When you reach a certain age, the IRS requires that you pull money
out of your pre tax retirement accounts, and that can happen with other
accounts as well, maybe inherited accounts, but what happens if you don't
need the money from your RMD, can you reinvest the funds or give
it away, or, what's the best thing to do with it?
This is a big deal, whether you're facing that situation this year or
you're planning ahead, in fact, the best time to start thinking about this
is well before you reach your 70s, by doing some planning,
you can figure out how things might look and set yourself up for
success. So that's what we'll talk about in this video. We'll cover some
of your options as well as some of the steps you can take
to potentially manage your RMDs in the future,
so as a refresher, RMD stands for required minimum distribution, and this
can be anything from a minor task that you just have to complete
every year to a big tax headache that you have to deal with,
the IRS does not allow you to keep money in pre tax retirement
accounts forever. In fact, once you reach a certain age, you have to
take money out of those accounts, which generally creates taxable income,
and that can be problematic in some cases, that additional income on your
tax return can complicate your life and affect you in surprising but potentially
avoidable ways. For. Example, this can affect your tax bracket, by having
that extra income, it might bump you up into a higher tax bracket,
and then any income you take in that bracket, such as your entire
RMD, could potentially be taxed at a high rate. This can also affect
your healthcare costs, so on Medicare, your premiums can depend on your
income from a few years prior, and with a higher income,
there's a chance that you would have to pay higher Medicare premiums each
month. There is also Social Security taxation, when you have income from
sources like IRA distributions, your Social Security retirement benefits
may be taxable, and with more income, more and more of your Social
Security is included in your taxable income. So social security can go from
being a tax free source of income to partially or mostly taxed, and
there could be other issues, in general, the higher your income,
the harder it is to qualify for credits and deductions and maybe other
types of programs as well. Fortunately, there may be some ways to avoid
the worst of those issues, but for now, here are a couple of
ways to deal with an RMD that you don't need, in no particular
order, let's start with re investing your RMD, so you can take those
funds that come out of your retirement account and re invest the money
in a taxable account, such as a brokerage account, you might just buy
investments like a diversified portfolio of mutual funds or ETFs, and you
can use the same level of risk or a different risk level in
that account if that makes the most sense, in that taxable account,
the investments may gain and lose value with the markets, but a big
difference is going to be that any earnings that you receive will be
reported to you and you have to report that on your taxes,
so for example, any dividends or interest, capital gains distributions or
capital gains from selling something would be something you have to report
on your taxes, that's not a reason not to invest in those accounts,
but it's important to know, and that might also point you towards using
tax efficient investment strategies inside of that brokerage account, most
people sell investments in their IRA and then transfer the cash over to
a brokerage account and then reinvest the money. There's nothing wrong with
that practice, but you can also transfer the shares or transfer investments
in kind without selling anything for example, you might pick some shares
of a mutual fund and just transfer those shares themselves from the IRA
to the taxable account without selling, that's called an in kind transfer,
and there are a couple of reasons you might want to consider that,
one is that you stay invested and you keep your portfolio in balance,
so if the markets move during the process of taking your RMD, you
won't be on the sidelines in cash, of course, that only works in
your favor if the markets go up and it's a drawback if the
markets fall, it's also easy, so if you wanted to stay invested anyway,
you don't need to enter a sell order, then distribute the cash,
then wait for the transfer to take place, and then subsequently enter the
buy order in your taxable account, you can just move the investment right
over and be done with it. But there are some challenges with using
an in kind RMD, and that is that you don't know exactly what
your investment is going to be valued at when it gets moved from
the IRA to the brokerage account, so if the investments lose value,
there's a risk of not meeting the RMD or not moving over enough
to satisfy the RMD. Of course, you can just double check things after
the fact and move more over if needed, that practice of reinvesting the
money in a taxable brokerage account is what most of the people I
work with do, but there are a couple of other good options as
well. Let's quickly clear up the question of if you're able to reinvest
that money in a Roth, so since the money has been taxed,
it might seem ideal to put the money into a Roth IRA,
that's understandable, but you would not be able to just directly move your
RMD into a Roth IRA. Unfortunately, you would need some sort of earned
income that's eligible for an IRA contribution, if you're going to put money
into a Roth IRA, and the RMD is not that type of income,
another option for using your RMD when you don't need the money right
away is to pay some taxes, if you're getting or RMDs and income
from other sources, there's a decent chance that you'll need to pay some
income tax and your RMD can be a source of funds to make
that payment, in your retirement years, you're not a wage earner who pays
taxes with every paycheck, instead, you might need to make estimated tax
payments, for many people, that happens four times each year through quarterly
payments to the IRS, but you can also have taxes withheld from your
RMD, for example. You might choose to have 10% or even 100%
of your RMD go to the IRS instead of having it come to
you. So why would you do that? Maybe you need to pay some
taxes and you don't need the cash flow, so you're required to pay
at least a safe harbor amount to avoid underpayment penalties, and to do
that, you can send the IRS at least 90% of what you owe
for the year, or 100% of the previous tax year's liability by paying
those taxes through withholding from your RMD, you can potentially simplify
your life and just make the required tax payments even in one chunk,
you could even wait until late in the year to do this,
enabling you to figure out what your earnings look like for the year,
that's because those withholding payments are considered to be received
throughout the year, which can be helpful if you miss some of those
estimated payments early in the year, ultimately, this might be a nice trick
to help you avoid some under payment penalties, but be sure to chat
with your tax expert before going this route, by the way,
I'm Justin Pritchard, and I help people plan for retirement and invest for
the future, and in the description below, you're going to find more information
on the topics we're talking about here, taxes and RMDs, etcetera,
as well as more general information about planning for retirement. I think
you'll find those very helpful, so be sure to check all of that
out, also a quick, friendly reminder. It's just a short video.
It can't possibly cover everything. And you really do need to do some
research and chat with your own tax experts, if you don't need the
money for taxes or spending, you can always give away your RMD in
a very tax friendly way and in a way that impacts a tax
qualified charity through a qualified charitable distribution or a QCD.
A QCD happens when you send money directly from your IRA to a
tax qualified charitable organization, but it's critical that the funds
move directly from your retirement account and do not go to you or
your bank account first when you complete a QCD properly, the RMD is
not included in your income, so as a result, the transaction does not
increase your gross income, which helps you dodge some of the problems we
talked about earlier, that's different from a typical RMD, which again,
is going to count as income in fact, that's the whole point of
having RMDs as the IRS wants to generate revenue, the charity you give
money to also comes out ahead here, and that's because if you just
took your RMD, you'd have to withdraw the funds from your IRA,
pay income tax on the withdrawal and then send the remaining funds over
to your favorite charity. But with the QCD, you skip the part about
paying taxes and there's more for you to give away, of course,
there are some specific requirements to get this done properly, so please
research that carefully. I also want to highlight one quirk when it comes
to QCD, you can actually start doing QCDs at age 70 and a
half or later under current law, whereas your RMD might not begin until
73 or 75 or whatever lawmakers make the age... As a result,
you have a couple of extra years to start doing those QCDs, and
this can potentially help you minimize RMDs even before they begin.
Another option for your RMD is just to put it in the bank.
So that might be the option you choose, if you want to keep
the money safe, you're undoubtedly going to have some expenses, so you can
put it in a savings account, get a little bit of interest and
just use it later when the inevitable comes up. Alternatively, you could
give the money away, whether that's to your loved ones or to charities,
maybe not tax qualified causes, but other causes where you can use it
to pay taxes if you're doing Roth conversions, for example. You might take
some of that money to fund the tax payments. If you're in the
pre RMD phase of life, you may be able to influence how big
your future rmds are, again, the bigger your pre tax retirement accounts,
the bigger those RMDs are going to be. So what can you do
about it? One strategy is to do Roth conversions, so you're taking money
from those pre tax accounts, you are converting it and paying taxes,
converting it over to Roth type money, which can potentially be tax free
money when you pull it out later in retirement. Similarly, if you need
to spend the money, you might just withdraw from those pre tax retirement
accounts before you're required to... That might make sense if you're using
a Social Security bridge strategy, for example, which I have other videos
on, with either the withdrawals from pre tax accounts or the Roth conversion
strategy, the idea is the same, you're going to pull forward some of
that taxable income, so that you reduce the size of your pre tax
accounts and you can smooth out the rate at which money is coming
out of those accounts, if you pursue those strategies, just be mindful of
how they affect your income because you could create a similar problem to
having a big RMD, so check out what tax bracket you might be
in, look at where you are on the Medicare premium levels and estimate
how much of your social security might be taxed with or without those
types of strategies. Then you can also do the QCD, giving money to
charity with a head start, even a couple of years before your RMDs
begin, so I hope you've found that helpful if you did,
please leave a quick thumbs up. Thank you and take care.