Strategies for necessary retirement withdrawals when income isn't essential
Retirees have several options to manage their Required Minimum Distributions (RMDs) from retirement accounts, focusing on strategies to minimize taxes and support charitable causes. Here are some key strategies:
Reinvesting RMDs
- Investing in Stocks and Real Estate: Reinvesting your RMDs into stocks, real estate, or other growth vehicles does not result in double taxation. However, any income generated from these investments is taxable. For example, if you reinvest $50,000 in stocks and they grow to $98,358, you won't pay taxes on the original $50,000, but the $48,358 gain is subject to taxes[1].
- Annuities: Adding RMD-friendly annuities can provide a steady income stream while aligning with RMD requirements. These can be purchased outright or held within retirement accounts, but understanding the IRS rules is crucial to avoid penalties[3][4].
Donating RMDs
- Qualified Charitable Distributions (QCDs): QCDs allow direct transfers from an IRA to a qualified 501(c)(3) charity, exempting the distribution from taxable income. This method can satisfy RMD requirements without needing to itemize deductions. The maximum annual distribution is $100,000[2][4].
Other Tax Strategies
- Donor Advised Funds (DAFs): While not directly related to RMDs, DAFs are a vehicle for charitable giving that can be funded with other assets, providing a tax deduction upon contribution[2].
- Charitable Remainder Trusts (CRTs): These can be used for estate planning but are not directly linked to RMDs. They allow donors to transfer assets into a trust, providing income for beneficiaries while offering tax benefits[2].
Overall, retirees can effectively manage their RMDs by reinvesting them in growth assets or using charitable distributions to support causes they care about, while also reducing tax liabilities.
[1] Contributions to a 529 plan may not offset all state income taxes, but they can secure a state tax break for the contributor while benefiting the grandchildren. [2] QCDs are considered the IRS' best-kept secret for retirees by CFP Ashton Lawrence at Mariner Wealth Advisors. [3] Retirees aged 73 and above are required to take minimum distributions, or RMDs, from their pretax retirement accounts. [4] Failure to take RMDs can result in an IRS penalty. [5] In 2024, Social Security was the most common source of retirement income, but 81% of retirees had one or more types of private income. [6] Some retirees may have guaranteed income or spend less than they receive, leaving them with excess funds from RMDs. [7] Legacy planning can be achieved by using RMDs to contribute to a 529 college savings plan for family. [8] No federal income tax break is currently available for 529 contributions. [9] More than 30 states offer a state tax credit or deduction for 529 contributions as of May 2025, according to education website Saving for College. [10] Selling specific assets with ETFs gives retirees more control. [11] ETFs are often recommended over mutual funds in a brokerage account because they are less likely to distribute capital gains or dividends throughout the year. [12] Tax-loss harvesting can be easier with ETFs due to their ability to trade throughout the day like a stock. [13] When retirees have more than they need, they may need to decide how to spend or reinvest their RMDs. [14] The limit for QCDs in 2025 is $108,000 per investor. [15] The first RMD deadline is April 1 of the year after turning 73, and subsequent deadlines are December 31. [16] One option for reinvesting RMD proceeds is to invest in exchange-traded funds (ETFs) in a brokerage account.
- Retirees can optimize their wealth by reinvesting their RMDs into exchange-traded funds (ETFs) for potential growth, though any income generated from these investments remains taxable.
- An alternative strategy for retirees is to invest in real estate or stocks with their RMDs, avoiding double taxation, but the gains are still subject to taxes.
- Purchasing RMD-friendly annuities can provide a steady income stream and align with RMD requirements, but it is essential to comprehend IRS rules to prevent penalties.
- A charitable option for retirees is the Qualified Charitable Distribution (QCD), which enables direct transfers from an IRA to a qualified charity, exempting the distribution from taxable income.
- Donor Advised Funds (DAFs) are another means for charitable giving, allowing contributions of other assets and offering tax deductions.
- While not directly linked to RMDs, Charitable Remainder Trusts (CRTs) can be used for estate planning, offering income for beneficiaries and tax benefits.
- Reinvesting excess funds from Required Minimum Distributions (RMDs) can be used for legacy planning, such as contributing to a 529 college savings plan for family.
- Tax liabilities can be minimized by selling specific assets with ETFs, which offer more control, less likely distribution of capital gains or dividends, and easier tax-loss harvesting compared to mutual funds.
