(PUB) Investing 2015

499 / 772

17 Morningstar FundInvestor November 2015
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
RMDs. If by year-end those income distributions are
insufficient to meet the RMDs, 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 RMDs 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
QCDs 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 RMDs will send them over
their planned withdrawal rates. While RMDs
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 IRAs are their whole retirement kitty,
those ever-higher RMDs can be disconcerting.
That said, it’s important to remember that even though
RMDs 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 RMDs 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 RMDs 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 RMDs, 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
RMDs kick in. K
Contact Christine Benz at