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Dispatches Retired Investor

Strategies for Unneeded RMDs

Required minimum distributions from retirement plans can create a quandary for those who do not need the money. Suggestions on what retirees in this situation can do with the unwanted cash.

by AAII Staff | February 2017

The U.S. tax code requires those age 70½ to take annual withdrawals from an IRA, 401(k), SEP IRA or similar type of retirement savings account. These required minimum distributions (RMDs) can create a quandary for those who are forced to take the distributions, but do not need the money. Christine Benz of Morningstar has three suggestions on what retirees in this situation can do with the unwanted cash.

1. Contribute to a Roth IRA: Roth IRAs are exempt from the RMD rules. Retirees can contribute new dollars to them if they or their spouse have enough income from working to cover the amount contributed to the Roth IRA. Retirees who do not have earned income cannot contribute new dollars to a Roth IRA, but can do a Roth IRA conversion provided the RMD requirements for the current calendar year are met.

2. Deposit Into a Taxable Investment Account: Those without earned income can deposit the excess RMD dollars into taxable account, such as a traditional brokerage account. If the money is not needed for a long time (e.g., intended for an heir), some type of equity investment could make sense. Those with shorter investment horizons and who are in a high enough tax bracket could consider municipal bonds or tax-managed funds.

3. Allocate to a 529 Plan: Retirees who plan to take college courses in the future can use a 529 plan to set dollars aside and allow those dollars to grow tax-free. There may also be a state tax benefit to doing so. The money must be used to pay for qualified educational expenses, however.

4. Make a Charitable Contribution: Those age 70½ or older can donate up to $100,000 directly from their IRA to a qualified charity. These qualified charitable donations (QCD) reduce the current year’s RMD dollar-for-dollar up to $100,000 per year. As such, they also reduce the amount of taxable income for the calendar year. Benz adds that waiting until late in the year to make the QCD allows the retiree to take advantage of compounded returns realized throughout the year.

Source: “What to Do With Unneeded RMDs,” Christine Benz, Morningstar, January 10, 2017.

Discussion

Bob from IN posted over 9 years ago:

If you are going to make charitable donations anyway, the QCD path will reduce your adjusted gross income (think taxes) as well as dealing with your RMD. Making donations from your income will provide a deduction, but also provides a higher AGI than you would receive by using the QCD.


Michael Mee from OR posted over 9 years ago:

I am not clear on the last sentence pertaining to Roth IRAs. Will moving money from my IRA to my Roth IRA satisfy my RMD? (I have no earned income.)


P Hester from VA posted over 9 years ago:

I thought the limit for a donation was the RMD, but this says $100,000. Please be more clear.


Jthomas Mcdonald from ME posted over 9 years ago:

It should be noted that one advantage of reducing the AGI is that AGI is the determing factor in the amount of medicare premium each year. For example, if your AGI is at the threshold of the next tier in Medicare prem, reducing the AGI could result in not having to pay a higher Medicare premiums for you and your spouse.


Ed Miller from KS posted over 9 years ago:

You may contribute up to $100,000 to a charitable deduction per year. This amount can be part of, all of, or none of your RMD.


Bud from NV posted over 9 years ago:

Anyone who doesn't want their RMD income should feel free to forward it to me.


Dick from WI posted over 9 years ago:

I understand the value of a QCD to reduce the AGI and its affect on Medicare premium. But if I'm filling 1040 long form because I have enough deductions then not doing a QCD means more income but more deduction to off set the added income. In this aspect a QCD has no benefit. Am I missing something?


Kenneth Hiseler from CO posted over 9 years ago:

What is the answer to the last question (from WI)???


Jeff from NY posted over 9 years ago:

Some retired individuals (particularly those whose mortgages are paid off) will not reach the level at which itemized deductions will exceed the allowable Standard Deduction (SD), which is higher for those over 65. This means that the QCD is not taxed even if the SD is used.


Robert from CA posted over 9 years ago:

If you itemize, a reduction in your AGI reduces the threshold for deductible medical expenses (as well as for miscellaneous expenses, such as what you spend on AAII). If any of your medical or miscellaneous expenses are deductible (above the threshhold), you will get more benefit from QCD, because you will get more than you would get from making it a charitable deduction alone.


Tom from NJ posted over 9 years ago:

This article is a combination of misleading and relatively useless information (quite common in contributions from Benz). Suggestion 1: Yes, you can contribute to a Roth if you have earned income and meet the income limitation requirement. That has nothing to do with your RMD, which is not earned income. The last sentence is very misleading, as it suggests that you can convert your RMD into a Roth IRA. THIS is NOT CORRECT. You CAN convert money in your traditional IRA into your Roth IRA, but that doesn't lessen the amount you have to take as your RMD. Suggestion 2: Deposit your RMD into a taxable investment account. What a brilliant idea! Why didn't I think of putting some excess money that I don't need into a regular account? Gee, I was just going to go out and buy a new car and invite 100 of my best friends to a party! Suggestion 3: Deposit to a 529 plan. OK, if you have some excess money, put it to use for education. Makes sense, but again, it doesn't really have anything to do with your RMD. Anytime you have excess money, this could be a good thing to do with it. Suggestion 4: This is the only point that actually relates to the RMD, so I suppose we could give the article a score of 25%.


Alan Siegel from FL posted over 9 years ago:

No part of the required minimum distribution may be rolled over into a Roth IRA. Once you have satisfied the RMD, you may take additional withdrawals from your IRA and roll them over into a Roth IRA.


Robert from CA posted over 9 years ago:

If you itemize, a reduction in your AGI reduces the threshold for deductible medical expenses (as well as for miscellaneous expenses, such as what you spend on AAII). If any of your medical or miscellaneous expenses are deductible (above the threshhold), you will get more benefit from QCD, because you will get more than you would get from making it a charitable deduction alone.


Anne from VA posted over 9 years ago:

I do have check writing privilege for my IRA account at a mutual fund company. Does anyone know if IRS would accept my check withdrawn from my IRA to the charity directly as QCD counted towards my RMD? Thank you in advance


Anne from VA posted over 9 years ago:

I do have check writing privilege for my IRA account at a mutual fund company. Does anyone know if IRS would accept my check withdrawn from my IRA to the charity directly as QCD counted towards my RMD? Thank you in advance


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