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 don’t require the funds have alternatives.
• Starting in 2023, the majority of retirees will be obligated to withdraw their required minimum distributions, known as RMDs, from pre-tax retirement accounts when they reach the age of 73.
• Should your cash flow be sufficient without Required Minimum Distributions (RMDs), you might want to explore making Qualified Charitable Distributions or channeling those funds back 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 drawing near — and individuals who aren't financially strapped have alternatives, according to experts.

Starting from 2023, the majority of retirees have to undergo required minimum distributions RMDs from pre-tax retirement accounts beginning 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 always hinges on an individual’s specific objectives along with their fiscal and tax strategy,” explained Judy Brown, a certified financial planner and partner at SC&H Group, based in the Washington, D.C., and Baltimore metro 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 your aspirations for leaving a lasting impact, alongside the current circumstances. tax impact , experts say.

Reinvest for future reductions in taxes

If you're aiming for long-term expansion, you have the option to put your after-tax Required Minimum Distribution (RMD) funds into a brokerage account and maintain your present investment approach, as suggested by Houston-based Certified Financial Planner Abrin Berkemeyer.

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 potential tax benefits" should you utilize these funds for significant expenditures at a later date, like health care According to Berkemeyer, a senior financial advisor at Goodman Financial, brokerage assets may be liable for capital gains taxes, while pre-tax retirement funds are subjected to ordinary income tax.

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.

Nevertheless, there are valid justifications for avoiding the storage of duplicate assets in a brokerage account, where annual taxation occurs on profits, noted CFP Karen Van Voorhis, who leads financial planning efforts at Daniel J. Galli & Associates located in Norwell, Massachusetts.

For instance, you might consider relocating your holdings to exchange-traded funds Because they are "extremely tax-efficient," she stated.

Unlike mutual funds, most ETFs do not. distribute capital gains payouts , potentially reducing annual tax liabilities for brokerage account holders.

Obtain a 'locked-in tax reduction'

If you have charitable inclinations, another possibility might be what's 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 have the option to donate up to $105,000, fulfilling their annual Required Minimum Distribution (RMD) obligations for individuals aged 73 and over.

There isn’t a charitable deduction, however, Qualified Charitable Distributions (QCDs) aren’t included in your adjusted gross income. This means retirees can benefit from this without needing to itemize their deductions for tax purposes.

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

Higher Adjusted Gross Income might lead to additional tax concerns, like increased income-related monthly adjustment amounts, known as IRMAA, for instance. Medicare Part B and Part D premiums.