If you have invested your money in a traditional retirement account, it would be surprising for you to know that the US government does not allow you to keep your money in it forever. It becomes mandatory for you to begin getting the minimum IRA distribution from your account once you achieve the age of 70 ½ years.
The specific amount of the IRA RMD (Required minimum distribution) will be calculated by using an IRS formula that takes into consideration your balance in the account, your age, and your expected life time. You will likely be notified of the exact amount of your IRA RMD by your account provider.
What if you don't need the money that you withdraw as a fraction of your IRA RMD to pay your bills?
The following options may be of some help:
1. Reinvest your IRA RMD. Officially, it's not possible to rollover your IRA minimum distribution to another account that provides you tax advantages, but that does not imply that you can't reinvest the profits into a personal brokerage account. Reinvesting your funds into mutual fund, stock fund, or bond account will help you to earn on your IRA RMD funds continuously.
Since there is no doubt that the investments in stock markets are best for those who can let their investments grow in value over a long time, those who have just reached the compulsory IRA Minimum Distribution age of 70½ may find only 20-30 years of their life left. Less risky bond or mutual fund investments might need even less time to show a profit during retirement.
2. Invest in those accounts that are yielding high. The present environment, after the economic crises, normally offers a very small interest rate of just 1% on a traditional savings account -- which is a small fraction of the funds that are invested in these accounts. Though, you can earn quite an interesting amount of interest from these Internet-based savings accounts that allow you to earn more profits.
Because these banks operate online, they have significantly lower overhead expenses, which enable them to offer higher interest rates on their savings accounts. Actually, their rate of interest may be a good two percentage points greater than their offline members. This lets them be a safe as well as profitable place to accumulate your IRA Minimum Distribution should you predict that you will need the funds in the next few years.
3. Give your IRA RMD to charity (this benefit for the qualified charitable distribution ends at the end of 2011). If you have any charitable plans, it's always best to give IRA money to charity. The reason is that IRA money in your hands or your beneficiary's hands loses approximately a third of its value to income taxes. But when you give the money to charity, each dollar gives a dollar benefit to the charity because the charity pays no tax. Added to this is the fact that charitable contributions made directly from your IRA do not increase the taxable income shown on your tax return. By minimizing your taxable income on your tax return, you can gain additional benefits such as potentially increased deductions for medical expenses and other itemized deductions.
Use up your IRA RMD on family or friends or simply contribute it to the needy. If you are wealthy enough not to have to use your IRA Minimum Distribution to pay your bills, it is because you have made wise retirement financial decisions to ensure security.
As a result, why not use your IRA RMD on entertainment? There could be a cause that you wish to support, a trip you always dreamed of, or a gift to your grandchild who has just got in to a college. Since you deserve some fun with your retirement savings, it is a good idea to use it for something you enjoy after you retire.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions