What Are You Going to Do with Your Required Minimum Distribution?
If you are over 70 ½ and have a traditional IRA or a qualified plan account like a 401(k), the tax rules require you to take withdrawals from your account annually, a process known as Required Minimum Distributions or RMDs. In most cases you pay income taxes on the RMD amount. But what you do with the distribution – the money itself – is your choice. Here are a few thoughts on what to do with your RMD.
For many, the easy solution – and most practical – is to spend it. They include the RMD amount in their annual spending plan. Some best practices for those who spend their RMD are to
- Have a certain portion of the RMD withheld for federal and state taxes
- Have the net distribution (after taxes are withheld) paid in monthly installments over twelve months
- Have that net monthly distribution automatically deposited into the checking account to facilitate spending.
If you plan to spend your RMD then you should make the process as convenient as possible and structure payouts to keep pace with the taxes owed.
If your regular income covers your spending plan then the RMD may be put to other uses. Sure, you will still have to take the distribution and pay income taxes, but any remaining surplus can be redirected back into after-tax savings accounts. You are not under any obligation to spend your RMD if it isn’t needed. Indeed, many folks in this situation put off taking their RMD until late in the calendar year to allow continued tax-deferred growth up until the time the distribution is made.
Another common practice for those who want to give back is to donate the RMD via a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of the RMD from the IRA custodian to a qualified charity. When you make a QCD the amount of the donation is excluded from your taxable income but note that since the QCD is not taxed no charitable deduction is permitted for the amount donated. There are some important rules that govern QCDs. You must be 70 1/2 or older to be eligible to make a QCD. The maximum annual amount that can qualify for a QCD is $100,000. You must make the QCD from an IRA (not a 401(k) or 403(b) plan) and it must be made by the RMD deadline, which is typically December 31. The charity must be a 501(c)(3) organization. If the QCD sounds right for you, be sure to consult with your tax preparer or CPA ahead of time for more details and to make sure you follow all the rules.
Again, if the RMD represents surplus income in a given year you may consider using these funds for annual exclusion gifting. Currently, you may gift up to $15,000 annually to any donee without incurring gift tax consequences. The unused RMD amount may be an excellent source of funds to help a family member pay down a loan, meet monthly expenses, fund a Traditional or Roth IRA contribution, or fund a 529 plan for future education needs.
You likely enjoyed many years of tax-deferred growth on the funds in your IRA or qualified plan. When RMDs come due you must meet your tax obligations but you have plenty of freedom to decide how to use your withdrawals. Your Unified Trust Company Fiduciary Investment Advisor can help you get the most out of your RMD.
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