If you are wondering whether you can reinvest your required minimum distribution, then chances are you have one coming up that you realize you don’t need.
Required minimum distributions are one of the most loathed aspects of retirement plans. They can even disrupt your withdrawal plan if you don’t account for them properly.
That doesn’t mean that you can’t save that money, or reinvest it at all.
Fortunately, there are some things you can do to minimize their negative impact on your savings.
Reinvest RMD in a Taxable Account
The simplest option you have for reinvesting your unneeded required minimum distribution is to deposit it into a taxable brokerage account. Although you won’t get the tax shield that an IRA provides, you can still continue to earn a return.
The new issue you now have is tax management of that account. You’ll want to plan for capital gains, as well as any dividends or interest payments you receive from the investments you hold in the account.
That isn’t too troublesome though. Passive investing using index funds or ETFs, taking advantage of tax-loss harvesting (and tax-gain harvesting when the time is right), and avoiding investments that produce taxable income like interest or ordinary dividends can help you keep your investment taxes low. If you haven’t invested in a taxable account before make sure you take some time to understand how investment taxes work.
Tax-free municipal bonds may be a good option too if you are in a high tax bracket.
Can I Reinvest My RMD in a Roth IRA?
If you have to take an RMD, you cannot reinvest that RMD into an IRA of any type, including a Roth. It may seem logical that you would be able to invest it in a Roth IRA since you have already paid taxes on it. That is the point of RMDs after all, to force you to withdraw that money so it can be taxed. And Roth IRAs are funded with after-tax money.
However, the IRS specifically prohibits this.
Use it to Pay Taxes on Roth Conversions
As long as you take your RMD for the year, you can convert any remaining amount in a tax-deferred retirement plan to a Roth IRA. The limiting factor for a lot of people though, is having the money outside of a retirement account to pay the taxes on the Roth conversion.
If you have to take an RMD that you don’t need, consider converting more of the account to a Roth IRA and using that RMD to pay the tax bill.
While it may seem odd to purposefully drive up your tax bill now, it may help you lower it later. In a way, you are reinvesting your RMD in a lower tax bill.
Avoid RMDs With Roth Conversions
This is a slightly different perspective on Roth conversions than the one we just discussed. If you are able, you may can avoid RMDs altogether even if you’ve already saved in a retirement plan other than a Roth IRA.
One of the main advantages of Roth IRAs over other types of retirement plans, including Roth 401ks, is that you don’t have to take RMDs.
It may make sense then to gradually move some of the money in your other retirement accounts into a Roth IRA each year with partial Roth conversions before you reach 72 and have to start taking RMDs. This same tactic can be used if you plan to retire a little early too.
You’ll have to pay taxes on any amount you convert this year, but it will eliminate the need to take an unwanted RMD from those amounts later. If you move it ALL over the course of several years then you may avoid RMDs completely.
Can I Reinvest My Required Minimum Distribution?
Yes, but you need to be careful about how you do it. You can’t deposit an RMD into another retirement account, but you can reinvest it in a taxable account or use it strategically to reduce your taxes later.
Want to talk about a plan for reinvesting your RMD? Email me at [email protected] or call 903-471-0624 and we will get started.
