(PUB) Investing 2015

17

November 2015

Morningstar FundInvestor

out. (Whether you hold bucket one inside or outside of your IRA is a matter of personal preference.) Those distributions may fully or partially satisfy your RMD s. If by year-end those income distributions are insufficient to meet the RMD s, you can then sell something that makes sense to sell from an invest- ment standpoint, based on your portfolio review (see Tip 2 ). 4 | Assess how RMDs will affect your taxes. Even if you don’t intend to take your RMD until later in the year, it’s still valuable to calculate your RMD as soon as possible. That way, you can take steps to offset the tax impact—with tax-loss selling or acceler- ating deductions by prepaying property taxes, for example. A tax advisor should be able to help you gauge the impact of your RMD s on your tax bill and may be able to suggest steps you can take to reduce it. 5 | Consider a qualified charitable distribution. For the charitably inclined, conducting what’s called a qualified charitable distribution can help kill three birds with one stone. By steering the IRA distribution directly to charity (rather than pulling the money out and then making a charitable contribution that is then deducted), the QCD enables the investor to fulfill the RMD , contribute to charity, and reduce his or her adjusted gross income at the same time. From a tax standpoint, reducing AGI is preferable to taking a “below-the-line” charitable deduction, because a lower AGI may qualify the taxpayer for cred- its and deductions. The trouble is, Congress typically hasn’t greenlighted the QCD maneuver until the late innings of a cal- endar year, after many investors may have hoped to have had the whole RMD process wrapped up. But as financial-planning expert Michael Kitces points out, there’s no downside in steering distributions directly to charity anyway. If Congress gives the go-ahead for QCD s in 2015 ’s waning days, the retiree can use the distribution to reduce AGI . If, in a worst-case scenario, the QCD provision remains dormant, the retiree could simply deduct the donation, as with a typical charitable contribution.

6 | Reinvest amounts you don’t need. One question I frequently get is from investors who are concerned that RMD s will send them over their planned withdrawal rates. While RMD s begin comfortably below 4% at age 70 1 / 2 , they quickly escalate well beyond that. Morningstar Investment Management’s head of retirement re- search, David Blanchett, thinks that retirees could use the RMD tables as a starting point when determining their withdrawals, as withdrawals can increase as life expectancies decline. But for in- vestors who are targeting lower withdrawal rates and whose IRA s are their whole retirement kitty, those ever-higher RMD s can be disconcerting. That said, it’s important to remember that even though RMD s mean the money must come out of your tax-deferred vehicles and be taxed, there’s no require- ment that you spend them. You can and should plan to reinvest RMD s you don’t need, either in a tax- able account or in a Roth account if you or your spouse has enough earned income to cover the contri- bution amount. 7 | Mull strategies for reducing RMDs. If you’re in the position of having to take RMD s that you don’t need, it’s also worth thinking through the steps you can take to reduce them in the future. Converting traditional IRA assets to Roth, which don’t entail RMD s, is a key idea on this front—though, ideally, you’d convert those traditional IRA assets in stages over several years rather than waiting until RMD s kick in. K Contact Christine Benz at christine.benz@morningstar.com