- For certain retirees, the timeframe for taking mandatory distributions from their retirement accounts is drawing near — and those who do not require the funds have alternatives.
- Starting in 2023, most retirees will be obligated to withdraw required minimum distributions, known as RMDs, from their pre-tax retirement accounts when they reach the age of 73.
- Should your cash flow be sufficient without Required Minimum Distributions, you might want to explore making qualified charitable distributions or redirecting those funds into brokerage accounts holding tax-efficient investments like exchange-traded funds.
For some retirees, the deadline to take required withdrawals from retirement accounts is approaching — and those who don't need the money have options, experts say.
Starting from 2023, the majority of retirees have been required to take required minimum distributions , or RMDs, from pretax retirement accounts starting at age 73.
The initial deadline for taking Required Minimum Distributions (RMDs) is April 1 following the year you turn 73. In subsequent years, however, these distributions must be completed by December 31.
The subsequent phase invariably hinges on an individual’s specific objectives along with their fiscal and taxation strategy,” stated Judy Brown, a certified financial planner and partner at SC&H Group, whose headquarters are located in the Washington, D.C., and Baltimore metro regions. Additionally, she holds certification as a public accountant.
Before making decisions about an RMD, it's crucial to take into account both your immediate and future objectives, as well as any aspirations for leaving a lasting inheritance. tax impact , experts say.
Reinvest for future reductions in taxes
If you're looking for long-term expansion, you have the option to put your after-tax Required Minimum Distribution (RMD) funds into a brokerage account and keep following your present investment approach, according to CFP Abrin Berkemeyer from Houston.
Once those assets are sold, you will receive long-term capital gains rates from 0%, 15%, or 20% after keeping the assets for over a year. The specific rate hinges on your taxable income.
This approach "might result in subsequent tax benefits" if you utilize the funds for significant expenditures down the line, like health care According to Berkemeyer, a senior financial advisor at Goodman Financial, brokerage assets may be liable for capital gains taxes, whereas pre-tax retirement funds are subject to ordinary income tax rates.
ETFs are remarkably tax-efficient.
Certain counselors employ "in-kind transfers" to shift assets directly from your pre-tax retirement account into a brokerage, allowing you to remain invested in the initial securities. While you will still be liable for taxes on this distribution, your initial investment portfolio remains intact.
However, there are "good reasons" not to keep identical assets in a brokerage account, which incurs yearly taxes on earnings, said CFP Karen Van Voorhis, director of financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts.
For instance, you might consider relocating your investments to exchange-traded funds Because they are "extremely tax-efficient," she mentioned.
Unlike mutual funds, most ETFs do not. distribute capital gains payouts , potentially reducing annual tax liabilities for brokerage account holders.
Ensure you get a 'locked-in tax reduction'
If you have charitable inclinations, another alternative might be what is known as a so-called qualified charitable distribution , or QCD, which involves a direct transfer from an individual retirement account to an eligible nonprofit organization .
In 2024, retirees who are 70½ years old or older may contribute up to $105,000, fulfilling their annual Required Minimum Distribution (RMD) obligations for individuals aged 73 and over.
There's no charitable deduction, but QCDs don't count toward adjusted gross income, meaning retirees don't need to itemize tax breaks to claim it.
"It's effectively a guaranteed tax deduction," Van Voorhis said.
More adjusted gross income can trigger other tax issues, such as higher income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums.
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