For Retirees: What to Do With Required Withdrawals When You Don’t Need the Cash

• For certain retirees, the deadline for taking mandatory distributions from their retirement accounts is drawing near — and those who don’t require the funds have alternatives.
• Starting in 2023, most retirees will be obligated to withdraw their required minimum distributions, known as RMDs, from pre-tax retirement accounts when they reach the age of 73.
• If your cash flow is sufficient without Required Minimum Distributions (RMDs), you might want to look at making qualified charitable distributions or using the proceeds to invest in brokerage accounts containing tax-efficient options like exchange-traded funds.

For certain retired individuals, the due date to withdraw required withdrawals from retirement accounts is drawing near — and individuals who aren't financially strapped have alternatives, according to experts.

Starting from 2023, the majority of retirees have been required to take required minimum distributions RMDs from pretax retirement accounts beginning at age 73.

The initial deadline for taking your first Required Minimum Distribution (RMD) is April 1 following the year you turn 73. In the years thereafter, withdrawals must be completed by December 31 each year.

The subsequent phase always hinges on an individual’s specific objectives along with their fiscal and tax strategy,” explained Judy Brown, a certified financial planner and partner at SC&H Group—a firm based in both the Washington, D.C., and Baltimore metro regions. Additionally, she holds certification as a public accountant.

Before making decisions about an RMD, it's crucial to take into account both your immediate and future objectives, as well as your aspirations for leaving a lasting impact, alongside the tax impact , experts say.

Reinvest for future reductions in taxes

If you're aiming for long-term expansion, you have the option to put your post-tax Required Minimum Distribution (RMD) funds into a brokerage account and keep following your present investment approach, according to CFP Abrin Berkemeyer from Houston.

Once those assets are sold, you will receive long-term capital gains rates ranging from 0%, 15%, or 20% once the assets have been held for over a year. This rate varies depending on your taxable income.

This approach "might result in reduced taxes" down the line if you utilize these funds for significant expenditures in the future, like health care According to Berkemeyer, a senior financial advisor at Goodman Financial, brokerage assets may be liable for capital gains taxes, while pre-tax retirement funds are subject to ordinary income tax rates.

ETFs are remarkably tax-efficient.

Certain counselors employ "in-kind transfers" to shift assets directly from your pre-tax retirement account into a brokerage, allowing you to remain invested in the initial securities. While you will still be liable for taxes on this distribution, you keep your original investments intact.

Nevertheless, there are valid grounds for avoiding the storage of duplicate assets in a brokerage account, where profits are subject to annual taxation, according to CFP Karen Van Voorhis, who leads financial planning efforts at Daniel J. Galli & Associates located in Norwell, Massachusetts.

For instance, you might consider relocating your investments to exchange-traded funds Because they are "extremely tax-efficient," she stated.

Unlike mutual funds, most ETFs do not. distribute capital gains payouts , potentially reducing annual tax liabilities for brokerage account holders.

Ensure you get a 'locked-in tax reduction'

If you're philanthropic, another option could be a so-called qualified charitable distribution , or QCD, which involves a direct transfer from an individual retirement account to an eligible nonprofit organization .

In 2024, individuals aged 70½ and over may contribute up to $105,000 as a charitable donation, fulfilling their required minimum distribution obligations for those who are 73 years old and older.

There isn’t a charitable deduction, however, Qualified Charitable Distributions (QCDs) aren’t included in your Adjusted Gross Income (AGI). This allows retirees to benefit from this without having to itemize their deductions for tax purposes.

"It essentially amounts to a guaranteed tax deduction," Van Voorhis stated.

Higher adjusted gross income might lead to additional tax concerns, like increased income-related monthly adjustment amounts, known as IRMAA, for instance. Medicare Part B and Part D premiums.