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RMDs: What to Do When You Don’t Need Them Yet

| February 27, 2017
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When retirees hit age 70 ½, they’re legally obligated to take required minimum distributions (RMDs) from individual retirement accounts and 401(k)s. For many retirees, this isn’t a problem. The RMDs serve as their income during their non-working years, as planned.

However, wealthy retirees are finding they don’t always need the RMDs. Thanks to generous pensions, Social Security funds, or other sources of income, many are left with more funds than they know what to do with. According to a recent Vanguard study1, three-quarters of wealthier households made withdrawals from retirement accounts, but 30 percent did not use those funds for spending. Even among those who spent some of the funds, the median withdrawal rate was 4 percent, but the median spending rate was just 2 percent, meaning half the withdrawal was left over.

It’s by no means a common problem for many retirees. According to data analysis2 from the Economic Policy Institute, the median working-age household (age 32 to 61) in America had just $5,000 in retirement savings in 2013. Among the wealthiest households, though, the median was $274,000. In fact, the top 20 percent of working families hold 74 percent of retirement account balances.

However, even an ample cash cushion can be depleted quickly in retirement, especially if health care issues arise. According to one study3, a healthy couple retiring at 65 and covered by Medicare and a supplemental insurance policy will spend an average of $266,589 over the course of retirement. Add in dental, vision, co-pays, and other out-of-pocket expenses, and the total rises to $394,954. Costs are even higher for couples with medical issues or where long-term care is needed.

For retirees who don’t yet need their RMDs, the following options can help put the funds to use, whether they’re needed for later or not. 

  1. Consider taxable accounts. Reinvesting the cash in a taxable brokerage account allows the funds to continue to grow. It’s also an opportunity to rebalance equity and fixed-income allocations.
  2. Invest in muni bonds. For those in the 28 percent federal income tax bracket, municipal bonds can create tax savings. Those in lower tax brackets, however, may be sacrificing yield. Retirees should consider both rate of return and tax savings and investigate the credit quality of all bonds before investing.
  3. Pay taxes. Retirees are not allowed to convert RMDs into Roth IRAs, but they can use the funds to pay taxes on other IRA dollars they wish to convert.
  4. Make a gift. RMDs can be gifted to heirs, up to $14,000 per recipient. Gifts like this help reduce estate size. Retirees can also use the qualified charitable distribution, which allows for the RMD to be directly donated to a charitable organization. Each taxpayer can give up to $100,000 per year. The transferred funds are excluded from tax returns, keeping income lower. 

1 Madamba, Anna, Ph.D., and Stephen P. Utkus. "Withdrawals From Financial Accounts in Retirement." Vanguard, July 2016. Web.

2 Morrissey, Monique. "The State of American Retirement: How 401(k)s Have Failed Most American Workers." Economic Policy Institute, 3 Mar. 2016. Web.

3HealthView Services: 2015 Retirement Health Care Costs Data Report (n.d.): n. pag. HealthView Insights, 2015. Web.

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