I Have to Take RMDs, But Don’t Need the Money Yet. What Can I Do With It?

While many retirement accounts offer tax-sheltered ways to save and invest, the IRS mandates accountholders start withdrawing money at a certain point. This takes the form of required minimum distributions (RMDs). Required minimum distributions currently start at age 73 for many retirement accounts.

It’s not uncommon to reach an age when the IRS requires you to start withdrawing money from retirement accounts that you don’t need to tap just yet. RMDs can trigger taxes and likely won’t generate a competitive return in your checking account. Instead, here are some ways to think about managing this money.

If you’re looking to build a tax-efficient plan for retirement, talk to a financial advisor today.

Why Plan for RMDs?

Required minimum distributions, or “RMDs,” are withdrawals that the IRS requires you to make from most tax-advantaged retirement accounts. They apply to all pre-tax accounts, such as IRAs and 401(k)s. They do not apply to Roth IRAs and, effective 2024, will no longer apply to Roth 401(k)s.

Starting at age 73, everyone with a qualifying account must take this minimum withdrawal each year. This rule applies per-account, not per-taxpayer. So, say you have both an IRA and a 401(k), then each account will have its own minimum annual withdrawal. The IRS calculates your minimum withdrawals based on your age and the account’s value.

For example, say that you turned 73 this year and have $500,000 in an IRA. The IRS would require you to withdraw at least $18,867 from this IRA by the end of 2023. With a $1 million retirement account, an annual minimum withdrawal of $37,735 would be required.

These are the rules for retirement accounts that you contributed to. Inherited retirement accounts also have required minimum distributions for heirs who receive them. Often you must withdraw this money within 10 years of inheriting it, but the specifics vary widely based on the nature of the account and its original owner.

Remember, a financial advisor can help you determine the best way to structure your withdrawals.

What Can You Do With Your RMDs?

At age 73 you can realistically have decades ahead of you, so don’t just take out this cash and put it into a depository account. A few ways you can make the money work for you include:

Redistribute for Safe Growth

Just because you don’t need this money right now doesn’t mean you won’t need it later. In that case, a required minimum withdrawal can be a golden opportunity to transfer your money from growth toward long-term security. Assets like a certificate of deposit (CD) or a Treasury bond can be an excellent way to minimize risk and prevent your money from losing value to inflation.

Redistribute for Growth

“You have to own more equities in retirement than you think,” said Kevin Caldwell, a financial planner with Golden Road Advisors.

The counterpoint to managing risk in retirement is anticipating growth, he said, because longevity should be at the forefront of your retirement conversations. Ideally you have a long life ahead and, while by no means a certainty, extended life and health in the years to come are also not an edge case possibility. You certainly don’t want your 100th birthday to come as an unwelcome surprise.

Years of spending, inflation and costs of living increases, and medical bills will all put demands on your retirement account. Particularly if you don’t need these distributions, that might make this money perfect for growth-oriented investing to help manage those needs.

Talk to a financial advisor about competitive ways to grow your money.

Consider a Qualified Charitable Deduction

Or, said Caldwell, if you are feeling charitable you can skip the minimum distribution altogether in favor of a Qualified Charitable Deduction (QCD).

A Qualified Charitable Deduction is a good way to manage your taxes around RMDs, while doing some good at the same time. Here, instead of withdrawing money from your retirement account you can transfer the cash or assets directly to a charity. The IRS will treat this as an above-the-line deduction, meaning that you won’t pay taxes on the assets you donate and can still claim the standard deduction for that year, and you will have met your RMDs.

Effectively, this allows you to meet your required minimum distribution tax-free.

If you need help structuring your retirement, talk to a financial advisor today.

The Bottom Line

If you need to start taking RMDs, but don’t yet need the money, it’s important to figure out how you want to use this money. You can invest for growth or safety, or you can simply try to manage the taxes that this will trigger.

Managing Your Required Minimum Distribution Tips

  • One thing to remember is that the IRS calculates your required minimum distributions annually. You have all year to take this withdrawal, in a lump sum or in pieces. So… what’s best for your money? 

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/Charday Penn

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