Jamie Spencer
Once you hit your 70s, navigating retirement income streams can become more complex, especially when it comes to required minimum distributions (RMDs). While many retirees rely on these distributions to fund daily expenses, others might not need to use the funds immediately. So, how do you handle these mandatory withdrawals efficiently, especially when they’re not needed right away?
Since 2023, retirees are obligated to start taking RMDs at age 73, with the first withdrawal deadline being April 1 of the year after reaching that age. Subsequent RMDs must be taken by December 31 each year. While the rules are clear, the strategy behind managing these distributions is often overlooked.
Crafting a Financial Strategy That Fits Your Life
The first step in dealing with RMDs is understanding how these distributions fit into your broader financial plan. Your strategy should reflect both short- and long-term goals, ensuring that your money works toward your specific needs. Whether it’s reducing your tax burden, securing future wealth, or passing on assets to your heirs, your approach should be aligned with your overall financial picture.
Judy Brown, a certified financial planner (CFP) and CPA with SC&H Group, emphasizes the importance of clarity in decision-making. “It’s not just about taking the money; it’s about understanding what you want to achieve,” she says. “Your RMDs should complement your financial goals.”
For some, the priority might be avoiding unnecessary tax consequences. For others, it’s about ensuring there’s enough set aside for future needs, especially in a world where healthcare costs and other unexpected expenses can quickly add up.
Reinvesting to Keep Building Wealth
One popular route for those who don’t need to immediately spend their RMDs is reinvesting them. Retirees can continue growing their wealth by reinvesting the after-tax funds into a taxable brokerage account.
Abrin Berkemeyer, a CFP from Houston, recommends this approach for those focused on long-term financial growth. “When you reinvest, you continue your investment strategy even after retirement. It allows your portfolio to keep working for you,” he says. Plus, if these assets are held for the long term, they’re subject to capital gains tax rates, which are generally lower than ordinary income tax rates applied to RMDs.
However, retirees should be aware of the differences in how various types of accounts are taxed. While retirement funds are taxed at withdrawal as ordinary income, any capital gains from a brokerage account could be taxed at more favorable rates depending on your overall taxable income.
Considering Tax-Efficient Investments
Another option that can help retirees minimize tax liabilities is shifting toward tax-efficient investments like exchange-traded funds (ETFs). These types of investments allow for continued growth without the frequent tax hits that come with mutual funds.
Karen Van Voorhis, CFP and director of financial planning at Daniel J. Galli & Associates, explains, “ETFs provide retirees with a level of tax efficiency that’s hard to match in other investments. The lack of annual capital gains payouts allows for more tax control.” Exploring ETFs or other tax-advantaged investment options can make a big difference for those concerned about taxes eating into their returns.
Supporting Charities While Managing Taxes
If philanthropy is a priority, using RMDs for charitable giving offers an opportunity to give back while reducing your tax liability. Retirees can make what’s known as a qualified charitable distribution (QCD), which allows them to donate directly from their IRA to a nonprofit organization. This donation counts toward fulfilling the RMD requirement and lowers your taxable income.
“Donating through a QCD is a great option for retirees who want to make a difference while managing their taxes,” says Van Voorhis. “By lowering your adjusted gross income, you can avoid triggering higher Medicare premiums and reduce your overall tax bill.”
It’s important to note that retirees age 70½ or older can donate up to $105,000 in 2024 through QCDs, making it a powerful tool for both tax planning and charitable impact.
The Bottom Line: Making RMDs Work for You
Required minimum distributions don’t have to be a burden. With a thoughtful approach, you can turn these mandatory withdrawals into opportunities for growth, tax savings, and even charitable giving. As Judy Brown advises, “Your strategy should reflect your individual financial plan—don’t treat RMDs as a one-size-fits-all situation.”
By aligning your RMDs with your goals, whether that’s reinvesting for future wealth, making tax-efficient choices, or giving back to your community, you can ensure that your RMDs serve your unique financial needs.
