Financially Fit Ways to “Spend” Your RMD – Part Two

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.

When it’s time to figure out what to do with your RMD, it’s a good idea to speak with a Wealth Management professional.  Consider scheduling an individual consultation to help you figure out the best choice for your unique financial situation.  Here are some possibilities they might discuss with you.

Set up a Trust:

If you haven’t already finalized your estate plans, it may be a worthwhile investment to use this extra income now to pay the legal fees and other expenses associated with opening a Trust.  The money spent will pay dividends in peace of mind.

Fund a Grandchild’s Education: 

In many states, if you open a 529 college savings plan in your name to fund a grandchild’s education, you can qualify for a state income tax deduction.  If the state deduction isn’t available to you or not important to you, know that any third-party contribution you make to an existing 529 plan, or any money you contribute to a Coverdell Education Savings Account won’t be income tax deductible, but it will at least grow tax-free for the beneficiary as long as it is eventually used toward qualifying educational expenses.

Reinvest into municipal bonds:

Investments in municipal bonds often reward you with income that is exempt from federal taxes and in some cases, state and local taxes too.

Non-deposit investment solutions are not insured by the FDIC; not deposits or obligations of the Bank; not guaranteed by the Bank; and are subject to investment risk, including possible loss of principal.

Please consult a tax adviser 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.

Monday on the Money is a weekly commentary from Bank of the Ozarks providing financial advice and solutions important to you and your family.

Share