What to do with your RMD from a Financial Advisor

Required minimum distributions (RMDs) are important for your retirement income plan. However, they have strict rules about when to take them and how to calculate them based on your age.

When you turn 73, the IRS usually requires you to start withdrawing from most retirement accounts. This includes IRAs and 401(k)s, but Roth IRAs are not included. However, some exceptions apply. For example, if you are still working at 73, you may delay RMDs from certain workplace accounts.

Retirement rules can change, so it's important to look at your options now. This way, you can avoid missing deadlines and penalties.

If you have accounts with RMDs, here are two important questions. They will help you find the best way to use your distributions.

1. How Do I Calculate and Withdraw My RMDs?

A financial advisor can help you find your required minimum distribution (RMD) amount. They will consider your age and last year's account balances. You can also use an online calculator to do it yourself.

You can calculate your RMD using either your single life expectancy or a joint life expectancy by using the Uniform Lifetime Table.

Once you have the right amount, you can manage withdrawals yourself. Alternatively, you can set up automatic distributions. Many providers offer automatic withdrawal options that calculate and transfer the appropriate amounts via direct deposit or check on a schedule you select.

Missing a Required Minimum Distribution (RMD) deadline can lead to a big penalty. This penalty is 25% of the amount you did not withdraw. However, it may be reduced if you fix it within a certain time.

For your first RMD, the deadline is April 1 of the year after you turn 73. After that, all RMDs are due by December 31 each year. However, if you wait until April 1 for your first withdrawal, you’ll need to take two RMDs that year, which could increase your taxable income.

Pro Tip: Many individuals opt to have taxes withheld from their RMDs, as these distributions count as ordinary income. If you don’t withhold taxes upfront, ensure you set aside funds to cover estimated tax payments throughout the year. Under withholding could lead to additional tax.

2. What Should I Do with My RMDs?

You can make the most of your required minimum distributions (RMDs) in several ways. Your choices depend on your financial goals and needs.

Invest It:

If you don’t need your RMD for everyday expenses, consider reinvesting it. You can move the distribution into a taxable brokerage account and align it with an investment strategy that suits your goals. Another option is a shares-in-kind transfer, where assets are moved directly from your retirement account to another investment account.

If supporting education appeals to you, you could use your RMD to fund a 529 college savings plan. Keep in mind that, even if you don’t need RMD funds to cover expenses, the IRS still requires you to withdraw them.

Spend It:

For retirees relying on RMDs for living expenses, it’s important to budget carefully. You might use a cash management account to handle bills and track spending. Creating a retirement budget can help you estimate your needs, monitor cash flow, and determine whether your RMDs will cover your lifestyle costs.

Gift It:

You can also use your RMDs to give back and potentially reduce your taxable income through a Qualified Charitable Distribution (QCD). A QCD is a direct transfer from your IRA to a qualified charity.

Once you reach age 73, QCDs count toward your RMD for the year, with an annual limit of $105,000 per person, or $210,000 for couples filing jointly (with each spouse donating up to $105,000 from their respective IRAs). QCDs are excluded from your gross income and do not affect the limits on charitable deduction eligibility, making them especially advantageous for high-income earners who take the standard deduction.

Plan Ahead:

If you plan to invest, spend, or donate your RMDs, it’s important to have a good retirement income plan. Working with a financial or tax advisor can help you explore your options. They can also ensure you follow IRS rules and avoid costly mistakes. A well-planned approach will allow you to use your RMDs efficiently to meet both short-term needs and long-term financial goals.

Bottom Line

Incorporating RMDs into your retirement plan is essential but managing them effectively requires careful planning. If you invest, spend, or donate your distributions, knowing the rules and deadlines is important. This knowledge can help you avoid penalties and reach your financial goals.

Talking to a financial advisor can help you stay on track with your RMDs. This can set you up for a more secure retirement.

Sources:
https://www.fidelity.com/learning-center/personal-finance/retirement/required-minimum-distributions

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information