I was doing some workshops for a group of pre-retirees (talk about envy!) and we were going over a lot of the basic questions that group often has, how do I know if I have enough money, how do I plan for medical costs, what should I do about my investment allocations, etc. But the question that seemed to generate a lot of interest was if there were any strategies surrounding taking the Required Minimum Distribution (RMD). The strategies listed below can help you be more efficient in deciding which dollars you should consider using to pay your RMD.
- Consider the number of retirement accounts you have: A lot of people have a misconception that if you have several retirement accounts you need to withdraw the required amount from each account. While you can do that, it’s important to understand what you’re allowed to do. If you have more than one IRA, you have a choice to withdraw each account’s required amount or you can take the combined distribution from one account. An important consideration here is that you cannot group your employer sponsored plan(s) like a 401(k) into this strategy. You would actually need to figure out the RMD from the 401(k) separately.
- What investments do you currently have: What if you have an investment that is doing very well and it’s time for you to take your RMD, do you absolutely have to sell that investment? Well if it is your only investment holding yes, but many people have more than one holding. Consider selling an investment that is not returning as much as others, i.e. dollars that you have in a money market account. This can also provide an opportunity for re-balancing. For example, say you have too much in bonds, by selling off a portion of bonds you can make your RMD and get back to a percentage in bonds that you are comfortable with.
- Re-investing your RMD: What happens if you don’t need the money that the RMD forces you to take? (I know, nice dilemma!) Well you still have to take it, unless of course you like the penalty for not taking it (50% of the amount you should have taken). So what are your choices? Of course you can spend it, I mean after all you worked hard for it, and of course you could re-invest. Some things to consider might be tax efficient investments, such as municipal bonds or if you are working, consider funding a Roth IRA where future growth can be pulled out tax free (after you have held the account for 5 years). Bottom line, just because you have to take your RMD, doesn’t mean you can’t be tax efficient by re-investing the money!
Keep in mind that your strategy may be quite simple or may employ some of the above tips, but the one constant is that you want to continue to be on time with your RMD and whenever possible, make it as advantageous for you as you can.