With December starting, there are a lot of financial matters to wrap up before the end of the year. One of those is RMDs, or required minimum distributions, from tax-deferred retirement accounts that the government makes retired taxpayers withdraw every year.
For those who have their 401(k)- and IRA-related financial ducks in row — and have extra money available to spend after their day-to-day living expenses have been taken care of — there are options available. As Synchrony Bank suggested: “You can allocate it for living expenses, start a new savings account, invest in the market, or give the money away to your family or a worthy cause.”
Required minimum distributions (RMDs) are mandatory withdrawals from certain types of retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b) and 457(b) retirement account, profit-sharing plan or other defined contribution plan when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
You must withdraw your entire RMD amount by December 31 every year, so it’s crucial to do your research and consult with a financial advisor or tax professional when making RMD decisions. Tax implications can vary based on your individual circumstances and failure to take RMDs may result in stiff penalties.
Here are eight ways to spend your mandatory required minimum distributions right now.
8. Prepay Your Taxes
As uninteresting as it might seem, paying off your taxes for next year is a great way to cover any tax burden. By withholding enough money from your RMD to pay your entire tax bill on all your income sources for next year, you can free your mind of any tax worries and likely see an earlier tax return, too.
7. Give to Your Family
Currently, you can give any number of people up to $17,000 each in a single year without taxation. For 2024, this will be increased to $18,000 — and for married couples, $36,000 will be available to be given to beneficiaries, tax-free, beginning next year. Barring a gift, you should consider contributing to a 529 Education Savings Plan for a grandchild or loved one.
6. Reinvest the Funds
If you don’t need the money for immediate expenses, consider reinvesting the RMD in a taxable brokerage account or another investment vehicle. This can help your money continue to grow, and you’ll only pay taxes on the amount you withdraw. Annuities can provide a stream of income and are another option for managing your RMD. However, it’s essential to carefully consider the terms and fees associated with these reinvestment options.
5. Convert to Roth IRA
If you don’t need the funds immediately, you may consider converting part of your RMDs to a Roth IRA. But beware of the tax implications when trying to optimize your tax bracket: While you will pay taxes on the converted amount, Roth IRAs offer tax-free withdrawals in retirement. “If your RMD is $50,000, you could convert an additional $125,000 of your traditional IRA to a Roth IRA, utilizing the entire RMD to cover associated taxes,” said finance expert Anderson Bray, as quoted by MarketWatch.
4. Donate to a Charity
If you are so inclined, you can donate some or all of your RMD to a qualified charity, up to $100,000 per year. The IRS looks very kindly on charitable givers. Generally, qualified charitable distributions, or QCDs, aren’t subject to ordinary federal income taxes and may have tax advantages, effectively by lowering your adjusted gross income.
3. Start a Short-Term Treasury or CD Ladder
A ladder is a strategy designed to provide current income while minimizing exposure to interest rate fluctuations. Choosing whether to invest in a short-term Treasury bill (T-bill) or a certificate of deposit (CD) will depend on the terms offered and the rate of interest each is paying at the time of purchase. Sold in increments of $100, T-bills are an attractive option because they’re backed by the federal government and offer terms ranging from four to 52 weeks. They’re also currently paying around 5.25% for a 3-month bill.
2. Review and Adjust Your Portfolio
Take the opportunity to review your overall investment portfolio. You might use your RMD as an opportunity to rebalance your investments or make adjustments based on your current financial goals and risk tolerance. By reinvesting your distributions in a taxable account, you can take advantage of continued growth. As Chicago-based financial advisor Brian Schmehil said, per MarketWatch: “Your investments will also receive a step-up in cost basis (an inherited asset’s fair market value on the date of the decedent’s death) when you pass, helping your beneficiaries.”
1. Take it to the Bank
It’s your money, so you shouldn’t feel the need to do anything with it but spend it. But, after making sure all your day-to-day finances are in order and you’ve paid down debt, you should consider banking it for safekeeping. While you’re doing so, you owe it to yourself to grow your money by using a high-yield savings account, which can earn you substantially more money (between 4%-5%) than socking your distributions away in a traditional account (under 1% interest on average).
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This article originally appeared on GOBankingRates.com: Retirement Planning: 8 Ways To Spend Your Mandatory Required Minimum Distribution Right Now