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3 Financially Smart Ways to Take Money Out of Retirement Accounts

May 1, 2024

Discover how planning for required minimum distributions from retirement accounts can help you fund future needs and support loved ones.

Author
Dan Hunt
Dan Hunt, Senior Investment Strategist

Key Takeaways

  • Generally, when you turn 73, the IRS requires you to take required minimum distributions (RMDs) from tax-qualified retirement accounts.
  • If you don’t need RMDs right away, consider using the funds to contribute to a loved one’s education or donate to charity.
  • You can also reinvest the money toward your future retirement needs by purchasing annuities or converting the amount in excess of your annual RMD to a Roth IRA. 

Whether you’re approaching retirement or already enjoying it, you might be wondering how to make the most of your required minimum distributions (RMDs). Generally, when you turn RMD Age (currently, age 73)1, the federal tax rules require you to take RMDs annually from certain tax-qualified retirement accounts such as traditional individual retirement accounts (IRAs) and 401(k) plans–whether or not you have an immediate need for that money.

 

For many retirees, this is not welcome news. The extra income you get from these distributions both creates a tax drag on your portfolio’s growth and has the potential to be taxed at higher marginal rates. However, any amount not withdrawn by the due date may be subject to a 25% excise tax.2

 

What if you’re fortunate enough to have other sources of income to support your living expenses in retirement and don’t need your RMDs right away? Here are three financially smart ways you can put those funds to work for the future.

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  1. 1
    Help fund a loved one’s education

    Interested in supporting a loved one in their education journey? Consider using your RMDs to invest in a 529 plan, which your designated beneficiary can use for a wide range of educational expenses, including college and K-12 tuition, meal plans, books, laptops and room and board fees. Withdrawals taken for qualified expenses (up to $10,000 in the case of expenses relating to K-12 education) are free from federal taxes and most states’ income taxes.

     

    In addition, contributions to 529 plans can be superfunded, meaning that up to 5 years’ worth of the annual gift tax exclusion amount can be pooled to allow larger contributions within a single year.3 As with any 529 contribution, these are considered “completed gifts,” which means such contributions can qualify for the annual gift tax exclusion. The assets within the 529 plan are generally excluded from your taxable estate for federal estate tax purposes.4

  2. 2
    Support causes that matter to you

    Donating your RMD money to charity may help you support the causes you care about while potentially lowering your overall tax liability.

     

    If you’re at least 70½, you can make a qualified charitable distribution (QCD) from your IRA directly to the eligible charities of your choice. QCDs can be counted toward satisfying your RMDs for the year, up to IRS limits,5 and generally come with no tax costs to you or the charity receiving the donation, potentially helping you give more than you could by donating cash or other assets. 

  3. 3
    Help reduce the risk of outliving your money

    If you’re concerned about outliving your nest egg, consider using your RMD money to purchase an annuity that offers guaranteed income. These products offer competitive after-tax yields and a minimum level of income for the life of you and/or your spouse, potentially reducing the risk that you will outlive your ability to comfortably fund your retirement. However, not all annuities offer the same benefits. A Morgan Stanley Financial Advisor can help find an appropriate annuity for your needs and goals.

     

    This can provide a sense of security and predictability in retirement, which can be particularly valuable if you are planning on a long retirement.

Work with a Financial Advisor

Planning for RMDs can be challenging, but working with your legal or tax advisors, as we as your Morgan Stanley Financial Advisor, can help guide you through each strategy to potentially help you manage the impact of taxes in retirement and plan for your financial future. By using RMDs strategically, you can help bolster your financial security and support the people and causes you love.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

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Footnotes:

1 RMD age is: (a) 70 ½ (if you were born before July 1, 1949), (b) 72 (if you were born after June 30, 1949, but before 1951), (c) 73 (if you were born after 1950, but before 1960), or (d) 75 for all others  (note, there is an apparent drafting error in the statutory language, which makes it unclear when age 75 starts to apply in lieu of age 73, but it appears age 75 is intended to apply if you were born after 1959).

2 Retirement Plan and IRA Required Minimum Distributions and FAQs, IRS, March 14, 2023, https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

3 Up to $90,000 per beneficiary for 2024, assuming no other gifts to that beneficiary during the 5 year period, starting with the year in which the frontloaded 529 contribution is made.

4 However, if the donor dies within five years of making the frontloaded 529 contribution, the estate will generally recapture a portion of the assets for federal estate tax purposes.

5 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000, IRS, Nov. 1, 20223, https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000

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