Make the Most of Your RMD

If you are at least 72 years old, or love someone who is, 2021 brings us the return of the RMD.

Last year in the heat of the sharp and fast bear market, the government told retirees they did not have to take their annual required minimum distribution (RMD) from their traditional 401(k) and traditional Individual Retirement Accounts (IRA).

They’re now back in play. If you are at least 72 (or you were at least 70 ½ by the end of 2019) you are required to take annual RMDs from your tax-deferred retirement accounts.

This is one tax requirement you don’t want to mess with. Failure to take an RMD can result in a 50% penalty tax on the amount you were supposed to withdraw.

If you have previously taken RMDs, it wouldn’t hurt to circle back to those accounts and confirm you are once again scheduled to receive an RMD this year. (You can also receive it monthly if you prefer.) If this is your inaugural RMD year, the brokerage or retirement plan that handles your accounts can tell you what your RMD is, and you can decide when you want it zapped to your bank account.

If you don’t need the RMD for regular household expenses, you still must take the distribution. But that doesn’t mean you must spend it.

How to use an RMD

If you don’t need the money for living expenses, let’s review some uses for the money:

• Save it. As a retiree, I want you to have both an emergency fund and at least two years of living expenses tucked into separate savings accounts. This is how you sleep well during bear markets. If you don’t yet have an emergency fund that can cover at least a year of expenses, check out the Ultimate Opportunity Saving Account being offered at Alliant Credit Union that I endorse. If you save $100 a month for 12 straight months your account will be credited with a $100 bonus. That is a seriously great deal.
• Pay down debt. Okay my 72+ friends: if you have any debt, I want you to make it a priority to get it paid off. Still paying off a mortgage? That’s your first target.
• Reinvest it. If your goal is to keep some money growing for your 80s and 90s, or you want to leave some money for your grandchildren or other heirs, you can always reinvest the money. Once the money is distributed from the retirement account, you can reinvest it in a regular taxable account. I recommend you focus on low-cost diversified index mutual funds or exchange-traded funds (ETFs). Keep in mind that if you own shares in a taxable account for at least one year, any gains you make when you sell will be taxed at your long-term capital gains rate, not your income tax rate (which is what applies to RMDs). Most people have a maximum capital gains tax rate of 15%.
• Bucket List it. Looking forward to when the pandemic is under control and we can travel again? Me too. If you have your eye on a big trip later this year, or maybe in the next few years, save the RMD in a separate account. When you separate money from your checking account it is easier to not use it for everyday expenses. That’s the best way to use your RMD to pay for a big trip on your post-pandemic to do list.