Retirement Planning


5 Great Uses for Required Minimum Distributions (RMDs)

December 10, 2018
Judith Ward, CFP®, Senior Financial Planner
While taking RMDs from tax-deferred retirement accounts is mandatory at age 70½, you may not need to spend this money. You have options of reinvesting it in a taxable account or donating it to charity.

Key Points

  • At age 70½, you will need to start taking an RMD from your tax-deferred retirement accounts.
  • The money can be invested in a taxable, nonretirement account.
  • You can contribute to a 529 college savings plan.
  • You can transfer your RMD to a charity using a qualified charitable distribution (QCD).
  • You may be able to contribute to a Roth IRA if you have earned income and meet the income limits.

If you’re approaching age 70½, get ready for the annual ritual of taking required minimum distributions (RMDs) from your tax-deferred retirement accounts.

These accounts include: Traditional individual retirement accounts (IRAs), Rollover IRAs, Simplified Employee Pension Plan (SEP-IRAs), and Savings Incentive Match Plan for Employees (SIMPLE IRAs), as well as other employer-sponsored retirement plans.* It’s finally time to pay taxes on these accounts after years of tax-deferred savings and growth.

For many investors, taking distributions is not a new concept, since many may have already started withdrawing money from their retirement savings to pay the bills before reaching age 70½. However, investors who haven’t tapped in to their retirement accounts and are turning 70½ will have to take these distributions whether they need the money or not. The distributions are a percentage of the previous year-end account balances and are generally considered taxable income.

Once the distribution is taken, it cannot remain in a tax-deferred retirement account. If you’re not sure what to do with your distribution, here are a few options:

1. Reinvest it.

You can reinvest the money in a regular, taxable account. Add to your rainy day savings or invest for the longer term if you don’t plan to use the money for necessities during your retirement. You can invest in mutual funds, stocks, or bonds appropriate for your risk tolerance and tax situation.  

2. Invest in your grandchild’s future.

What grandparent wouldn’t love to give the gift of education to a grandchild? You can contribute to your grandchild’s 529 college savings plan—many 529 providers make it easy for family and friends to “gift” to an account. You may even qualify for a state tax deduction for your contribution. Or if your grandchild does not have a 529 account already in place, you can create one for him or her. But it’s important to understand the implications of your choice. Keeping the account in your name allows you to maintain control but could have a negative impact on your grandchild’s financial aid eligibility.

3. Be charitable.

If you are age 70½ or older, you can transfer up to $100,000 to an eligible charity. Known as a qualified charitable distribution (QCD), these funds have to come from your IRA and must be paid directly to a qualified charity. This special distribution can satisfy your RMD amount and be excluded from your taxable income. Contact your financial institution to make sure the transfer is executed correctly—and don’t wait until the December 31 deadline! Keep in mind, any QCD amount is not considered a charitable deduction if you itemize deductions at tax time, making this strategy very beneficial for people who don’t itemize. And this option can only be used with IRAs (except SEP-IRAs or SIMPLE IRAs that are considered active—meaning the IRA owner is receiving ongoing employer contributions). Employer-sponsored plans are not eligible.

4. Fund a Roth IRA.

While it’s not possible to roll RMDs directly to another retirement plan or convert them into a Roth IRA, you could contribute to a Roth IRA if you have earned income over the year and meet the income limits. This might be appealing if you are still working in some capacity and like the idea of a potentially tax-free source of retirement savings. Subsequently, you could take out any of the contributions tax-free, while earnings can be withdrawn tax-free after five years. Your heirs may appreciate this strategy, too, since they could continue to benefit from tax-free distributions.  

5. Make a memory.

After years of saving, sometimes it’s difficult to spend that hard-earned money. If you haven’t treated yourself in a while, splurge a little. Treat your family to a destination vacation. Help friends and family explore their passion. Pay it forward to a complete stranger. If you are in a position where you have to take RMDs and don’t need that money yourself, take the opportunity to make a difference for others.

*If you are still working at age 70½ at a company where you have an employer-sponsored plan, you may be able to delay taking distributions from that account until you retire. Roth IRAs are not subject to RMDs for the original owner.

A 529 college savings plan’s disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. You should review the 529 plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan.

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments or investment management. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

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