Four Ways to Use Excess RMDs

Required minimum distributions (RMDs) can provide an annual stream of income for retirement living. However, if your cash flow from other sources—such as taxable brokerage accounts, Social Security, part-time work or pensions—is more than sufficient to meet your needs, consider the following four ways to make the most of your “excess” RMD income this year.   

1. Pay down mortgage or other debt

While it’s not typically tax-efficient to take money above your RMD from your retirement account in order to pay down debt, using your RMD for debt reduction could be a great way to lower your debt burden and increase peace of mind. Having one less debt payment could help you weather a market downturn or allow you to devote more resources to other important priorities or interests. Additionally, an RMD could be used to pay cash for a car or other big purchase, thereby avoiding a new finance charge altogether.     

2. Reinvest in a taxable brokerage account or Roth IRA, if eligible

If you don’t need all of your RMD for living expenses and want to have the money growing for the future, consider reinvesting the funds in a taxable brokerage account. Having extra money invested in a taxable account can provide tax diversification benefits, such as selling appreciated positions at lower long-term capital gains rates for extra cash flow needs. Moving RMD money from an IRA to a taxable investment account may be a straightforward administrative process, especially if the accounts are held at the same company. Be sure to consider any necessary tax withholdings or payments before investing the net amount.

Additionally, retirement account holders who are also eligible to fund a Roth IRA could use their RMD to fund a Roth contribution (in 2024, up to $8,000 for the year if over age 50).¹ The benefits of a Roth IRA include the opportunity to invest money for tax-free growth, potentially for many years into the future and without an RMD requirement. You must have earned income to contribute to a Roth IRA, and the IRS has income limits for Roth contribution eligibility. For example, in 2024, the Roth contribution eligibility phase-out range for a couple filing jointly with earned income and modified adjusted gross income is between $230,000 and $240,000.²

3. Fund 529 college savings plans for family members

Another option to consider is using RMD proceeds to contribute to a 529 college savings plan that will grow tax-free if used for qualified education expenses, such as tuition.

Since assets in a 529 plan are not included in the account owner’s estate, this funding strategy could help reduce the size of someone’s taxable estate.³ Additionally, many states offer tax incentives to residents who are making contributions to their 529 plans. For example, Georgia allows a state income tax deduction for joint filers on contributions up to $8,000 per year, per beneficiary (or up to $4,000 per year, per beneficiary, for individual filers).⁴

4. Donate to charitable causes

Account owners aged 70.5 and older may donate up to $105,000 per year directly to qualified charitable organizations from their IRA by making a qualified charitable distribution (QCD).⁵ QCDs count toward your annual RMD total and could, therefore, reduce or eliminate the taxable portion of an RMD.

While you do not receive a tax deduction for a QCD, the income is not included on your tax return. If you are taking the standard deduction, this strategy could be particularly effective since the standard deduction would already be higher than any deductions you may have. Keep in mind that the distribution must be taken directly from your IRA in order for the amount to be excluded from income.⁶ Since QCDs are not considered income to the account owner, having lower top-level income may lead to other benefits, such as lower Medicare premium surcharges.*

* This information is not intended to provide, and should not be relied on for, tax, legal or investment advice. We encourage you consult your own tax, legal and investment experts to discuss your unique circumstances.

¹ https://www.cnbc.com/select/401k-ira-contribution-limits-2024/
² https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
³ https://www.savingforcollege.com/article/are-529-plan-assets-subject-to-estate-tax-or-inheritance-tax
⁴ https://www.path2college529.com/resources/faq
⁵ https://www.irs.gov/pub/irs-drop/n-23-75.pdf
⁶ https://www.investopedia.com/articles/financial-advisors/032116/how-use-qcd-rule-reduce-your-taxes.asp

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