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While many retirement accounts offer tax-sheltered ways to save and invest, the IRS directs account holders to withdraw funds at some point. This takes the form of required minimum distributions (RMDs). Required minimum distributions currently begin at age 73 for many retirement accounts.
It’s not unusual to reach an age where the IRS requires you to start withdrawing money from retirement accounts that you don’t have to tap yet. RMDs can trigger taxes and are unlikely to generate competitive returns on your checking account. Instead, here are some ways you can think about managing this money.
If you want to create a tax-efficient retirement plan, contact a financial advisor today.
Required minimum distributions, or “RMDs,” are withdrawals 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 will no longer apply to Roth 401(k)s starting in 2024.
Beginning at age 73, everyone with a qualifying account must make this minimum withdrawal each year. This rule applies per account, not per taxpayer. Say you have both an IRA and a 401(k), each account has its own minimum annual withdrawal. The IRS calculates your minimum withdrawals based on your age and the value of the account.
For example, let’s say you turned 73 this year and have $500,000 in your IRA. The IRS requires that you 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 you’ve contributed to. Minimum distributions are also required for heirs who receive them. Often you must withdraw this money within ten years of inheritance, but the details vary widely depending on the nature of the account and the original owner.
Remember, a financial advisor can help you determine the best way to structure your withdrawals.
At age 73, you may realistically still have decades ahead of you, so don’t just withdraw this money and put it in a savings account. A few ways you can make the money work for you include:
Just because you don’t need this money now doesn’t mean you won’t need it later. In that case, a minimum withdrawal requirement can be a golden opportunity to convert your money from growth to long-term security. Assets such as a certificate of deposit (CD) or a government bond can be an excellent way to minimize risk and prevent your money from losing value due to inflation.
“You should own more stocks in retirement than you think,” says Kevin Caldwell, financial planner at 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 of you and, while it is by no means a certainty, extended life and longer health in the years to come are not a remote possibility either. You certainly don’t want your 100th birthday to come as an unwanted surprise.
Years of expenses, inflation and living costs are rising, and medical bills will all place demands on your retirement account. Especially if you don’t need these benefits, this money could be perfect for growth-oriented investments to meet these needs.
Talk to a financial advisor about competitive ways to grow your money.
Or, Caldwell said, if you’re 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 and do some good at the same time. Here, instead of withdrawing money from your retirement account, you can transfer the money or assets directly to charity. The IRS will treat this as an above-the-line deduction, meaning you won’t pay taxes on the assets you donate and can still claim the standard deduction for that year, and you’ve met your RMDs.
This essentially allows you to meet your required minimum distribution tax-free.
If you need help structuring your retirement, contact a financial advisor today.
If you need to start using RMDs but don’t need the money yet, it’s important to figure out how you want to use those funds. You can invest for growth or security, or you can simply try to manage the taxes this entails.
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One thing to remember is that the IRS calculates your required minimum distributions annually. You have the whole year to take this recording in one go or in parts. So… what’s best for your money?
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A financial advisor can help you draw up a comprehensive retirement plan. 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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