Rosalind Evans
As retirees approach the deadline to take required minimum distributions (RMDs) from their retirement accounts, many wonder what to do with the money, especially if they don’t need it immediately. Since 2023, most retirees are required to take these withdrawals starting at age 73, and while the first deadline is April 1 of the year after turning 73, subsequent RMDs must be taken by December 31 each year. Fortunately, financial experts offer strategies to make the most of these required withdrawals.
Understand Your Personal Goals and Financial Plan
When deciding what to do with your RMDs, the first step is to consider your personal goals, both short-term and long-term. Judy Brown, a certified financial planner (CFP) and certified public accountant (CPA) with SC&H Group emphasizes that each client’s decision should “always come down to a client’s personal goals, financial and tax plan.” Whether you’re thinking about leaving a legacy for your heirs or minimizing your tax burden, aligning your withdrawal strategy with your overall financial outlook is essential.
Reinvest for Long-Term Gains
One popular option for those looking to grow their wealth over time is reinvesting the after-tax proceeds from their RMDs into a brokerage account. Houston-based CFP Abrin Berkemeyer recommends this approach for retirees focused on long-term growth. He notes that “upon the sale of those assets, you’ll get long-term capital gains rates of 0%, 15%, or 20%, depending on taxable income,” making it an effective way to manage taxes on future significant expenses like healthcare.
By reinvesting, you can continue your investment strategy while benefiting from favorable capital gains tax rates. However, it’s important to remember that while brokerage assets are subject to capital gains taxes, pretax retirement funds are taxed as ordinary income when withdrawn.
Shift to Tax-Efficient Investments
Another strategy is to move your current retirement assets into a brokerage account through an “in-kind transfer,” keeping the same holdings while paying taxes on the distribution. However, Karen Van Voorhis, CFP and director of financial planning at Daniel J. Galli & Associates, advises that there are “good reasons” to reconsider keeping identical assets in a brokerage account due to yearly taxes on earnings.
Instead, she recommends exploring exchange-traded funds (ETFs) for their tax advantages. “ETFs are incredibly tax efficient,” she explains. Unlike mutual funds, ETFs generally don’t distribute capital gains payouts, allowing you to avoid extra taxes on earnings, a significant benefit for retirees seeking to minimize their annual tax liabilities.
Give Back Through Charitable Donations
For retirees with a philanthropic inclination, a qualified charitable distribution (QCD) can be tax-efficient to handle RMDs. A QCD is a direct transfer from an individual retirement account to a qualified nonprofit organization, and retirees age 70½ or older can donate up to $105,000 in 2024, which also satisfies the RMD requirement for those age 73 and older.
Although QCDs don’t provide a charitable deduction, they don’t count toward adjusted gross income, offering retirees a valuable tax advantage. “It’s effectively a guaranteed tax deduction,” says Van Voorhis. By lowering adjusted gross income, retirees can avoid potential increases in Medicare premiums determined by income levels.
Make the Most of Your RMDs
Whether you’re looking to reinvest, reduce your tax burden, or give back to your community, various strategies exist to manage your RMDs effectively. As Judy Brown reminds us, you must base your decision on your unique financial and tax plan. By considering your goals and utilizing the right approach, you can ensure that your required withdrawals work in your favor.
