What to do if you don’t need your RMD | personal finance

(Chuck Saletta)

Many retirees who were strong savers throughout their careers reach retirement and are pleasantly surprised at how little they actually need from their savings to make ends meet. Between the costs that fall in retirement and Social Security income and their after-tax pocketbooks, some even find they don’t even need to spend their required minimum distributions (RMDs).

However, regardless of whether you need to spend that money, once you turn 72, those RMDs mean you should withdraw money from most qualified retirement plans. Although you can’t transfer those required distributions to another retirement account, you can still make wise use of that money, even if you don’t need to spend it. These three approaches offer excellent strategies for what to do if you don’t need your RMD.

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No. 1: Give it directly to charity

Once you turn 70½, you can make what is known as a qualified charitable distribution. With that approach, you can donate up to $100,000 per year to charity directly from your traditional IRA. if it is done prior to takes your RMD for the year, the donation can count against the total you need to take as your RMD.

In addition to reducing the need to take the RMD, the qualified charitable distribution never counts as income for a retiree. This can help retirees reduce the higher taxes and mandatory costs that RMDs would otherwise incur.

One key caveat, however, is that you may run into problems if you make a traditional IRA contribution and a qualified charitable distribution in the same year. In essence, the qualified portion of your charitable distribution is reduced by the amount of your traditional IRA contribution. That may reduce the net tax benefit of the plan, but it’s still a good deal.

No. 2: Invest it in after-tax accounts

Although you must take the Required Minimum Distribution from your retirement accounts, there is no rule that says you have to to spend the money once you withdraw it. After you pay your taxes on the distribution, the cash you withdraw can be invested in an ordinary brokerage account with no problems attached.

Even if you don’t directly need the money, investing it this way can be an important wealth planning tool. Investments transferred as an inheritance get an increase based on the date of death of the original owner. In essence, if you buy $10,000 of shares in an after-tax account that grows to be worth $50,000 when you die, your heirs receive those shares as if they had paid $50,000 for them.

Plus, the money you’ve invested in after-tax accounts remains available to you throughout your lifetime. If you find that you need the money, you can tap on it to spend it. If you decide you want to take your extended family on an important bucket list vacation, you can use it.

No. 3: Use it to pay taxes on Roth IRA conversions

You must take your required minimum distributions before making any Roth IRA conversions with your money. Still, once those distributions have been taken, you can convert any additional amounts you want from your traditional IRA to your Roth IRA. Those conversions are taxable events. Using the money you are required Drawing from your other retirement accounts to cover the taxes on your Roth IRA conversion can help you in several ways.

First, once your money is in your Roth IRA, it will never again be subject to a required distribution during your lifetime. Those required distributions can become quite large later in life, since the percentage of your account balance subject to them increases as you age. By converting more of your traditional retirement account balance to a Roth IRA before you retire, you can keep those later distributions low.

Then, once you’ve had money in a Roth IRA for at least five years and you’re over age 59½, you can take distributions from your Roth IRA completely tax-free at any time for any reason. That offers an unparalleled level of flexibility in how you spend your money, should you eventually need or want to tap into it.

Also, after you die, your heirs can usually make withdrawals from an inherited Roth IRA entirely tax-free as long as the account has been open for at least five years. Keep in mind that your heirs usually should empty the inherited Roth IRA within 10 years, although there are some exceptions for cases like spouses who are the sole beneficiary of the Roth IRA.

Use these approaches to manage your retirement savings effectively

If you’re in a place where you don’t need your RMDs to make ends meet in retirement, then you’re generally doing just fine. Congratulations on having a great base in place. Think of these approaches like icing sweetener on an already baked cake.

Still, remember that to use these approaches effectively, it helps to plan ahead. In some cases, the order in which you approach things is important to ensure your success. Also, paying attention to the tax years involved and your age at the time will help ensure you always stay on the right side of the rules associated with RMDs. So build your plan now and improve your ability to effectively manage your retirement savings according to your personal priorities.

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Chuck Saletta has no position in any of the listed stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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