What to do with your required minimum distributions (RMDs)

Required minimum distributions, better known as “RMDs,” refer to the amount of money that is required to be distributed from pre-tax retirement accounts, like IRAs, after age 70.5. If the amount is not withdrawn, a 50% penalty may be assessed.

While some retirees might take the RMD for necessary personal expenses, there are other options available to those who do not need the money. Here are two simple ideas for what you can do if you don’t anticipate needing your RMD:

1)      Convert your IRA to a Roth:  The RMD itself is not available for a conversion (after all, the government wants its tax dollars), but you can convert an IRA account into a Roth IRA. The conversion will be taxable, but the post-tax money can grow in a Roth IRA account tax-deferred afterwards without any RMDs. This is a good solution for those who are looking to leave their IRA account to heirs who may be in the same or higher tax bracket than themselves. Please speak with your investment and tax advisor before doing a Roth conversion as mistakes can be very costly.

2)      Donate to charity: In 2013, up to $100,000 can be transferred directly from an IRA account to a qualified charity to fulfill the RMD. Donating to charity directly from your IRA RMD allows one to donate the total amount without incurring income taxes upon distribution. This allows you to more effectively manage your giving by donating to a charity of your choice rather than to the government through taxes.  This IRS rule may change next year, so speak to your advisor for future rule updates.

Of course, please consult with your tax advisor for information specific to your financial situation.


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