Investment Commentary – September 21, 2022
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American Century Investments: Can I Reinvest My Required Minimum Distribution?

With most retirement accounts, once you reach a certain age, you’ve got to take what’s called an annual required minimum distribution (RMD). This means you take a payout from your IRA, 401(k) or other retirement account. The required amount is calculated based on your age and the account balance.
But what can you do with the RMD money you may not need right then? Let’s say your pension or other income has already got your expenses covered for the year. If that’s the case, you may be scratching your head over what to do with the amount you are required to withdraw.

It’s a great problem to have, but it can still be a problem. Even if you’re fortunate enough not to need that money, leaving it in a checking account invites inflation risk. Never fear: We’ve got some ideas about how you might want to put that RMD to work for the future.

When Do You Need to Take RMDs?

Before we dive in let’s figure out whether you need to worry about RMDs this year. If you were born on or after July 1, 1949, you must take an RMD starting at age 72. To figure out your RMD for this and future years, use our RMD calculator. If this is a year you need to take an RMD, read on for some suggestions on how you can potentially use the money.

Reinvest the Money

You may wonder, Can I reinvest my required minimum distribution? The answer is yes, with caveats. You can invest an RMD in a taxable investment account—but not back into most retirement accounts. We can help you choose investments that match your goals.

You might also be able to contribute your RMD to a Roth IRA as long as you have earned income in an amount equal to or greater than the RMD amount you contribute to the Roth IRA.* The RMD amount you must take is still considered taxable income in the year you take it. Roth IRAs have no RMDs during your lifetime.

Spend It

A good rule of thumb is to always pay expenses out of your RMD before you cash out other investments. That’s because you must take the RMD, while other investments could remain untouched.
But if you’ve already got the funds for your normal expenses, like your groceries, taxes and other necessities, you may want to consider using your RMD for a splurge. That’s what retirement is for, after all. Take a memory-making vacation with family. Buy a fire pit. Take salsa lessons. Or make a practical “investment” such as a new roof, a reliable car or a more energy-efficient furnace.

Give It Away—to Charity

Another good use for an RMD can be a blessing for someone else—and can let you enjoy a tax advantage. Whether it’s to an arts foundation, a volunteer fire company or a society for the prevention of cruelty to animals, you can have your RMD check issued directly to the qualified charity of your choice. This is called a qualified charitable distribution (QCD).

A Few QCD Basics

The maximum annual amount that can qualify for a QCD is $100,000 per person, per calendar year. QCD amounts are excluded from your taxable income. This is especially valuable if you take the standard deduction on your tax return. With the standard deduction, most other charitable donations are no longer tax deductible. Check for more specifics.

QCDs can be tricky, so you may want to consult a tax professional before using your RMD this way.

Finally, no matter how you decide to use it—or even if you still haven’t made up your mind—be sure to take your RMD by December 31. If you don’t, the IRS gets half of what you should have withdrawn.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments. (Market Indices) (Around the Web & Upcoming Events) (YTD Performance Chart)