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Required Minimum Distributions – How to reinvest them?

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on December 20, 2019. The Secure Act made major changes to the RMD rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.

For defined contribution plan participants, or Individual Retirement Account (IRA) owners, who die after December 31, 2019, (with a delayed effective date for certain collectively bargained plans), the SECURE Act requires the entire balance of the participant’s account be distributed within ten years. There is an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person or a person not more than ten years younger than the employee or IRA account owner. The new 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date, now age 72.

Your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after the death of the owner.

  • You can withdraw more than the minimum required amount.
  • Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

For more information on RMDs, click on the IRS document below:

When you reach age 72, 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

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

2. Municipal bonds

Muni bonds 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.

3. Charitable giving

3. 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.

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