7 Financially Fit Ways to “Spend” Your RMD – Part One

African grandfather playing chess with his grandson

If you’ve reached age 70½ and have tax-deferred retirement accounts, like a 401(k) or traditional IRA, consider this as a reminder to take your required minimum distribution, commonly referred to as an RMD, before the end of the year.  Failing to do so will result in the IRS imposing a 50% penalty on the amount of the RMD you didn’t take and no one wants to incur this kind of penalty.  Many retirees rely on retirement account withdrawals for living expenses, but for the more fortunate, RMDs are a taxable inconvenience leaving a minefield of decisions about what to do with the extra cash. Here are some possibilities you may consider.

Give to Charity: 

Beyond the feel-good benefits of having a giving heart, there’s tax incentives to donating your RMD directly to charity.  If you transfer your RMD straight to a public charity, without ever taking possession of the funds, you don’t have to include it as income on your taxes.  This is particularly handy if you are nearing a higher tax bracket or Medicare income threshold or if you typically don’t itemize your taxes.

Reinvest into your Roth IRA:

If you expect to be in a higher tax bracket in the future, perhaps due to other investments or employment, it may make sense to move funds into a Roth IRA.  Since future withdrawals from a Roth IRA will not be taxed at the higher rate, this can lessen the collective amount of taxes you pay over your lifetime and add years of income to your retirement portfolio.

Certificate of Deposit

Since you’ve reached the fortunate point in your retirement where your expenses may be lower, you may be at a point in your life where you do not need to undertake risk in an effort to increase your wealth.  A Certificate of Deposit may be a great, secure place to put your RMD.

Money Market Account

If you deposit into a Personal Money Market Plus account, or even better, if you meet the $10,000 minimum balance requirement and open a Money Market Gold account, you will have the liquidity and security needed in the short-term so you can take your time deciding how to spend your RMD, all while earning a competitive interest rate.

Looking for More Options? Check our related post on additional ways to “spend” your RMD.

Please consult a tax advisor for further information on your specific tax situation.

By Adam Lucas Adam Lucas holds a Finance degree and an MBA from the University of Kentucky. His work has appeared in many major outlets including Yahoo, AARP.org, and GoBankingRates.com.

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