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If Your Required Minimum Distribution (RMD) Isn't Needed Immediately, Here's How You Can Utilize the Incoming Funds.
Required annual withdrawals (RAAWs) represent the smallest sums you need to pull out annually from specific retirement accounts to keep the Internal Revenue Service (IRS) happy. These accounts encompass traditional IRAs, SEP IRAs, SIMPLE IRAs, along with other pre-tax retirement plans.
At present, you should commence drawing your RAAWs at the age of 73, enabling you to cough up taxes on those withdrawals. If you belong to a corporate plan, like a traditional 401(k), you may defer your initiation till the year you bid adieu to work.
In the event that you don't fancy the extra income provided by your RAAWs, such withdrawals might appear like an enormous nuisance. In fact, they could potentially shift you into a higher tax bracket. Yet, there exist thoughtful strategies to optimize your RAAWs. Below, you'll find two appealing options worth pondering.
1. Put your funds to good use
While it might be enticing to withdraw your RAAW and leave it in a checking account, the smarter alternative is to reinvest it in a taxable brokerage account to keep your money active. By investing in dividend-yielding stocks, you'll owe taxes on your earnings, but you'll be able to establish a consistent stream of dividend income. You might even receive payouts each month. Alternatively, opt for growth stocks and ride the wave of capital gains.
If you'd prefer to diversify your risks, investigate exchange-traded funds (ETFs). ETFs provide instant portfolio diversification.
Having additional income sources should motivate you to invest in a Roth IRA if you meet the qualifications.
2. Ponder the advantages of a QCD
If you don't relish handling your RAAWs, perhaps you'd rather contribute to a worthwhile cause. In this scenario, you might take pleasure in a qualified charitable distribution (QCD). If you're 70 1/2 years old or above, you can use a QCD to meet your RAAW obligation and lend support to your favorite charity without itemizing deductions.
The most alluring aspect? Your income tax liability will remain untouched. Your IRA trustee should directly transfer the funds to the eligible charity to maintain its tax-exempt status.
In 2024, the tax-free charitable donation cap through QCDs has climbed to $105,000. If you're wed, you and your spouse can donate up to $210,000 jointly – as long as you have separate IRAs and adhere to the mandatory requirements.
Bear in mind the deadlines to ensure your RAAW counts towards the current fiscal year. Moreover, secure a written acknowledgment of your donation from the charity prior to submitting your tax statement.
What happens if you neglect your RAAW?
Hesitating to draw your RAAW is one thing, but refusing to do so? That's another issue – and one that may leave you with a substantial financial penalty. Regardless of your financial situation, the IRS still expects you to draw your RAAW before the due date. If you miss it, you'll incur a penalty tax of up to 25% on the sum you overlooked.
To prevent this penalty, make sure you comprehend the regulations, and calculate your RAAW accurately. Some financial institutions might manage this for you, but double-check their calculations.
Beginning in 2024, your RAAW obligation starts at age 73, with most withdrawals due by December 31 each year. If you turn 73 in 2024, your initial RAAW deadline is April 1, 2025. And you'll need to draw your subsequent RAAW by December 31, 2025.
If RAAWs are on your to-do list, be sure to plan ahead to maximize your returns.
In the realm of retirement finance, strategically investing your Required Annual Withdrawals (RAAWs) can help mitigate their impact on your tax bracket. Instead of leaving your RAAW in a checking account, consider reinvesting it in dividend-yielding stocks or exchange-traded funds (ETFs) to generate a consistent income stream. Alternatively, you could invest in growth stocks to take advantage of capital gains.
If you're not inclined to manage your RAAWs, a qualified charitable distribution (QCD) might appeal to you. If you're 70 1/2 or older, you can use a QCD to fulfill your RAAW obligation and support your preferred charity without itemized deductions, while also avoiding any income tax liability.