax burden, a qualified charitable distribution (QCD) might be the ideal route. This involves directly donating your RMD to a qualifying charity. It’s essential that this transfer is direct, meaning it never touches your personal finances. Consult your retirement plan administrator if you’re unsure how to proceed.
With a QCD, the funds are still withdrawn from your account, but they won’t count toward your taxable income. Additionally, you’ll be able to support a charitable cause.
Most retirees may be unable to take QCDs for their 2024 RMDs, as these must generally be taken by December 31. However, if you turned 73 in 2024, you have until April 1, 2025, to take your first RMD, making a QCD available to you. Even if not pursued this year, this strategy remains relevant for future years.
Choosing the best path for your RMD can change yearly, and that’s perfectly acceptable. You may even opt to split your RMD into different allocations; for instance, reserving funds for future expenses while reinvesting or donating the remaining amount. Ultimately, your choice should align with your financial plans and comfort level.
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