Required Minimum Distributions – How to reinvest them?


When you reach age 70 ½, you generally have to start withdrawing money from your retirement accounts. These required minimum distributions, outlined by the IRS, can cost you as much as a 50 percent penalty if you fail to take them.

Fortunately, you have plenty of options that can provide you with some tax advantages.

1. Longevity insurance

You may not need your retirement money now, but you can use it later with a qualified longevity annuity contract, or QLAC.

In July 2014, the IRS and Treasury Department ruled that QLACs, a type of deferred income annuity, could be included in IRAs or other retirement accounts. Under current rules, investors are allowed to put up to $125,000 from a traditional IRA or employer-sponsored retirement plan, such as a 401(k), into a longevity annuity that pays out at a much later date, anywhere from age 70 ½ to age 85, with payments increasing the longer you wait.

2. Municipal bonds

The 30-year-plus bull market in bonds may be over. However, municipal bonds are attractive today. Muni bonds are can be appealing because income earned on the bonds is exempt from federal income taxes. In most states, interest income received from munis within the state are also exempt from state and local taxes. However, many people worry that potential tax cuts under Trump would make the exemption less of a draw if yields on the bonds rise.


3. College plan contributions

A retirement account distribution can go straight into your grandchildren’s college fund.

You can contribute up to $14,000 annually ($28,000 if you’re married) in 2017 without triggering the federal gift tax to a 529 college savings plan. Investment earnings in a 529 plan are not subject to federal capital gains tax and generally not taxed by federal and state governments when used for the qualified education expenses, such as tuition, fees, and books, as well as room and board, of the designated beneficiary.

You can also bundle up to five years of gifts into a one-time 529 plan contribution of up to $70,000 for single filers and $140,000 for married couples.

4. Charitable giving

Use your RMD to make what is called a qualified charitable distribution, which allows you to donate all or part of your withdrawal without adding to your income.

You will need to have the trustee of your IRA directly transfer the money to a charity. You can give up to $100,000 per taxpayer, per year.

For people who give to charity, qualified charitable distributions can satisfy their RMDs and in some cases better reduce their taxes than can direct cash donations.