Benz: What To Do With Unneeded RMDs

for morning time Jeremy Glaser we may have just finished 2016 our MD season but our director of personal finance Christine band sings it's not too early for investors to think about the 2017 required minimum distributions particularly if they're in that n viewable position of having more than enough to live on without those armed DS the same things trying to make carême great to be here let's start by defining a few terms our MDS is required minimum distribution what are they and who does have to take them so if you have assets that are in a traditional IRA maybe a traditional company retirement plan once you pass age 70 and a half you need to begin taking these distributions they're calculated the amount that you take is calculated based on your life expectancy you go on to the RMD cap tables and divide your balance by a factor to arrive at how much you need to take out each year the basic idea is that if you've been taking advantage of these text sheltered investment vehicles over your accumulation years at some point the tax benefits have to come to an end and the government starts to want to take a little bit of a piece of your of your assets so that's the basic idea behind RMD you're required to take this diffusion but you're not required to spend it right worth so many retirees get your ass out of a tax sheltered account maybe they want to put it back into a tax sheltered account is that something that's feasible well no and when it comes to a traditional IRA you can't get the money back into the kitty once you've taken it out and when you think about it why would you even want to do that because this account is subject to RMD so you might be able to get it back in there but you'll have to take it out at some point at which point you'll owe taxes on it so you cannot get it back inside of a traditional IRA if you have a if you have some sort of earned income though and so this wouldn't be income from Social Security it wouldn't be income from your portfolio if you have some sort of work income enough to cover the amount of your contribution to a Roth IRA then you can in fact make a Roth IRA contribution post RMD age and this is also true if you have a house who is still working so as long as the spouse has enough income to cover perhaps both of your Roth IRA contributions you're okay so that's definitely something to consider I sometimes talk to retirees who say you know I was interested in working a little bit on a part-time basis maybe doing some consulting in retirement whatever it might be and this was an additional impetus to consider doing so I wanted to be able to take some of my RM DS and get them into something with some more favorable tax treatment than a taxable account but if you have no orange in common your spouse's no earned income do you have any option not within retirement accounts you'd need to turn to a non retirement account a traditional taxable account taxable brokerage or mutual fund account so if I am looking at some of these traditional taxable accounts that what are some steps I could take to reduce taxes and reduce the potential tax liability down the road well I think you want to take a step back and think about your time horizon for that money if it's money that you've already identified that you don't need money that has come up come out of your IRAs or 401 k's and you don't need it chances are you have a pretty long time horizon for that money so you'd want to have the money invested chances are in some sort of equity investment certainly broad market exchange-traded funds or even traditional index funds can be a great option in terms of reducing the drag of ongoing taxable distributions if you have a shorter time horizon for part of the money or perhaps all of the money you'd want to think about some sort of municipal bond investment provided that you are in a high enough income tax bracket where that makes sense for you but those would be really the key flavors of investment types that you'd want to think about for that taxable account you may also think about some sort of a tax managed fund so one that I often recommend is Vanguard tax managed balance it's actually kind of a hybrid of equity index exposure as well as municipal bonds all in one package and it gets rebalanced in a tax efficient way so that might be another idea especially if it's not an especially large kitty and you want it be well diversified how about five to nine plants that another option it's a great option for retirees who are planning to save for college who do not need their RM DS it's a way to get some additional tax benefits from the money down the line so with a 529 you may be able to earn some sort of a state tax benefit by contributing to your home state's 529 plan and of course the money will enjoy tax-free compounding and assuming that you use the money for some sort of qualified higher education expenses they the money will enjoy tax-free withdrawals as well how about qualified charitable distribution this is a great strategy if you had twenty sixteen RMD since you didn't need that ship has already sailed you would have needed to gone through the steps to do a QCD by year end but for 2017 this is definitely something to have on your radar and the basic idea there is that you are letting your investment provider work directly with the charity of your choice the idea is that the charity receives your part of your distribution up to a hundred thousand dollars directly you never touch the money so that money does not affect your income your adjusted gross income on your tax return so this can be a really neat strategy even if you are making a fairly small charitable contribution per year it can be something to think about doing with with part of your required minimum distributions and we're sitting here in early 2017 is there any reason that you should take a 20-17 RMD earlier in the year or does it really make sense to wait till the end of the year why it's a great question Jeremy and the important point to remember is that those RMDs are based on your balance at year end of the year prior so for 2017 RMDs that RMD amount is going to be calculated off of your December 31st 2016 balance so that's really already set you do not have the ability to effect the amount that you take out based on your timing of that distribution so that's an important point to keep in mind I think all else being equal for retirees who are in this position of not needing there are MDS for ongoing income needs they probably would want to take advantage of that extra year of tax deferred compounding to kind of wait until your end hopefully not too late until year-end but wait until toward the end of the year to be able to take advantage of maybe just a little bit more tax benefit but truly it's a matter of personal preference and your own need for that income as a practical matter most retirees are not in this position of not needing there are md's most most retirees are spending more aggressively from their IRAs and then the government dictates that they do Christine thanks joining me Thank You Jeremy for morning sir I'm Jeremy Glaser thanks for watching

Channel: Morningstar, Inc.

Views: 34,308

Keywords: morningstar, investing, stocks, funds, etfs, mutual, market, RMD, Christine, Benz, required, minimum, distribution, distributions, retirement

Id: 85Aml_KtVkg

Length: 7min 30sec (450 seconds)

Published: Tue Jan 10 2017