What do you do with RMD money you don't need?

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nbseer
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What do you do with RMD money you don't need?

Post by nbseer » Tue Aug 22, 2017 8:43 pm

If you're fortunate enough to have more $$ than you need to live on from RMDs/Social Security and possibly a pension, what do you do with the excess money from your RMDs?

Do you spend it on the things you always lusted after, re-invest it (stocks or bonds/cds?), make donations to charity, or give it as gifts to children or family members?

RudyS
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Re: What do you do with RMD money you don't need?

Post by RudyS » Tue Aug 22, 2017 8:46 pm

I reinvest into a taxable account. But, actually, money is fungible. If I have more coming in than I need, some goes to personal items, gifts, charity, etc. RMD or not RMD doesn't really matter.

The Wizard
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Re: What do you do with RMD money you don't need?

Post by The Wizard » Tue Aug 22, 2017 8:52 pm

RudyS wrote:
Tue Aug 22, 2017 8:46 pm
I reinvest into a taxable account. But, actually, money is fungible. If I have more coming in than I need, some goes to personal items, gifts, charity, etc. RMD or not RMD doesn't really matter.
Fungible, yes.
I'm reinvesting occasional excess retirement income into VTSAX in my taxable account right now. And I'm merely a lad of 67, not taking RMDs yet...
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arcticpineapplecorp.
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Re: What do you do with RMD money you don't need?

Post by arcticpineapplecorp. » Tue Aug 22, 2017 8:53 pm

I believe the conventional wisdom is:
1. put the money in a taxable account (and match the same AA where the money was).
2. gifts to children
3. You could donate the money to charity. If you do this, you probably want to do it as a QCD (qualified charitable deduction). There are specific ways that needs to be handled. read more here:
https://www.kitces.com/blog/qualified-c ... uirements/
To qualify for QCD treatment, the rules also stipulate that the distribution must go to a public charity (as described in IRC Section 170(b)(1)(A)), and thus cannot go to a private foundation, nor (as specified in the tax code) may a QCD go to a charitable supporting organization or a donor-advised fund, either. source: https://www.kitces.com/blog/qualified-c ... uirements/
there's also information from the horse's mouth at the IRS:
https://www.irs.gov/retirement-plans/re ... ithdrawals
Qualified charitable distributions

What is a qualified charitable distribution?

Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. See Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs)) for additional information.

Can a qualified charitable distribution satisfy my required minimum distribution from an IRA?

Yes, your qualified charitable distributions can satisfy all or part the amount of your required minimum distribution from your IRA. For example, if your 2014 required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution for 2014, you would have had to withdraw another $5,000 to satisfy your 2014 required minimum distribution.

How are qualified charitable distributions reported on Form 1099-R?

Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made.

How do I report a qualified charitable distribution on my income tax return?

To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter "QCD" next to this line. See the Form 1040 instructions for additional information.

You must also file Form 8606, Nondeductible IRAs, if: you made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution; or the qualified charitable distribution was made from a Roth IRA. source: https://www.irs.gov/retirement-plans/re ... ithdrawals
I'm sure others will think of other things to do. Good problem to have. Have you considered a donor advised fund? Vanguard has them:
https://www.vanguardcharitable.org/
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Dead Man Walking
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Re: What do you do with RMD money you don't need?

Post by Dead Man Walking » Tue Aug 22, 2017 9:12 pm

RMDs are a pita if you don't need the money for living expenses. I do a combination of the options that you listed. Most of it is reinvested in taxable accounts. Having to invest the money in a taxable account aggravates me. I've made significant contributions to charities and learned that once is enough to get my name on their regular mailing lists. My family members appreciate the special gifts. I also buy some luxuries for myself. For example, the last car I bought had several options that I had never purchased when I was accumulating money for retirement. My wife and I eat out more often. I'm blessed and my only real complaint is having to move money from a tax-free account to a taxable account.

DMW

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Re: What do you do with RMD money you don't need?

Post by GerryL » Tue Aug 22, 2017 9:28 pm

I'm still about 2 years away from RMD #1, but I have already created a simple spreadsheet with a pie chart that I intend to use each year to plan and visualize how to divide my RMD pie among Cash, Reinvest and QCD each year. Long-term goal is to prevent MAGI from reaching $85k, so I won't hit the IRMAA cliff. I anticipate that SS and two tiny pensions will cover most if not all of my needs, so Cash will largely go for emergency fund, travel and splurges. If returns on taxable investments and increasing RMDs push me closer to the $85k mark, the QCD slice will need to grow.

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Re: What do you do with RMD money you don't need?

Post by scrabbler1 » Tue Aug 22, 2017 9:50 pm

A good friend of mine inherited an IRA and a brokerage account after his remaining parent (mom) died 5 years ago. Like me, he was 49 at the time. Still working full-time, he didn't need the small RMD he had to take every year. But I set things up for him so that he would use some or most of the RMD to pay the state and federal income taxes on the investment income the inherited brokerage account generates. Some years he still had to pay some estimated taxes but most of the time he had a little of the RMD left over to invest in the brokerage account.

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Re: What do you do with RMD money you don't need?

Post by doneat53 » Tue Aug 22, 2017 9:53 pm

If you aren't doing this already I would begin a plan to roll over your IRA to a ROTH IRA so that your RMD drops to the point of what you need to live on.

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Re: What do you do with RMD money you don't need?

Post by grabiner » Tue Aug 22, 2017 10:20 pm

One thing to do with an RMD you don't need is to convert your part of your traditional IRA to a Roth IRA, using the RMD to pay the taxes. This will decrease your unneeded RMDs in future years. It is a particularly good idea if your heirs are in a higher tax bracket than you are, as they will inherit your Roth IRA tax-free, rather than your traditional IRA on which they have to pay tax at their own high rate.

I would suggest not converting at a higher marginal tax rate. If you are in the 25% tax bracket, it probably isn't worth converting to 28% in order to postpone taxes at 25% for a few years. But if you are in the 15% tax bracket and in the phase-in for Social Security taxation which makes your marginal tax rate 27.75%, it might well be worth converting all the way to the top of the 28% bracket (possibly including a small amount at the bottom of the 25% bracket taxed at 46.25%, but then most of the 25% bracket taxed at 25%).
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Re: What do you do with RMD money you don't need?

Post by munemaker » Tue Aug 22, 2017 11:16 pm

Taking a RMD doesn't mean you have to spend the money.

To take a RMD from Vanguard VTSAX or VBTLX in a traditional IRA, you merely transfer it to the same fund in a taxable account. Viola! Problem solved.

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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 7:59 am

munemaker wrote:
Tue Aug 22, 2017 11:16 pm
Taking a RMD doesn't mean you have to spend the money.

To take a RMD from Vanguard VTSAX or VBTLX in a traditional IRA, you merely transfer it to the same fund in a taxable account. Viola! Problem solved.
Well, sort of, aside from the 28% + 5% income taxes that need to be paid in my case.
And since dividends from VBTLX are taxed as ordinary income, I don't think I'd hold that fund in my taxable account...
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The Wizard
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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 8:25 am

grabiner wrote:
Tue Aug 22, 2017 10:20 pm
One thing to do with an RMD you don't need is to convert your part of your traditional IRA to a Roth IRA, using the RMD to pay the taxes. This will decrease your unneeded RMDs in future years...
I'm not sure if this is a good idea for many people.
I start RMDs and full SS in 2020 and will have my highest AGI and taxable income ever then unless stocks crash in 2019. Taking significant additional income in the form of Roth conversions would quite likely push folks similar to me into an even higher Medicare tier.

Also, the benefit of getting additional funds into a Roth IRA vs same funds into taxable account is less pronounced after age 70, with fewer years of tax free growth ahead.

So I'm pretty sure my last Roth conversions will be at age 69...
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Re: What do you do with RMD money you don't need?

Post by midareff » Wed Aug 23, 2017 8:30 am

nbseer wrote:
Tue Aug 22, 2017 8:43 pm
If you're fortunate enough to have more $$ than you need to live on from RMDs/Social Security and possibly a pension, what do you do with the excess money from your RMDs?

Do you spend it on the things you always lusted after, re-invest it (stocks or bonds/cds?), make donations to charity, or give it as gifts to children or family members?
Have been decreasing the lust lust since I retired 6 years ago. Travel, charitable donations, nicer restaurants, better Scotch, nicer toys and so forth. There are things I will/would enjoy now and probably not later. When you get to the point that your daily exercise is the walk from the cruise chip cabin to the dining room you are probably not enjoying the trip.

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Re: What do you do with RMD money you don't need?

Post by Braumeister » Wed Aug 23, 2017 8:40 am

Many seem to think of RMDs as new "income" which is obviously not the case.

In most cases, it's just a combination of
a. a transfer from one account to another
b. the tax man collecting what you deferred long ago.

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Re: What do you do with RMD money you don't need?

Post by Artsdoctor » Wed Aug 23, 2017 8:40 am

"Anything you want."

I work with my mom every year to plan her RMD. First thing is to pay your annual taxes out of it; if you pay taxes from the RMD, you don't have to bother with quarterly taxes, a nice feature. Second thing is to make a donation to you favorite charities; she doesn't have a DAF so the QCD is a very nice feature. Anything left over, she puts into her taxable account.

There are so many things in life that can be difficult and painful. If you find yourself (not the OP) really, really bothered by "having to take" the RMD when "you don't need it," you need to check out the benefits of meditation or yoga. You haven't paid a penny of taxes of that money and it's time to pay up; don't complain about it.

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Re: What do you do with RMD money you don't need?

Post by Steelersfan » Wed Aug 23, 2017 9:13 am

arcticpineapplecorp. wrote:
Tue Aug 22, 2017 8:53 pm
I believe the conventional wisdom is:
1. put the money in a taxable account (and match the same AA where the money was).
2. gifts to children
3. You could donate the money to charity. If you do this, you probably want to do it as a QCD (qualified charitable deduction). There are specific ways that needs to be handled. read more here:
I start RMDs next year and that's my plan, a mix of all three.

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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 9:16 am

Braumeister wrote:
Wed Aug 23, 2017 8:40 am
Many seem to think of RMDs as new "income" which is obviously not the case.

In most cases, it's just a combination of
a. a transfer from one account to another
b. the tax man collecting what you deferred long ago.
I think some folks aren't planning ahead too well and are possibly unaware of RMDs and the tax impact until they are imminent.

In my case, I've been withdrawing around 4% of my tax deferred balance each year since 2013, as a combination of Roth conversions and monthly transfers to my checking account.
When 2020, my age 70.5 year, gets close, I will turn off ongoing Roth conversions. But my initial required portfolio withdrawal rate in 2020 could actually be a bit less than presently, depending on portfolio performance over next two years...
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Ron
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Re: What do you do with RMD money you don't need?

Post by Ron » Wed Aug 23, 2017 9:54 am

My wife/me will both be starting RMD's in 2018, along with our respective age 70-SS.

As for the few extra $K we'll have (after taxes) each month, we'll probably just spend it rather than reinvest it; at least that's the plan for now.

We've spent decades saving/investing for the future; for us, the future is now...

- Ron

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Re: What do you do with RMD money you don't need?

Post by JohnFiscal » Wed Aug 23, 2017 10:03 am

nbseer wrote:
Tue Aug 22, 2017 8:43 pm
If you're fortunate enough to have more $$ than you need to live on from RMDs/Social Security and possibly a pension, what do you do with the excess money from your RMDs?

Do you spend it on the things you always lusted after, re-invest it (stocks or bonds/cds?), make donations to charity, or give it as gifts to children or family members?
The "excess" is simply part of my overall spending plan and could be saved (in taxable) for future needs. As account values decrease the dollar amount of the RMD may also, leading to my needing to make up the shortfall from somewhere.

The on-line (free) retirement spending planner iORP actually shows this in the reporting tables. iORP has been discussed in a number of threads here and is worthwhile checking out.

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Re: What do you do with RMD money you don't need?

Post by DrGoogle2017 » Wed Aug 23, 2017 10:14 am

I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.

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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 10:21 am

DrGoogle2017 wrote:
Wed Aug 23, 2017 10:14 am
I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.
Fill us in on your personal Tax Torpedo, if you will.

From a levellized income perspective, whether to convert ALL traditional tax deferred to Roth prior to 70.5 depends on:
1) the amount of age 70 SS
2) the size of tax deferred portfolio
3) # of months or years remaining till start of age 70.5 year.

Example: assume $3000 of SS, 85% taxable, starting at 70. This adds additional $2550/month to AGI.

Assume retiree has 60 months remaining till start of 70.5 year.
Retiree then Roth converts up to $2550/month which is $153,000 over the 60 month period.

So in this simplified example, convert all of your tIRA/401(k) to Roth if it totals less than around $153k.
If total is quite more than $153k, consider a blended approach of Roth conversions plus modest RMDs...
Last edited by The Wizard on Wed Aug 23, 2017 10:49 am, edited 1 time in total.
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Re: What do you do with RMD money you don't need?

Post by tetractys » Wed Aug 23, 2017 10:27 am

So far I haven't needed any of my RMD's, so I've reinvested them into taxable, replacing taxable bonds with tax exempt. -- Tet

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Re: What do you do with RMD money you don't need?

Post by JohnFiscal » Wed Aug 23, 2017 10:31 am

The Wizard wrote:
Wed Aug 23, 2017 10:21 am
DrGoogle2017 wrote:
Wed Aug 23, 2017 10:14 am
I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.
Fill us in on your personal Tax Torpedo, if you will...
I also was planning on converting IRA to Roth, up to top of, say, the 25% tax bracket. Delay SS until 70, that gives me 4 years (more or less) with little taxable income otherwise, so lots of headroom for the Roth conversion. Looked at one way, it seemed to give the potential to save $50,000 over 4 years (as I remember) versus not doing so. But when looking at the total picture of delaying SS and the cost of having to live off savings for those 4 years doing the conversions to Roth did not seem so beneficial after all. This was confirmed with numerous runs using iORP (yes, I'm a fan) and my spreadsheets. Yes, a slight advantage to doing the conversions, but on the order of maybe increasing my spendable income by about $1,000 per year over the span of my retirement life, and at the cost of paperwork headaches.

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Re: What do you do with RMD money you don't need?

Post by House Blend » Wed Aug 23, 2017 10:34 am

The Wizard wrote:
Wed Aug 23, 2017 8:25 am
grabiner wrote:
Tue Aug 22, 2017 10:20 pm
One thing to do with an RMD you don't need is to convert your part of your traditional IRA to a Roth IRA, using the RMD to pay the taxes. This will decrease your unneeded RMDs in future years...
I'm not sure if this is a good idea for many people.
I start RMDs and full SS in 2020 and will have my highest AGI and taxable income ever then unless stocks crash in 2019. Taking significant additional income in the form of Roth conversions would quite likely push folks similar to me into an even higher Medicare tier.

Also, the benefit of getting additional funds into a Roth IRA vs same funds into taxable account is less pronounced after age 70, with fewer years of tax free growth ahead.

So I'm pretty sure my last Roth conversions will be at age 69...
I agree that there will be plenty of circumstances where a post-70.5 Roth conversion will not make sense. In any case, such conversions are most often going to be dictated by what makes sense for your beneficiaries.

Also a one-time Roth conversion means one year of boosted medicare premiums. That can be a win if it gets you into a lower tier in the future years with lower RMDs.

Beyond that, for someone near the upper end of the SS tax hump, it would be better to Roth convert a large amount even after age 70.5 so that more of the distributions from the IRA are taxed at 25% instead of 46.25%.

It may sound counter-intuitive, but it can make sense to do a Roth conversion even when you are above the SS tax hump, if the lower future RMDs push you back down into the hump in the future. The point is that again (if done properly) more of your IRA distributions will be taxed at a 25% rate instead of 46.25%. (Another way to think of it is that by getting back into the hump, more of your SS benefit becomes tax-free.)

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Re: What do you do with RMD money you don't need?

Post by DrGoogle2017 » Wed Aug 23, 2017 10:47 am

The Wizard wrote:
Wed Aug 23, 2017 10:21 am
DrGoogle2017 wrote:
Wed Aug 23, 2017 10:14 am
I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.
Fill us in on your personal Tax Torpedo, if you will...
SS income at 70 for me. Husband is already taking it. Increased rental income. Decreased rental depreciation. RMD for me at 70.5. Another thing to take into account is my husband is older than me by 8 years, I'm only 57. Right now the tax bracket is for married couple. Who knows what's going to happen in 13 years, one of us might not be here. SS will be an inflated amount in 13 years. I'm not sure the tax bracket will adjust according. Turbotax only has 2016 tax bracket.

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Re: What do you do with RMD money you don't need?

Post by Ged » Wed Aug 23, 2017 10:50 am

nbseer wrote:
Tue Aug 22, 2017 8:43 pm
If you're fortunate enough to have more $$ than you need to live on from RMDs/Social Security and possibly a pension, what do you do with the excess money from your RMDs?

Do you spend it on the things you always lusted after, re-invest it (stocks or bonds/cds?), make donations to charity, or give it as gifts to children or family members?
Some goes to family members who are in need, the rest goes into taxable accounts that will end up with family members when I am gone.

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Re: What do you do with RMD money you don't need?

Post by WhiteMaxima » Wed Aug 23, 2017 10:54 am

So it is very crucial to reduce your future RMD by eliminate pre-tax portion before 70 1/2.

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Re: What do you do with RMD money you don't need?

Post by bengal22 » Wed Aug 23, 2017 10:56 am

Dead Man Walking wrote:
Tue Aug 22, 2017 9:12 pm
RMDs are a pita if you don't need the money for living expenses. I do a combination of the options that you listed. Most of it is reinvested in taxable accounts. Having to invest the money in a taxable account aggravates me. I've made significant contributions to charities and learned that once is enough to get my name on their regular mailing lists. My family members appreciate the special gifts. I also buy some luxuries for myself. For example, the last car I bought had several options that I had never purchased when I was accumulating money for retirement. My wife and I eat out more often. I'm blessed and my only real complaint is having to move money from a tax-free account to a taxable account.

DMW
Made sense after I looked up the definition:

"pi·ta
ˈpēdə/Submit
nounNORTH AMERICAN
flat hollow unleavened bread that can be split open to hold a filling."

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Re: What do you do with RMD money you don't need?

Post by munemaker » Wed Aug 23, 2017 11:21 am

The Wizard wrote:
Wed Aug 23, 2017 7:59 am
munemaker wrote:
Tue Aug 22, 2017 11:16 pm
Taking a RMD doesn't mean you have to spend the money.

To take a RMD from Vanguard VTSAX or VBTLX in a traditional IRA, you merely transfer it to the same fund in a taxable account. Viola! Problem solved.
Well, sort of, aside from the 28% + 5% income taxes that need to be paid in my case.
And since dividends from VBTLX are taxed as ordinary income, I don't think I'd hold that fund in my taxable account...
I agree totally on the tax implications. You have to pay the taxes no matter what...whether you give to charity, family, spend it yourself, whatever. I agree it is not good form to hold a bond fund in taxable, but with the meager rates on bonds these days, it is as much of a problem as it was in more normal times; you might even be able to write off a short term loss if rates would ever rise.

Point is you can "transfer" from IRA to taxable and not be out of the market. Take some of the proceeds and pay the taxes. The rest just can just stay in your taxable investment account. You do not have to figure out any way to dispose of it.

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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 11:48 am

WhiteMaxima wrote:
Wed Aug 23, 2017 10:54 am
So it is very crucial to reduce your future RMD by eliminate pre-tax portion before 70 1/2.
This is not necessarily correct...
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Ron
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Re: What do you do with RMD money you don't need?

Post by Ron » Wed Aug 23, 2017 12:22 pm

The Wizard wrote:
Wed Aug 23, 2017 11:48 am
WhiteMaxima wrote:
Wed Aug 23, 2017 10:54 am
So it is very crucial to reduce your future RMD by eliminate pre-tax portion before 70 1/2.
This is not necessarily correct...
True.

I could die tomorrow and leave my TIRA to charity with no taxes due. Currently, the tax laws state that the charity needs to be a named beneficiary of your TIRA in order to not have to pay tax; however there are changes being considered (if ever) that would allow them not to be named beneficiaries but be able to get the funds tax-free via a will/trust.

What will actually happen is it will be going to my (disabled) son (via trust) and paid out at a lower rate than I currently pay in taxes.

It all depends on your personal situation...

- Ron
Last edited by Ron on Wed Aug 23, 2017 1:21 pm, edited 1 time in total.

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Re: What do you do with RMD money you don't need?

Post by House Blend » Wed Aug 23, 2017 12:51 pm

WhiteMaxima wrote:
Wed Aug 23, 2017 10:54 am
So it is very crucial to reduce your future RMD by eliminate pre-tax portion before 70 1/2.
No.

If all you have is SS income and Roth withdrawals, then you will pay no Federal income tax.

That may sound like a great deal, but it isn't. It means that some of your Roth conversions that involved paying tax were mistakes. You should have left some tax-deferred dollars untouched so that some of your RMDs would be taxed at the 0% rate.

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House Blend
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Re: What do you do with RMD money you don't need?

Post by House Blend » Wed Aug 23, 2017 12:58 pm

munemaker wrote:
Wed Aug 23, 2017 11:21 am
The Wizard wrote:
Wed Aug 23, 2017 7:59 am
munemaker wrote:
Tue Aug 22, 2017 11:16 pm
Taking a RMD doesn't mean you have to spend the money.

To take a RMD from Vanguard VTSAX or VBTLX in a traditional IRA, you merely transfer it to the same fund in a taxable account. Viola! Problem solved.
Well, sort of, aside from the 28% + 5% income taxes that need to be paid in my case.
And since dividends from VBTLX are taxed as ordinary income, I don't think I'd hold that fund in my taxable account...
I agree totally on the tax implications. You have to pay the taxes no matter what...whether you give to charity, family, spend it yourself, whatever. I agree it is not good form to hold a bond fund in taxable, but with the meager rates on bonds these days, it is as much of a problem as it was in more normal times; you might even be able to write off a short term loss if rates would ever rise.

Point is you can "transfer" from IRA to taxable and not be out of the market. Take some of the proceeds and pay the taxes. The rest just can just stay in your taxable investment account. You do not have to figure out any way to dispose of it.
Correction: with QCDs you don't have to pay the tax. It doesn't get reported at all.

Given that you are going to donate to charity in the first place, and are in the OPs situation of being over 70.5 and having an excess of "forced income", a QCD is the way to go. Advantages over donating appreciated shares include:

1. Given that you have an excess of forced income, it is unlikely that you will ever need to spend your highly appreciated shares. QCDs allow your beneficiaries to get the step-up in basis from those shares, rather than a larger tax-deferred IRA.

2. It lowers your AGI, which helps keep a lid on medicare premiums.

3. It can lower state taxes, if your state bases tax off of AGI, and has limited deductibility for donations.

4. You get the tax advantage even if you don't or can't itemize. No 30% AGI limit, either.
Last edited by House Blend on Wed Aug 23, 2017 1:59 pm, edited 1 time in total.

HIinvestor
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Re: What do you do with RMD money you don't need?

Post by HIinvestor » Wed Aug 23, 2017 1:09 pm

We have been using our RMD to support a relative with chronic health issues who can't work. Anything we have left over at the end of the year goes toward CDs or other investments. Sometimes we give each of our adult children a significant cash gift as well.

itstoomuch
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Re: What do you do with RMD money you don't need?

Post by itstoomuch » Wed Aug 23, 2017 1:15 pm

If you are buying a house, for your own use or for a rental, while in retirement mode:
Our mortgage broker says that underwriters want to see 2 yrs income from IRAs, annuities, or other deferred sources unless a fixed monthly award as pensions or SS.
Our first RMD, Will be used to replenish either the ROTH or taxable accounts that were used for the downpayment.
Ymmv
Last edited by itstoomuch on Thu Aug 24, 2017 5:20 pm, edited 1 time in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

chabil
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Re: What do you do with RMD money you don't need?

Post by chabil » Wed Aug 23, 2017 1:40 pm

After the initial shock at the amount of taxes we were paying due to the RMD we have now become accustomed to viewing the RMD net of taxes and deal with it. After living a careful life all these years it takes some doing to spend for joy.This year we are taking the family with grand kids for an African safari on the RMD. We do not own a second home as many people do, so we plan to rent a place for a a couple of weeks in the summer and one in winter to be close to family. We transfer money into a Roth account for our son. We will be needing a new car soon. It is a good problem to have and I am grateful.

nolesrule
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Re: What do you do with RMD money you don't need?

Post by nolesrule » Wed Aug 23, 2017 2:05 pm

bengal22 wrote:
Wed Aug 23, 2017 10:56 am
Dead Man Walking wrote:
Tue Aug 22, 2017 9:12 pm
RMDs are a pita if you don't need the money for living expenses. I do a combination of the options that you listed. Most of it is reinvested in taxable accounts. Having to invest the money in a taxable account aggravates me. I've made significant contributions to charities and learned that once is enough to get my name on their regular mailing lists. My family members appreciate the special gifts. I also buy some luxuries for myself. For example, the last car I bought had several options that I had never purchased when I was accumulating money for retirement. My wife and I eat out more often. I'm blessed and my only real complaint is having to move money from a tax-free account to a taxable account.

DMW
Made sense after I looked up the definition:

"pi·ta
ˈpēdə/Submit
nounNORTH AMERICAN
flat hollow unleavened bread that can be split open to hold a filling."
There's another definition not referring to my favorite falafel holder. It's an acronym. Take a look at the urban dictionary definition.

Lynette
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Re: What do you do with RMD money you don't need?

Post by Lynette » Wed Aug 23, 2017 2:21 pm

I've been fixing up my house and garden and spending part of my RMD on this. Negotiations are ongoing between me, neighbor, City and Concrete Man who is good at concrete but not permits or returning calls as he either working with concrete or returning calls from his truck while driving.

My plumber tells me that in our area no one can install concrete from mid November till tax day. Still no news from my Concrete Man. I think I'll still have my RMD at tax day - sitting in my checking account.
Last edited by Lynette on Wed Aug 23, 2017 6:53 pm, edited 4 times in total.

trueblueky
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Re: What do you do with RMD money you don't need?

Post by trueblueky » Wed Aug 23, 2017 3:21 pm

House Blend wrote:
Wed Aug 23, 2017 12:58 pm
munemaker wrote:
Wed Aug 23, 2017 11:21 am
The Wizard wrote:
Wed Aug 23, 2017 7:59 am
munemaker wrote:
Tue Aug 22, 2017 11:16 pm
Taking a RMD doesn't mean you have to spend the money.

To take a RMD from Vanguard VTSAX or VBTLX in a traditional IRA, you merely transfer it to the same fund in a taxable account. Viola! Problem solved.
Well, sort of, aside from the 28% + 5% income taxes that need to be paid in my case.
And since dividends from VBTLX are taxed as ordinary income, I don't think I'd hold that fund in my taxable account...
I agree totally on the tax implications. You have to pay the taxes no matter what...whether you give to charity, family, spend it yourself, whatever. I agree it is not good form to hold a bond fund in taxable, but with the meager rates on bonds these days, it is as much of a problem as it was in more normal times; you might even be able to write off a short term loss if rates would ever rise.

Point is you can "transfer" from IRA to taxable and not be out of the market. Take some of the proceeds and pay the taxes. The rest just can just stay in your taxable investment account. You do not have to figure out any way to dispose of it.
Correction: with QCDs you don't have to pay the tax. It doesn't get reported at all.

Given that you are going to donate to charity in the first place, and are in the OPs situation of being over 70.5 and having an excess of "forced income", a QCD is the way to go. Advantages over donating appreciated shares include:

1. Given that you have an excess of forced income, it is unlikely that you will ever need to spend your highly appreciated shares. QCDs allow your beneficiaries to get the step-up in basis from those shares, rather than a larger tax-deferred IRA.

2. It lowers your AGI, which helps keep a lid on medicare premiums.

3. It can lower state taxes, if your state bases tax off of AGI, and has limited deductibility for donations.

4. You get the tax advantage even if you don't or can't itemize. No 30% AGI limit, either.
Believe you report QCD as a distribution with zero taxable.

Dandy
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Re: What do you do with RMD money you don't need?

Post by Dandy » Wed Aug 23, 2017 5:56 pm

I have reached the conclusion that since I can't take it with me (sad) then gifting to children and more to charity is the plan. My kids like most are unlikely to see a pension, both husband and wife working, getting few raises, trying to raise and educate their children and paying a lot for child care. A different world than we faced. On top of that having a large mortgage for a modest home and/or high rent for a modest rental.

So, rather than have to wait 20 years or so (if we are lucky) to inherit a nice windfall - gifting a large portion (80%?) of my after tax RMD (starting early next year) will occur. Taking off some financial pressure and hopefully adding a bit more enjoyment to their life. Also, it will be nice to see them use and enjoy the gifts while we are alive. For their planning purposes we said this level of gifting, at a minimum, would continue for 3 years but the plan is for it to be ongoing.

As long as our retirement is well funded and there are contingencies for large unusual expenses we are comfortable with this approach. We are lucky that our children and their spouses are responsible adults.

We feel good about this approach as opposed to reinvesting the unneeded RMD money and maximizing our asset growth.

The next idea I'm considering is using the donor advised fund. The thought was that we would not only get a tax deduction but get the family involved including our grandchildren in selecting charities. Hopefully instilling charitable giving in them since they probably don't have much extra money to do much of that in this stage of life.

Last year was the first time in 40 years or so that we couldn't itemize deductions. So, if that continues we may increase our gifts to our children who do itemize and have everyone still suggest worthy charities to gift to. We will see how plan A goes before getting too creative. :oops:

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VictoriaF
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Re: What do you do with RMD money you don't need?

Post by VictoriaF » Wed Aug 23, 2017 6:08 pm

DrGoogle2017 wrote:
Wed Aug 23, 2017 10:47 am
The Wizard wrote:
Wed Aug 23, 2017 10:21 am
DrGoogle2017 wrote:
Wed Aug 23, 2017 10:14 am
I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.
Fill us in on your personal Tax Torpedo, if you will...
SS income at 70 for me. Husband is already taking it. Increased rental income. Decreased rental depreciation. RMD for me at 70.5. Another thing to take into account is my husband is older than me by 8 years, I'm only 57. Right now the tax bracket is for married couple. Who knows what's going to happen in 13 years, one of us might not be here. SS will be an inflated amount in 13 years. I'm not sure the tax bracket will adjust according. Turbotax only has 2016 tax bracket.
Is there a reason your husband did not delay taking Social Security until he is 70 years old? Without his SS income you could be in a lower bracket or make larger Roth conversions.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

dbr
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Re: What do you do with RMD money you don't need?

Post by dbr » Wed Aug 23, 2017 6:14 pm

You don't do anything different with RMD money you don't need than with any other money you don't need.

However, as a first step one should not think that the RMD is free money that has just appeared out of nowhere. It is in fact a transfer of assets from tax deferred accounts to taxable accounts accompanied by a tax cost. One should look at what one is doing before making the assessment that this is money one does not need.

Short answer is that one invests the money in one's taxable account. Keeping asset allocation in balance is a factor regarding what to sell to raise the RMD and what it invest it in when received. Whether or not one might then withdraw and spend that money is determined by whether or not you can afford or need a withdrawal and spending, not by the fact there has been an RMD.

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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 6:53 pm

dbr wrote:
Wed Aug 23, 2017 6:14 pm
You don't do anything different with RMD money you don't need than with any other money you don't need.

However, as a first step one should not think that the RMD is free money that has just appeared out of nowhere....
Right.
But at least some people seem to be waking up to the fact that lifetime is finite and that all this extra money should be spent in generous ways over the next few years while conditions are good.
I can't totally disagree with that...
Attempted new signature...

dbr
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Re: What do you do with RMD money you don't need?

Post by dbr » Wed Aug 23, 2017 7:07 pm

The Wizard wrote:
Wed Aug 23, 2017 6:53 pm
dbr wrote:
Wed Aug 23, 2017 6:14 pm
You don't do anything different with RMD money you don't need than with any other money you don't need.

However, as a first step one should not think that the RMD is free money that has just appeared out of nowhere....
Right.
But at least some people seem to be waking up to the fact that lifetime is finite and that all this extra money should be spent in generous ways over the next few years while conditions are good.
I can't totally disagree with that...
What does that have to do with RMD's? Any money you don't need can be spent. The question is how do you know you don't need that money. It certainly isn't because it is an RMD. The hidden error that seems to be in the OP is that an RMD is somehow "free money" and can be spent whether it is needed or not. The error is in not recognizing that it is a liquidation of assets in tax deferred that had better be reinvested in taxable.

Of course if the OP had something different in mind, then the answer changes. Maybe in this case all of the spending needs are met without taking any withdrawals from tax deferred accounts and the money really is excess money. What is hidden in that case is that this investor has more wealth than they need. It could very well be the case that they are living a needlessly frugal lifestyle. But in that case we should be explicit about it.

DrGoogle2017
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Re: What do you do with RMD money you don't need?

Post by DrGoogle2017 » Wed Aug 23, 2017 7:25 pm

VictoriaF wrote:
Wed Aug 23, 2017 6:08 pm
DrGoogle2017 wrote:
Wed Aug 23, 2017 10:47 am
The Wizard wrote:
Wed Aug 23, 2017 10:21 am
DrGoogle2017 wrote:
Wed Aug 23, 2017 10:14 am
I plan to convert all of my IRA, even if we take a tax hit. Because we may have a tax torpedoed coming when I turn 70.
Fill us in on your personal Tax Torpedo, if you will...
SS income at 70 for me. Husband is already taking it. Increased rental income. Decreased rental depreciation. RMD for me at 70.5. Another thing to take into account is my husband is older than me by 8 years, I'm only 57. Right now the tax bracket is for married couple. Who knows what's going to happen in 13 years, one of us might not be here. SS will be an inflated amount in 13 years. I'm not sure the tax bracket will adjust according. Turbotax only has 2016 tax bracket.
Is there a reason your husband did not delay taking Social Security until he is 70 years old? Without his SS income you could be in a lower bracket or make larger Roth conversions.

Victoria
No real reason except since we have a large age gap, we have every intention of milking out the Social Security system, I know it sounds bad, especially the milking part. As long as one of us is taking SS, the other one can wait.
But also originally we thought we may use his IRA and just convert mine. But after we retired for nearly two years, it seems like we don't spend as much as I had thought, good problem to have, I know. I was off in my spending estimate, despite spending months or 4-5 months traveling in Europe. I don't know why, but I'm not kicking myself for not planning better.
Last edited by DrGoogle2017 on Wed Aug 23, 2017 7:32 pm, edited 4 times in total.

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joe8d
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Re: What do you do with RMD money you don't need?

Post by joe8d » Wed Aug 23, 2017 7:28 pm

I just put it in my taxable TSM account.
All the Best, | Joe

The Wizard
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Re: What do you do with RMD money you don't need?

Post by The Wizard » Wed Aug 23, 2017 7:32 pm

dbr wrote:
Wed Aug 23, 2017 7:07 pm
What does that have to do with RMD's? Any money you don't need can be spent. The question is how do you know you don't need that money. It certainly isn't because it is an RMD. The hidden error that seems to be in the OP is that an RMD is somehow "free money" and can be spent whether it is needed or not...
I totally agree and this is not how I am approaching it.
But a previous poster mentioned using RMD funds for an African safari and this alerted me to the fact that SOME retirees have difficulty spending amounts for fun in retirement.
This was the reason for my post...
Attempted new signature...

dbr
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Re: What do you do with RMD money you don't need?

Post by dbr » Wed Aug 23, 2017 7:40 pm

The Wizard wrote:
Wed Aug 23, 2017 7:32 pm
dbr wrote:
Wed Aug 23, 2017 7:07 pm
What does that have to do with RMD's? Any money you don't need can be spent. The question is how do you know you don't need that money. It certainly isn't because it is an RMD. The hidden error that seems to be in the OP is that an RMD is somehow "free money" and can be spent whether it is needed or not...
I totally agree and this is not how I am approaching it.
But a previous poster mentioned using RMD funds for an African safari and this alerted me to the fact that SOME retirees have difficulty spending amounts for fun in retirement.
This was the reason for my post...
You would be right about this. The situation may well be one where the retiree really does not have a grasp on what their wealth is, what they can actually afford to spend, a failure to understand that money is fungible, and not being clear on the difference between a distribution and a withdrawal. Confusion is not a good thing. All of that said, African safaris and things of that nature are a good thing and we hope no one is denying themselves over a mistaken understanding about money. On the other hand, it would not be wise to be spending money that should not be spent if the person is on the knife edge in supporting necessary expenditures. That would be when the investor fails to recognize the RMD as a liquidation of their deferred savings.

chabil
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Re: What do you do with RMD money you don't need?

Post by chabil » Thu Aug 24, 2017 10:04 am

dbr wrote:
Wed Aug 23, 2017 7:40 pm
The Wizard wrote:
Wed Aug 23, 2017 7:32 pm
dbr wrote:
Wed Aug 23, 2017 7:07 pm
What does that have to do with RMD's? Any money you don't need can be spent. The question is how do you know you don't need that money. It certainly isn't because it is an RMD. The hidden error that seems to be in the OP is that an RMD is somehow "free money" and can be spent whether it is needed or not...
I totally agree and this is not how I am approaching it.
But a previous poster mentioned using RMD funds for an African safari and this alerted me to the fact that SOME retirees have difficulty spending amounts for fun in retirement.
This was the reason for my post...
You would be right about this. The situation may well be one where the retiree really does not have a grasp on what their wealth is, what they can actually afford to spend, a failure to understand that money is fungible, and not being clear on the difference between a distribution and a withdrawal. Confusion is not a good thing. All of that said, African safaris and things of that nature are a good thing and we hope no one is denying themselves over a mistaken understanding about money. On the other hand, it would not be wise to be spending money that should not be spent if the person is on the knife edge in supporting necessary expenditures. That would be when the investor fails to recognize the RMD as a liquidation of their deferred savings.
These are all good explanation for those who may not have a clear concept of withdrawal and distribution. I admit it has taken both of us, my husband in particular, a while to understand what we can really afford. Maybe it is an immigrant syndrome, from having to start from scratch with no safety net. Maybe there are those know well what they can and cannot afford and posses some kind of magical time-machine forecaster. :-)

Even now we only give as gifts that part which is income from investments, both from taxable and tax-deferred. Sometimes it is cash (after tax) and at other times it is appreciated stock (no tax event.) Both would eventually decrease the value of our portfolio, I know. I agree one always needs to know what she is doing and it requires some thought.

fourkids
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Re: What do you do with RMD money you don't need?

Post by fourkids » Thu Aug 24, 2017 11:06 am

Congrats for having more income than you need! Enviable position.

I think I would fund my grandkids' college 529 accounts- for which you will get the state tax deduction.
I might also take a fabulous trip.
I already give to charity- but I would give more.

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