What to do With Required Minimum Distributions You Don’t “Need”
By Greg Hammond
Some individuals simply don’t need their full Required Minimum Distribution (RMD) amounts for living expenses; they’d rather keep the money invested, so that it can compound and grow. Of course, most would no doubt like to keep deferring the tax bill on their IRA assets, too. Although it’s impossible to circumvent RMDs without incurring big penalties, there’s nothing saying you have to spend that money, either. Instead, you can keep at least some of your distribution working on your behalf. The following strategies can help you maximize the RMD proceeds you don’t need for living expenses.
Look for a Roth Opportunity
If you have unused RMDs, steer a portion to a Roth IRA. You can contribute to a Roth at any age, and your withdrawals will be tax-free provided you meet certain criteria. The catch is that you or your spouse must have enough earned income to cover the amount of your Roth contribution–unearned income such as your pension, IRA withdrawals, income from other investments, or Social Security benefits don’t count.
Fund a Tax-Efficient Wealth Replacement Strategy
Individuals who do not need RMDs typically pass on IRA assets to heirs at death. IRA accounts are one of the least desirable assets to pass on to heirs, as they will be taxed at ordinary income tax rates upon distribution. A tax-efficient strategy uses unneeded RMDs to purchase a life insurance policy that names the heirs as beneficiaries. Life Insurance proceeds can be received tax free, allowing the IRA owner to give the remainder of the IRA to groups that don’t pay income taxes, like charities.
Charitable Giving While Living
At this time, there is no allowable Qualified Charitable Deduction for tax year 2014 because Congress has not renewed this provision. Should they decide to renew the provision as it existed for 2013, you would be able to donate all or part of your RMDs, up to $100,000, directly to a qualified charity. By sending a donation directly to a charity, you would not owe income tax on the amount of the donation or see an increase in adjusted gross income (AGI) that generally accompanies an RMD. Lowering your AGI, in turn, makes it more likely that you’ll qualify for deductions and credits, which typically hinge on AGI. Keeping your AGI down also reduces the chance you’ll be affected by the Medicare surtax.