If I don’t spend all of my required minimum distribution money (RMD) each year, can I put some of it back into my shares? If so, will tax be levied on the refunded amount? Would this be considered double taxation? If I am only taxed on the additional interest this money generates when I reinvest it, how is this interest calculated and tracked? Would this extra income be better spent on another investment, such as real estate, since you can write off costs?
-Karen
You can use your RMD money any way you want, including reinvesting it in stocks. It would then behave like any other non-pension investments you have. The RMD itself would not be taxed again, so there would be no double taxation. But if the new investments generated any income, it would be taxed.
Each year you will receive $1,099 for any interest or dividends earned on securities or information about securities sold. If you choose to invest directly in rental property, you will be taxed on any rental income that exceeds expenses. Other real estate investment options would be taxed more like ordinary securities rather than direct ownership of rental properties.
Consulting with a financial advisor can help determine which investments would work best with your existing investments and retirement accounts. Contact a fiduciary advisor.
When you don’t need your RMD
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RMDs must be withdrawn from retirement accounts before taxes, regardless of whether you need or want to withdraw the money. Since that money hasn’t yet been taxed, the IRS wants to make sure that the withdrawals are recorded and that the money is ultimately taxed.
But what you do with your RMD money is entirely up to you. Among the many options for that money you can:
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Use it to pay regular expenses
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Invest it
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Contribute to a Roth IRA (if you have sufficient income)
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Donate it directly to charity as a qualified charitable distribution (QCD) and avoid RMD taxes (assuming the RMD comes from an IRA)
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Give it as a gift to someone you love
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Save it for a rainy day
There are no restrictions on what you do with your RMD after you take it, as long as you take the required amount. (But if you need help planning and managing your RMDs, contact a financial advisor and see how they can help you.)
Many investment opportunities
Investing your RMD can be a great way to put your money to work for you. Before you decide how to invest it, look at your entire portfolio to determine the best way to add value to your current investments. You’ll also want to consider how quickly you’d like to use that money (your time horizon), as that can also influence your investment choices.
Stocks offer opportunities for growth, especially in the long term. Many companies regularly pay dividends to their shareholders, which would increase your current income streams or allow them to be reinvested. You can invest in stocks directly or through mutual funds or exchange-traded funds (ETFs). (A financial advisor can help you evaluate different investments and choose the best one for your situation.)
Real estate can also be a lucrative investment, and this can be done in several ways. In addition to buying properties to rent out or flip, you can also invest in real estate investment trusts (REITs), real estate funds, or crowdfunded real estate.
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REITs are similar to mutual funds and ETFs, but hold dozens or hundreds of rental properties or mortgages, providing a diverse real estate portfolio with each share.
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Real estate investment trusts or ETFs include a variety of REITs and possibly other real estate-oriented securities (such as construction stocks, for example).
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Crowdfunding pools money from many investors to finance real estate projects or purchase private real estate investments that would otherwise be inaccessible to most investors.
REITs, real estate funds and crowdfunding offer the opportunity to invest in real estate with minimal out-of-pocket expenses, which can be a more flexible financial choice.
How investments are taxed
Investments are only taxed if you earn money from them. The form this income takes depends on the type of investment. For example, shares can generate dividend income, bonds can generate interest income and rental properties can generate rental income. In addition to this ongoing income, investments are also taxed if you sell them at a profit.
When you purchase an investment, the basis is the total amount you pay for that investment. The basis is used to calculate any gains or losses when the investment is ultimately sold. This means that you do not pay tax on the amount you have invested, but only on the extra money you receive when you sell it.
For example, if you buy stock for $10,000 and later sell it for $12,000, you will only pay tax on the $2,000 gain. (If you need help planning the taxes you pay on investments, consider talking to a financial advisor.)
Tax benefits of direct real estate investments
Investing in rental properties offers a unique opportunity to generate positive cash flow and tax losses. That’s because of the wide variety of expense write-offs that rental properties offer. Landlords can deduct costs directly related to the property, along with the costs of running this business.
Common property tax write-offs include:
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Mortgage interest
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Property insurance
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Property taxes
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Management costs
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Repairs and maintenance
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Advertising for tenants
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Legal costs
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Accounting costs
In addition to these cash-intensive expenses, rental properties are also subject to depreciation. This allows you to deduct part of the cost of the property each year, increasing depreciation. These expenses offset the rents collected and reduce the taxable income the investment generates. (If you want to invest in rental properties, a financial advisor can help you plan.)
In short: Reinvesting your RMD can provide the potential for additional growth and income in retirement. Evaluating your portfolio, especially with input from a trusted financial advisor, can help you figure out which types of investments are best suited to your situation.
Tips for finding a financial advisor
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If you need help finding and choosing a financial advisor, start by assessing your needs and goals. Perhaps you are looking for help selecting investments or managing restricted stock units (RSUs) that your company has granted. Or perhaps you are looking for comprehensive financial planning services. Evaluating your needs and goals can help you determine what services the consultant you hire should provide.
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Michele Cagan, CPA, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column. Questions may be edited for length and clarity.
Please note that Michele is not a participant in the SmartAsset AMP platform nor an employee of SmartAsset. She received compensation for this article.
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