(PUB) Investing 2016

17

November 2016

Morningstar FundInvestor

70 - 1 / 2 , but there’s nothing saying that you have to spend it. Thus, if your planned withdrawal rate is 3% but your RMD is over 5% of your total portfolio, you need to reinvest that money. As noted above, you can reinvest the proceeds in a Roth IRA , provided you or your spouse have earned income and the contribu- tion doesn’t exceed $6 , 500 . Or you can reinvest in a taxable account. Employing tax-efficient invest- ments, you can actually do a pretty good job of reducing the drag of taxes on the taxable account on an ongoing basis, similar to what you had in your tax- deferred account. I’ve been hearing that I can delay RMDs with a portion of my IRA if I buy a qualified longevity annuity contract. How does this work? A qualified longevity annuity contract is a type of deferred income annuity. In contrast with immediate annuities, which start paying income straightaway, payouts from deferred income annuities commence at some later date, often at age 85 . In 2014 , the U.S. Treasury approved rules that made these annuities a viable option within 401 (k)s and IRA s by waiving RMD requirements, which had previously been an im- pediment to their usefulness. For the annuity to dodge RMD s, the contract value cannot exceed $125 , 000 , or 25% of the account balance, whichever is less. In addition to helping a portion of the port- folio avoid RMD s, the products also have merit from a planning standpoint, in that they provide a base- line of income later in life, when the portfolio may be at a low ebb. Do I need to pull RMDs from all of my IRA holdings? No. To calculate your RMD s, look back to the balance for each of your accounts as of the previous year- end. To calculate the RMD that you’ll take out by Dec. 31 , 2016 , for example, you’ll find your balances as of Dec. 31 , 2015 . If you own three separate tradi- tional IRA s—one with an RMD of $4 , 000 at the end of 2015 , one with a $1 , 000 RMD , and one with a $3 , 500 RMD —you’d need to take $8 , 500 in total, but it wouldn’t matter which IRA you took it from. Be- cause you can pick and choose where you pull them

from, RMD s can be an effective way to help improve your portfolio’s positioning.

Note that you can’t combine RMD s from different account types—for example, if you have IRA assets as well as a 401 (k) that you’re pulling from, you’d need to take separate RMD s. Nor can spouses combine RMD s, pulling from one spouse’s account while leaving the other RMD -subject spouse’s account alone; because the accounts are owned individually, the RMD s apply on an individual basis, too. I’ve heard that I may be able to delay RMDs if I’m still working after age 70-1/2. True? Yes and no. If you have IRA assets, you still have to take RMD s from those accounts post-age 70 - 1 / 2 , even if you’re working. But if you’re still working and have assets in a company retirement plan, you can delay withdrawals from those accounts until April 1 of the year after you retire. The exception to this rule is for employees who own more than 5% of the company where they’re working and participat- ing in the plan; they must begin taking their RMD s at age 70 - 1 / 2 . K Contact Christine Benz at christine.benz@morningstar.com