You’ve worked hard for your money. After saving for years and tucking away a percentage of your paycheck each month, you might want to sit back and relax about your finances after you retire. Perhaps, you want to wait to use your IRA until you need it. Then you discover the required minimum distribution or RMD.
What is an RMD?
Once you reach 70 and a half, you are required to take a percentage out of your IRA each year. According to the IRS website, “the required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table.’” If you fail to withdrawal the RMD, then you are required to pay taxes on that amount.
How to Maximize Your Required Minimum Distribution
You withdrawal your RMD. Now, how do you maximize that distribution efficiently? Once you’ve used the funds for average retirement expenses and evaluated what you have left, there are many ways that you can use what is left over to secure your financial future. Here are a few ideas.
-Pay Off Debt: The last thing anyone wants to leave behind for their family and friends is debt. A great way to use your RMD is to start paying off any remaining debts such as credit cards, loans, or your mortgage. Also, if you have grandchildren, you can also invest in their tuition to ensure that they will not have dilapidating loans for years to come.
-Invest: Investing your money can be risky, but it can also possess a high return if you are smart about it. With a little luck and the help of a financial advisor, your minimum distribution could help turn your retirement years into a life of luxury.
-Build: Another way to make the most of your RMD is by investing in your home. Perhaps it’s time to replace your roof, or maybe you have always wanted a larger kitchen. Either way, ensuring that your home can stand the test of time can help keep your family secure long after you are gone.
Advanced Planning Strategy for your required Minimum Distribution
Here is another way you can maximize your RMD distribution efficiently from an Advanced Planning perspective.
- Qualified Charitable Distribution or (QCDs): A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity or church. That is right - if you attend a church or any 501(c)(3) facility and donate on a weekly or monthly basis, you can actually use your required minimum distribution as a direct transfer to the church of your liking. QCDs can be counted toward satisfying your required minimum distribution for the year, as long as certain rules are met.
In addition to the benefits of giving to charity, a QCD excludes the amount donated from a taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
Any amount donated above your RMD does not count toward satisfying a future year's RMD.
Funds distributed directly to you, the IRA owner, and which you then give to charity do not qualify as a QCD.