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6 ways to use required minimum distributions in retirement

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After focusing on saving for decades, shifting your retirement money mindset to withdrawing those savings could take some effort. But once you’ve retired, that might be exactly what you must learn to do—whether you feel that you need the money or not.

If you have saved in certain retirement accounts, such as traditional IRAs or 401(k)s, you must begin taking RMDs, or required minimum distributions, from those accounts at age 72.

Here’s an overview of how required minimum distributions work, along with six ways you might use these savings.

How required minimum distributions (RMDs) work

The government introduced tax-deferred savings in the 1970s to encourage individuals to save for retirement. And, to ensure that retirees would eventually pay taxes on those accounts, the law set the age when withdrawals would be required to begin. You will have RMDs if you’re the original owner of tax-deferred retirement accounts including:

  • Traditional IRAs
  • 401(k)s
  • 403(b)s
  • 457 plans
  • SEP IRAs
  • Defined benefit plans
  • Profit-sharing plans

Note that Roth IRAs do not have RMDs.

Your first RMD must begin by April 1 following the year you reach age 72. You will need to take RMDs from all of your qualified retirement accounts. The one exception is if you are still working at age 72, in which case your RMD from your employer’s plan may be delayed.1

RMDs are taxable and you must continue them until the entire account is depleted. What happens if you don’t take your RMD in any given year? You could pay a 50% penalty tax on your RMD in addition to the ordinary income tax due on the distribution.

How to calculate your RMDs

Your RMDs are determined each year by dividing the account’s prior year-end value by a life-expectancy factor set by the IRS.

For example, say the value of your traditional IRA is $100,000. At 75 years old, the life-expectancy factor in 2021 is 22.9, according to the IRS Uniform Lifetime Table. The RMD for that account would be $4,366. Use this worksheet to calculate your RMDs.

The calculation is used for every qualifying account you own. Marital status only affects your RMD calculation if one spouse is at least 10 years younger than the other. In this case, use the IRS Joint Life Expectancy worksheet to calculate your RMDs.

You can find the revised life expectancy tables here.

6 ways to use your RMDs

It’s worth noting that, as the name suggests, your required minimum distributions are the minimum amount you can withdraw from your retirement accounts each year. Depending on your strategy for using the funds, you may choose to withdraw more. There are many ways to use your RMDs in retirement, and we’re highlighting six of them.

1. Use RMDs for living expenses

Many retirees use RMDs exactly as they were intended—to cover routine expenses during retirement. Using the funds you worked so hard to save to support your retirement lifestyle is a worthy goal, especially if you don’t expect to be in a higher tax bracket during retirement since RMDs are taxed as ordinary income.

Think about how RMDs will factor into your retirement budget. Are you working part-time, or do you have a pension that is helping fund your retirement? How much Social Security will you be getting?

You can start on your own by completing this retirement income worksheet as an inventory of your retirement income sources. It may also benefit you to consult with your financial advisor about creating a withdrawal strategy of other investment accounts you may own in order to help manage your taxable income in retirement.

2. Save or reinvest your RMDs

Saving your RMDs is another option. You may want to add to your emergency savings account so you’re prepared in retirement for unplanned expenses or medical costs.

Depending on your situation, you might consider reinvesting some or all of your RMDs in a mutual fund or an annuity to ensure your retirement income strategy works the way you planned. A mutual fund may be appropriate if you like the potential of continued growth and want to explore investment options. An annuity is an option if you want potential earnings to grow tax-deferred and to provide for your heirs.

3. Complete a Roth IRA conversion

If paying taxes on your RMDs throughout retirement is a concern, you might consider completing a Roth IRA conversion.2 Roth IRA conversions have several advantages, including portfolio diversification, alleviating concerns of future tax rates, keeping your current tax bracket and having no required minimum distributions.

The downside is your taxable income the year of the conversion will rise, and you will have to wait at least five years to withdraw the earnings on a tax-free basis. Additionally, you must satisfy your current year’s RMD requirement prior to the conversion. A Roth conversion may be appropriate if you:

  • Won’t need the RMD income during your lifetime.
  • Seek the potential for continued tax-deferred growth.
  • Are in a lower tax bracket now compared to what you think you’ll be in at age 72.
  • Believe your heirs will be in a higher tax bracket when they inherit these funds than the tax bracket you’re in now.

Read about the pros and cons of Roth IRA conversions for more detailed information.

4. Pay college expenses for your family

As college costs continue to climb, families are relying more and more on financial help from parents and grandparents. If you don’t need RMDs for your retirement expenses, you may effectively reduce the size of your estate by using them to fund a tax-advantaged college savings account.

Read more: Smart Strategies for Grandparents Funding College Costs.

5. Use RMDs to pay for life insurance

Another RMD strategy can help you create a legacy beyond your lifetime for the benefit of your loved ones. If you’re healthy and don’t need RMDs for living expenses, you could use the after-tax portion to fund a life insurance policy. The death benefit of the life insurance could eventually be used to pay the taxes due on the IRA, leaving the full remaining value of the IRA for your loved ones.

Alternatively, if you could name a charity as the beneficiary of your life insurance contract, proceeds from the contract could support this cause after you pass away.

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Charitable Strategies: Charitable Life Insurance

6. Use RMDs for charitable purposes

If you don’t need the money and are charitably minded, you can receive a significant tax deduction to help offset the tax liability created by the RMD.

A qualified charitable distribution (QCD) can meet your RMD requirement while providing charitable intent and potential tax benefits. Individuals age 70½ or older can give up to $100,000 from a traditional or inherited traditional IRA tax-free. This distribution will count toward their RMD for the year as long as it is made payable to a qualified charity by the year’s end.

You could also consider naming a charitable nonprofit as a beneficiary of your retirement account so that the gift is made after you pass away. This option may be appropriate if you want to make a substantial charitable gift and would like to minimize the portion of your taxable estate.

Delay some RMDs with a qualifying longevity annuity contract

IRS regulations make it possible to delay taking RMDs on a portion of your retirement plan assets until you reach age 85 by transferring them into a qualified longevity annuity contract (QLAC). By doing so, you’ll receive higher guaranteed income payments and your retirement assets will last longer. The caveat, of course, is anticipating how long you’ll live. However, QLACs give you the ability to name a beneficiary, who would receive the assets after you die.

Talk to a financial advisor

As you consider all the options for your retirement accounts, your financial advisor can help you figure out your annual required minimum distributions and decide which approach is right for you.

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1If you are still working for an employer that provides a qualified retirement plan, RMDs may be delayed until you retire if your employer elected delayed distribution. If you are a 5% or more owner of the business, RMDs must begin by April 1 of the year following reaching age 72.

2State tax rules may differ from federal rules governing the tax treatment of Roth IRAs and there may be conflicts between federal and state tax treatment of IRA conversions. Consult your tax professional for your state's tax rules.

Thrivent and its financial advisors do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Thrivent financial advisors have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.