Once you reach age 70 ½, you have to start withdrawing money each year. It’s called your Required Minimum Distribution or RMD. (As a service for our clients, we calculate and oversee the distribution process to ensure they never get hit with those nasty 50% penalties the IRS imposes when you withdraw too little).
Some clients take the money out and use it to supplement their monthly retirement expenses. But other clients tell us they just don’t need the money, because their spending needs are already covered (lucky people!) by pensions, Social Security, rentals, or other inflows.
If that’s your case, here’s what you need to know:
It really isn’t that big an amount. First of all, the RMD amounts are pretty reasonable. What the IRS tells you to take out each year is very close to your sustainable spending amount – the amount we tell clients they can take out and spend anyway. It’s designed to make the money last for your entire lifetime and not run out prematurely. Some people think the RMD is some horrendously large amount. It isn’t – at least in percentage terms – although the dollar amounts can get scary if you have a super-large IRA account. Your first RMD at age 70 ½ weighs in at less than 4% of your account balance….not such a big deal.
Don’t need it? Keep it invested. Some clients tell us they just don’t need the money to spend. That’s OK. The IRS doesn’t say you need to spend the money. You just need to take it out. In cases like this, the client has us withdraw the money from their IRA and move it to their personal investment account. The IRS rules are satisfied and their investments keep working for them.
For the greater good. When clients really don’t need the money, they can take advantage of a fantastic provision to gift their RMD to their favorite charity and avoid counting the withdrawal as taxable income. Last year, one of our clients used her RMD to fund scholarships for working adults going back to college. Everyone wins in this scenario and you gain the satisfaction of helping others (special rules apply, so ask your financial advisor for help).