Age 70.5 is a milestone birthday in the United States. It’s also a birthday most people dread because Uncle Sam comes knocking, looking for you to pay taxes on retirement money that you’ve been diligently saving and deferring. If you are like most who reach this magical age, you probably factor in your anticipated required minimum distribution (“RMD”) that you must take from your various retirement accounts each year into your overall living expense needs. However, if you are one who truly doesn’t need the money to pay for everyday expenses, here are a couple of options for you to consider.
Bulk Up Emergency Savings or Contribute to a Taxable Investment Account
The rules surrounding required minimum distributions from retirement accounts is pretty cut and dry — once you reach age 70.5, you must withdraw a specified amount (per IRS guidelines) from your accounts each year and pay applicable taxes on the distribution. If you don’t need to use the money for living expenses, consider adding to an emergency savings account if yours has been depleted. If you have adequate emergency savings, consider taking your distribution and investing in a taxable account. You are no longer in a tax deferred account, but you can still remain invested.
Plan for Children or Grandchildren
There are many ways you can leverage your RMD dollars to benefit your children and grandchildren. If you are in good health, you could consider a permanent life insurance policy and use your RMDs to pay the annual premium payments. When you pass away, your beneficiaries typically receive an income tax free lump sum death benefit. Work with a qualified professional before implementing this strategy to make sure you don’t run afoul with gifting and estate tax rules as they can be complex.
If you have grandchildren that are in college, you can pay tuition bills for them. As long as you make the check payable to the institution directly (not your grandchild!), this should not be considered a taxable gift. Work with your tax professional for guidance on how to properly document this. Lastly, if you have younger grandchildren, you could use your annual RMD to contribute to a 529 college savings plan that you set up for the benefit of your grandchild or you contribute to a 529 plan that has been set up by your children for the benefit of your grandchildren. Work with a qualified professional to determine how much you can contribute annually without potentially incurring gift tax implications.
Qualified Charitable Distribution
This is one provision under the tax code that seems to always be on the chopping block. However, for the time being, it is still allowed. In a nutshell, the tax code allows you to direct your IRA custodian to make a direct transfer of some or all of your annual RMD requirement to a qualified charity. The amount donated can potentially be excluded from taxable income. The annual limit is currently set at $100,000. The rules surrounding this type of distribution are complicated. Consult with a qualified tax advisor prior to doing anything to ensure this type of distribution is still allowed, the charity you are considering qualifies under the tax code, and the distribution is done correctly.
If you truly do not need to use the money you are required to take from your tax deferred retirement accounts for living expenses, then it is up to you where it is going to go. Whether it is saving or investing for yourself, planning to benefit another individual, or making a contribution to a qualified charitable organization, it’s up to you. Of course, don’t forget it is your money, so spending a little on yourself by way of a vacation or a present can feel real good too.
Gary E. Croxall, CFP®
Soren E. Croxall, CFP®
Croxall Capital Planning
Advisory services provided by Croxall Capital Planning (CCP), a Registered Investment Advisor. Separate advisory and securities services may be provided by National Planning Corporation (NPC), member FINRA/SIPC, and a SEC Registered Investment Advisor. CCP & NPC are independent and unrelated companies. Please consult with your representative to confirm on which company’s behalf services are being provided. NPC and CCP do not provide tax or legal advice. The information contained herein is for general education and is not intended as specific advice or a recommendation to any person or entity. The opinions expressed in this article do not necessarily reflect those of NPC.