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What To Do With My Unspent RMDs?

401(K) 2012

Have you gotten to the age where your investment company is sending you the required minimum distribution amount from your IRA each year?


If you’re like a lot of folks I know, you don’t really need the money, so it’s just sitting in the bank, earning nothing.

If that’s you, you may be wondering if you have other options.

The federal government mandates that once you turn 70 ½, you must begin annually taking a “required minimum distribution (RMD)” from your traditional IRA. If you fail to take the RMD out of your IRA on time, you’ll be subject to a 50% penalty on the RMD amount. Then you’ll have to take it out and pay regular taxes on it anyway.

That’s the definition of ugly.

So right now, a lot of folks are doing what they’ve done their whole life –saving these distributions when they are sent to them.

The problem with just saving it is that you may be allowing someone else to decide how to spend your money. Maybe you ought to be deciding how to spend that money.

So… here are just a few possibilities that come to mind for you to do with your RMDs:

1. Spend it. I know this may go against your instincts and a lifetime of habits. Maybe you don’t need the money to fund your current lifestyle. But you could spend it to have some fun, take a vacation, fund a family trip, or do some traveling you’ve always dreamed of.

Or if you just have to be responsible, you could fund a long-term care insurance policy with it. That’s an important option to consider if you aren’t already covered.

2. Give it. Some people derive great joy giving money away to causes or people they love.

It might be as simple as a one-time gift to your church or a charity you support.

Do you have grandchildren who could use some help funding a college education? You may not be able to pay for the whole thing, but $1,000 goes a long way to paying for books and some tuition costs.

Once you start day dreaming about giving, the possibilities are endless only (again, for the right person) to be outdone by the joy received in doing so.

3. Multiply it. And speaking of dreaming, maybe you’re the type that likes to think big. What if you could multiply the size of your existing IRA by spending the RMDs? You may be able to do so by taking your annual RMDs and buying life insurance on yourself.

You would have to be healthy enough to get it, but a reasonably healthy 70 year old can usually get insured. Of course, you would have to work with a qualified agent familiar with this type of planning.

Normally, when the next generation of beneficiaries receives the proceeds from an IRA, sooner or later, they’re going to have to pay the taxes due.

Life insurance pays an income tax free benefit to the named beneficiaries at the time of the insured’s death. That could result in passing the entire value of the IRA (and then some) to your beneficiaries income tax free.

SO…whether you spend it, give it, multiply it or do something else with it, here’s my primary recommendation:

You decide.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
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