For Retirees: What to Do With Required Withdrawals When You Don’t Need the Cash

• For certain retirees, the deadline for taking mandatory distributions from their retirement accounts is looming—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 certain retirees, the due date to withdraw required withdrawals from retirement accounts is coming near — and individuals who aren't financially strapped have choices, according to experts.

Starting from 2023, the majority of retirees have been required to take required minimum distributions RMDs from pre-tax retirement accounts beginning at age 73.

The initial deadline for taking your first Required Minimum Distribution (RMD) is April 1 following the year you turn 73. For each year afterward, withdrawals 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, who is both a certified financial planner and a principal at SC&H Group. This firm has headquarters in the Washington, D.C., and Baltimore regions. Additionally, she holds certification as a public accountant.

Before making decisions about your Required Minimum Distribution (RMD), it's crucial to take into account both your immediate and future objectives, as well as any aspirations you have for leaving a lasting inheritance. tax impact , experts say.

Reinvest for future tax benefits

If you're looking for long-term growth, you have the option to put your after-tax Required Minimum Distribution (RMD) funds into a brokerage account and maintain your present investment approach, according to CFP Abrin Berkemeyer from Houston.

Once those assets are sold, you will receive long-term capital gains rates ranging from 0%, 15%, or 20% once the assets have been held for over a year. This rate varies depending on your taxable income.

This approach "might result in reduced taxes in the future" should you allocate these funds towards a significant expenditure down the line, like health care According to Berkemeyer, a senior financial advisor at Goodman Financial, brokerage assets may face capital gains taxes, while pre-tax retirement funds are subjected to ordinary income tax.

ETFs are remarkably tax-efficient.

Certain advisers utilize "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. However, you will still be liable for taxes on this distribution, though your initial investment positions are preserved.

Nevertheless, there are valid grounds for avoiding the storage of duplicate assets in a brokerage account, where profits are subject to annual taxation, according to CFP Karen Van Voorhis, who leads 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 the annual tax burden 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, individuals aged 70½ and over may contribute up to $105,000 as a charitable donation, fulfilling their required minimum distribution obligations for those who are 73 years old and above.

There isn’t a charitable deduction, however, Qualified Charitable Distributions (QCDs) aren’t included in your Adjusted Gross Income (AGI). This allows retirees to benefit from this without needing to itemize their deductions for tax advantages.

"Effectively, this ensures a tax deduction," Van Voorhis stated.

Higher adjusted gross income might lead to other tax complications, including increased income-related monthly adjustment amounts, known as IRMAA. Medicare Part B and Part D premiums.