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What To Do With Your RMDs

What To Do With Your RMDs

April 14, 2021

Did you know that approximately 4 million will retire from the U.S. workforce every year?

If you’re one of the fortunate retired individuals who planned ahead and funded a retirement account (IRA) throughout your career or have/had a 401k, you’ll soon need to make a decision about what to do with your Required Minimum Distributions.

You may not need to use your Required Minimum Distributions when you are first required to start taking them, so you may want to familiarize yourself with your investment options for reinvesting them…

  • What is an RMD?

When you first started contributing, you received a tax deduction for any dollar you put into your tax-deferred IRA. Additionally, you didn’t pay any capital gains taxes on the growth of your investments as the account value increased over all those years.

Once you reach age 72, the IRS generally mandates that you take Required Minimum Distributions, or RMDs, each year from your traditional IRAs or employer-sponsored retirement accounts.

  • How much do you have to take out?

Each year your RMD amount will vary… and increase. The US Treasury uses two factors to determine your RMD value: your age and your IRA account value as of December 31st of the prior year.

It’s important to note that there is a strict deadline. While you may not actually need your RMD funds, you’re still required to withdraw. The IRS penalty for not taking an RMD, or for taking less than the required amount, is a steep 50% of the amount not taken on time. The deadline to take your first RMD is normally April 1st on the year after you turn 72, and December 31st each following year.

  • Can you reinvest your RMD?

Yes, but you need to be careful about how you do it. You can’t deposit an RMD into another retirement account, but you can reinvest it in a taxable account or use it strategically to reduce your taxes later.

The simplest option you have for reinvesting your unneeded required minimum distribution is to deposit it into a taxable brokerage account. Although you won’t get the tax shield that an IRA provides, you can still continue to earn a return.

If your liquid cash cushion is sufficient for your retirement purposes, consider tax-efficient investing options, such as municipal bonds. Index funds don’t throw off a lot of capital gains and can help keep your future tax bills in check. If you have investments in your retirement account that may be difficult to sell, like an inherited stock with restrictions, consider transferring them in-kind to a nonretirement account. This helps satisfy your RMD and allows you to stay invested in the security, but you’ll still owe the taxes on the distribution.

We have many tax efficient ideas regarding how to invest your RMD should you choose to reinvest in an after tax account.

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

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