How to get the most out of your retirement savings

As retirees approach their golden years, many find themselves facing a unique financial challenge: what to do with required minimum distributions (RMDs) when they don't actually need the money. This article explores various strategies to help retirees make the most of these mandatory withdrawals, ensuring that their hard-earned savings continue to work for them even in retirement.

Before diving into strategies, it's crucial to understand what RMDs are and who needs to take them. Starting in 2023, individuals reaching 73 years of age are required to begin taking minimum distributions from their pre-tax retirement savings accounts, such as traditional IRAs and 401(k)s.

The initial deadline for this withdrawal is April 1 following the year in which a retiree turns 73. After this, it is necessary to complete RMDs by December 31 of each subsequent year. These distributions are designed to ensure that retirement savings, which have grown tax-deferred for many years, are eventually taxed.

Evaluating Your Financial Landscape

Before making decisions about RMDs, it's essential to assess your overall financial situation. Judy Brown, a certified financial planner and principal at SC&H Group, emphasizes the importance of aligning RMD strategies with personal goals:

"The next steps should align with the retiree's personal ambitions, as well as their financial and tax strategies."

Consider both short-term and long-term objectives, including any legacy aspirations and potential tax implications. This holistic approach will help guide your decision-making process.

Reinvestment Strategies for Long-Term Growth

For retirees focused on long-term financial growth, reinvesting RMD proceeds can be a smart move. Abrin Berkemeyer, a Houston-based certified financial planner, suggests:

"Reinvesting after-tax RMD proceeds into a brokerage account while adhering to an existing investment strategy is a viable option."

This approach can lead to potential tax advantages in the future. When these reinvested assets are sold after more than a year, they may be subject to long-term capital gains tax rates of 0%, 15%, or 20%, depending on the individual's taxable income. This can result in significant tax savings compared to the ordinary income tax rates applied to traditional retirement account withdrawals.

Berkemeyer notes that this strategy could result in "future tax savings," particularly if the funds are earmarked for significant expenses, such as healthcare.

The Power of In-Kind Transfers

Some financial advisors recommend "in-kind transfers" as a way to manage RMDs. This method allows for the direct movement of assets from a pre-tax retirement account to a brokerage account, enabling retirees to retain their existing investments. While taxes are still owed on the distribution, the original assets remain intact, potentially preserving their growth potential.

However, it's important to consider the tax implications of holding identical assets in a brokerage account. Karen Van Voorhis, a certified financial planner at Daniel J. Galli & Associates in Norwell, Massachusetts, cautions:

"There are valid reasons to avoid holding identical assets in a brokerage account, which would be liable for annual taxes on earnings."

Embracing Tax-Efficient Investment Vehicles

For those looking to optimize their reinvestment strategy, exchange-traded funds (ETFs) present an attractive option. Van Voorhis highlights their tax efficiency:

"ETFs are considered incredibly tax efficient. Unlike mutual funds, most ETFs do not distribute capital gains, which can help investors in brokerage accounts minimize their tax burden each year."

By transitioning RMD proceeds into ETFs, retirees can potentially reduce their annual tax liability while maintaining exposure to desired market sectors or asset classes.

Charitable Giving: A Win-Win Strategy

For retirees with philanthropic intentions, qualified charitable distributions (QCDs) offer a powerful way to manage RMDs while supporting causes they care about. This strategy involves a direct transfer from an individual retirement account to a qualified nonprofit organization.

In 2024, retirees aged 70½ and older can contribute up to $105,000 through QCDs, which can also satisfy the annual RMD requirements for individuals aged 73 and older. The benefits of this approach are twofold:

Tax Efficiency: While there is no charitable deduction associated with QCDs, they do not count toward adjusted gross income. This means retirees can effectively reduce their taxable income without needing to itemize deductions.

Charitable Impact: QCDs allow retirees to support their favorite charities while simultaneously managing their RMDs and potential tax burden.

As one financial expert puts it, QCDs serve as a "guaranteed tax deduction" for charitable giving.

Balancing RMDs with Social Security and Other Income Sources

When developing a strategy for RMDs, it's crucial to consider how these distributions interact with other income sources, such as Social Security benefits. By carefully managing the timing and amount of RMDs, retirees can potentially minimize their overall tax burden and avoid pushing themselves into a higher tax bracket.

Some retirees may benefit from delaying Social Security benefits while taking strategic RMDs to optimize their long-term financial picture. This approach requires careful planning and should be discussed with a qualified financial advisor.

Estate Planning Considerations

For retirees concerned about leaving a legacy, RMDs can play a significant role in estate planning. By reinvesting RMD proceeds or using them to fund life insurance policies, retirees can potentially increase the value of their estate for heirs.

Additionally, for those with significant assets, using RMDs to fund gifting strategies can help reduce the size of the taxable estate while providing financial support to loved ones during the retiree's lifetime.

The Importance of Professional Guidance

Given the complexities of tax laws and the individual nature of each retiree's financial situation, seeking professional advice is crucial. A qualified financial advisor or tax professional can help create a personalized strategy that aligns with your goals, risk tolerance, and overall financial picture.

As Judy Brown emphasizes:

"Before making decisions regarding RMDs, experts advise evaluating both short- and long-term objectives, including any legacy aspirations and the potential tax implications."

Staying Informed and Adaptable

Tax laws and retirement regulations are subject to change, as evidenced by recent adjustments to RMD age requirements. Retirees should stay informed about these changes and be prepared to adapt their strategies accordingly.

Regular reviews of your financial plan, ideally with the help of a professional advisor, can ensure that your RMD strategy remains aligned with your goals and compliant with current regulations.

Required Minimum Distributions don't have to be a financial burden for retirees who don't need the additional income. By understanding the various strategies available – from reinvestment and tax-efficient vehicles to charitable giving – retirees can turn these mandatory withdrawals into opportunities for continued financial growth and legacy planning.

Whether you choose to reinvest in a brokerage account, leverage ETFs for tax efficiency, or support charitable causes through QCDs, the key is to align your RMD strategy with your overall financial goals and values. With careful planning and professional guidance, RMDs can become a powerful tool in your retirement financial toolkit, helping you to maximize your wealth and achieve your long-term objectives.

Remember, the best strategy for managing RMDs is one that is tailored to your unique financial situation, goals, and values. By taking a proactive approach and exploring the options available, you can ensure that your retirement savings continue to work for you, even as you fulfill IRS requirements.