Retirees Face Critical Deadline: What to Do with Required Minimum Distributions
As the deadline approaches for retirees to take required minimum distributions (RMDs) from their pre-tax retirement accounts, many are left wondering what to do with the funds. Since 2023, most retirees must take RMDs starting at age 73, with the first deadline being April 1 after turning 73 and subsequent deadlines being December 31.
According to certified financial planner Judy Brown, the next step depends on a client’s personal goals, financial, and tax plan. Before making a decision, it’s essential to consider short- and long-term priorities, including legacy goals, along with the tax impact.
One option is to reinvest after-tax RMD proceeds in a brokerage account and continue with the current investing strategy. This approach can lead to future tax savings if the funds are used for a large expense later, such as healthcare. However, brokerage assets may be subject to capital gains taxes, whereas pre-tax retirement funds incur regular income taxes.
Another strategy is to use “in-kind transfers,” which move assets directly from the pre-tax retirement account to a brokerage, allowing retirees to maintain their original holdings. Although taxes are still owed on the distribution, this approach can help minimize taxes in the long run.
Some advisors recommend shifting holdings to exchange-traded funds (ETFs), which are known for their tax efficiency. Unlike mutual funds, most ETFs don’t distribute capital gains payouts, saving brokerage account investors on annual taxes.
For philanthropic retirees, a qualified charitable distribution (QCD) may be an attractive option. A QCD is a direct transfer from an individual retirement account to an eligible nonprofit organization, satisfying yearly RMD requirements. In 2024, retirees aged 70½ or older can donate up to $105,000, which doesn’t count towards adjusted gross income. This approach effectively provides a guaranteed tax deduction.
Ultimately, the decision on what to do with RMDs depends on individual circumstances and goals. Retirees should consult with a financial advisor to determine the best course of action for their unique situation.
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